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 June 30, 2009





OR





 ̈ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





Commission
File Number 000-50962





ATLANTIC
      COAST FEDERAL CORPORATION
              (Exact
      name of registrant as specified in its
charter)





FEDERAL
                    (State
      or other jurisdiction of incorporation or
                    organization)
                  
                  59-3764686
                    (I.R.S.
      Employer Identification Number)505
      Haines Avenue
                    Waycross,
      Georgia
                    (Address
      of principal Executive Offices)
                  
                  31501
                    (Zip
      Code)





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





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


YES   x    NO    ̈





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


YES    ̈    NO    ̈





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





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





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


YES    ̈NO   x





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





Class
                  
                  Outstanding
      at August 11, 2009Common
      Stock, $0.01 Par Value
                  
                  13,444,436
      shares









ATLANTIC
COAST FEDERAL CORPORATION





Form
10-Q Quarterly Report





Table
of Contents





PART
      I. FINANCIAL INFORMATIONPage NumberItem
      1.
                            Financial
      Statements
                            3Item
      2.
                            Management’s
      Discussion and Analysis ofFinancial
      Condition and Results of Operations
                            24Item
      3.
                            Quantitative
      and Qualitative Disclosures about Market Risk
                            39Item
      4.
                            Controls
      and Procedures
                            41PART
      II.  OTHER INFORMATIONItem
      1.
                            Legal
      Proceedings
                            42Item
      1A.
                            Risk
      Factors
                            42Item
      2.
                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                            43Item
      3.
                            Defaults
      upon Senior Securities
                            43Item
      4.
                            Submission
      of Matters to a Vote of Security Holders
                            43Item
      5.
                            Other
      Information
                            44Item
      6.
                            Exhibits
                            44Form
      10-Q
                            Signature
      Page
                            45Ex-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


June
30, 2009 (unaudited) and December 31, 2008


(Dollars
in Thousands, Except Share Information)





June 30,
                                  
                                  
                                  December 31,2009
                                  
                                  
                                  2008ASSETSCash
      and due from financial institutions
                                  
                                  $
                                  16,916
                                  
                                  
                                  $
                                  10,025Short-term
      interest earning deposits
                                  
                                  
                                  29,371
                                  
                                  
                                  
                                  24,033Total
      cash and cash equivalents
                                  
                                  
                                  46,287
                                  
                                  
                                  
                                  34,058Securities
      available for sale
                                  
                                  
                                  177,806
                                  
                                  
                                  
                                  147,474Real
      estate mortgages held for sale
                                  
                                  
                                  5,345
                                  
                                  
                                  
                                  736Loans,
      net of allowance of $11,873 at June 30, 2009and
      $10,598 at December 31, 2008
                                  
                                  
                                  680,959
                                  
                                  
                                  
                                  741,879Federal
      Home Loan Bank stock
                                  
                                  
                                  9,961
                                  
                                  
                                  
                                  9,996Accrued
      interest receivable
                                  
                                  
                                  3,493
                                  
                                  
                                  
                                  3,934Land,
      premises and equipment
                                  
                                  
                                  16,385
                                  
                                  
                                  
                                  16,562Bank
      owned life insurance
                                  
                                  
                                  22,527
                                  
                                  
                                  
                                  22,173Other
      real estate owned
                                  
                                  
                                  4,168
                                  
                                  
                                  
                                  3,332Goodwill
                                  
                                  
                                  2,811
                                  
                                  
                                  
                                  2,811Other
      assets (includes deferred tax asset of $11,625 at June 30,
      2009and
      $7,727 at December 31, 2008)
                                  
                                  
                                  16,830
                                  
                                  
                                  
                                  13,134Total
      assets
                                  
                                  $
                                  986,572
                                  
                                  
                                  $
                                  996,089LIABILITIES
      AND STOCKHOLDERS' EQUITYDepositsNon-interest-bearing
      demand
                                  
                                  $
                                  37,186
                                  
                                  
                                  $
                                  33,192Interest-bearing
      demand
                                  
                                  
                                  77,497
                                  
                                  
                                  
                                  67,714Savings
      and money market
                                  
                                  
                                  177,504
                                  
                                  
                                  
                                  164,388Time
                                  
                                  
                                  337,300
                                  
                                  
                                  
                                  359,312Total
      deposits
                                  
                                  
                                  629,487
                                  
                                  
                                  
                                  624,606Federal
      Home Loan Bank advances
                                  
                                  
                                  177,647
                                  
                                  
                                  
                                  184,850Securities
      sold under agreements to repurchase
                                  
                                  
                                  92,800
                                  
                                  
                                  
                                  92,800Accrued
      expenses and other liabilities
                                  
                                  
                                  9,178
                                  
                                  
                                  
                                  9,873Total
      liabilities
                                  
                                  
                                  909,112
                                  
                                  
                                  
                                  912,129Commitments
      and contingencies
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Preferred
      stock: $0.01 par value; 2,000,000 shares authorizednone
      issued
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Common
      stock: $0.01 par value; 18,000,000 shares authorized,shares
      issued of 14,813,469 at June 30, 2009 and December 31,
2008
                                  
                                  
                                  148
                                  
                                  
                                  
                                  148Additional
      paid in capital
                                  
                                  
                                  60,830
                                  
                                  
                                  
                                  60,061Unearned
      employee stock ownership plan (ESOP) shares of 209,484 atJune
      30, 2009 and 232,760 at December 31, 2008
                                  
                                  
                                  (2,095
                                  )
                                  
                                  
                                  (2,328
                                  )Retained
      earnings
                                  
                                  
                                  38,417
                                  
                                  
                                  
                                  46,201Accumulated
      other comprehensive income (loss)
                                  
                                  
                                  6
                                  
                                  
                                  
                                  (308
                                  )Treasury
      stock, at cost, 1,369,033 shares at June 30, 2009 and1,361,633
      at December 31, 2008
                                  
                                  
                                  (19,846
                                  )
                                  
                                  
                                  (19,814
                                  )Total
      stockholders' equity
                                  
                                  
                                  77,460
                                  
                                  
                                  
                                  83,960Total
      liabilities and stockholders' equity
                                  
                                  $
                                  986,572
                                  
                                  
                                  $
                                  996,089





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




3




ATLANTIC
COAST FEDERAL CORPORATION


CONSOLIDATED
STATEMENTS OF INCOME


(Dollars
in Thousands, Except Share Information)


(unaudited)





ThreemonthsendedJune30,
                                                        
                                                        
                                                        SixmonthsendedJune30,2009
                                                        
                                                        
                                                        2008
                                                        
                                                        
                                                        2009
                                                        
                                                        
                                                        2008Interest
      and dividend incomeLoans,
      including fees
                                                        
                                                        $
                                                        10,266
                                                        
                                                        
                                                        $
                                                        11,497
                                                        
                                                        
                                                        $
                                                        21,088
                                                        
                                                        
                                                        $
                                                        23,131Securities
      and interest-earning depositsin
      other financial institutions
                                                        
                                                        
                                                        1,861
                                                        
                                                        
                                                        
                                                        2,279
                                                        
                                                        
                                                        
                                                        3,864
                                                        
                                                        
                                                        
                                                        4,673Total
      interest and dividend income
                                                        
                                                        
                                                        12,127
                                                        
                                                        
                                                        
                                                        13,776
                                                        
                                                        
                                                        
                                                        24,952
                                                        
                                                        
                                                        
                                                        27,804Interest
      expenseDeposits
                                                        
                                                        
                                                        4,190
                                                        
                                                        
                                                        
                                                        4,910
                                                        
                                                        
                                                        
                                                        8,746
                                                        
                                                        
                                                        
                                                        10,462Federal
      Home Loan Bank advances
                                                        
                                                        
                                                        1,709
                                                        
                                                        
                                                        
                                                        1,818
                                                        
                                                        
                                                        
                                                        3,421
                                                        
                                                        
                                                        
                                                        3,613Securities
      sold under agreements to repurchase
                                                        
                                                        
                                                        1,017
                                                        
                                                        
                                                        
                                                        937
                                                        
                                                        
                                                        
                                                        2,000
                                                        
                                                        
                                                        
                                                        1,799Total
      interest expense
                                                        
                                                        
                                                        6,916
                                                        
                                                        
                                                        
                                                        7,665
                                                        
                                                        
                                                        
                                                        14,167
                                                        
                                                        
                                                        
                                                        15,874Net
      interest income
                                                        
                                                        
                                                        5,211
                                                        
                                                        
                                                        
                                                        6,111
                                                        
                                                        
                                                        
                                                        10,785
                                                        
                                                        
                                                        
                                                        11,930Provision
      for loan losses
                                                        
                                                        
                                                        6,195
                                                        
                                                        
                                                        
                                                        3,930
                                                        
                                                        
                                                        
                                                        12,007
                                                        
                                                        
                                                        
                                                        5,491Net
      interest income (loss) after provision for loan losses
                                                        
                                                        
                                                        (984
                                                        )
                                                        
                                                        
                                                        2,181
                                                        
                                                        
                                                        
                                                        (1,222
                                                        )
                                                        
                                                        
                                                        6,439Noninterest
      incomeService
      charges and fees
                                                        
                                                        
                                                        1,028
                                                        
                                                        
                                                        
                                                        1,175
                                                        
                                                        
                                                        
                                                        2,020
                                                        
                                                        
                                                        
                                                        2,350Gain
      on sale of real estate mortgages held for sale
                                                        
                                                        
                                                        189
                                                        
                                                        
                                                        
                                                        36
                                                        
                                                        
                                                        
                                                        374
                                                        
                                                        
                                                        
                                                        36Gain
      on sale of securities available for sale
                                                        
                                                        
                                                        118
                                                        
                                                        
                                                        
                                                        18
                                                        
                                                        
                                                        
                                                        215
                                                        
                                                        
                                                        
                                                        83Other
      than temporary impairment losses(includes
      losses of $1,146 and $1,320, net of$506
      and $806 recognized in other comprehensiveincome,
      pre-tax, for the three and six months endedJune
      30, 2009, respectively)
                                                        
                                                        
                                                        (1,146
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (1,320
                                                        )
                                                        
                                                        
                                                        -Loss
      on sale of foreclosed assets
                                                        
                                                        
                                                        (286
                                                        )
                                                        
                                                        
                                                        (157
                                                        )
                                                        
                                                        
                                                        (990
                                                        )
                                                        
                                                        
                                                        (176
                                                        )Gain
      on redemption of Visa class B common stock
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        79Interchange
      fees
                                                        
                                                        
                                                        235
                                                        
                                                        
                                                        
                                                        230
                                                        
                                                        
                                                        
                                                        450
                                                        
                                                        
                                                        
                                                        451Bank
      owned life insurance earnings
                                                        
                                                        
                                                        179
                                                        
                                                        
                                                        
                                                        278
                                                        
                                                        
                                                        
                                                        354
                                                        
                                                        
                                                        
                                                        487Life
      insurance proceeds in excess of CSV
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        2,634
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        2,634Other
                                                        
                                                        
                                                        147
                                                        
                                                        
                                                        
                                                        141
                                                        
                                                        
                                                        
                                                        196
                                                        
                                                        
                                                        
                                                        244464
                                                        
                                                        
                                                        
                                                        4,355
                                                        
                                                        
                                                        
                                                        1,299
                                                        
                                                        
                                                        
                                                        6,188Noninterest
      expenseCompensation
      and benefits
                                                        
                                                        
                                                        2,967
                                                        
                                                        
                                                        
                                                        3,121
                                                        
                                                        
                                                        
                                                        5,542
                                                        
                                                        
                                                        
                                                        6,401Final
      plan benefits for deceased executive officer
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,032
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,032Occupancy
      and equipment
                                                        
                                                        
                                                        667
                                                        
                                                        
                                                        
                                                        689
                                                        
                                                        
                                                        
                                                        1,288
                                                        
                                                        
                                                        
                                                        1,332Data
      processing
                                                        
                                                        
                                                        249
                                                        
                                                        
                                                        
                                                        205
                                                        
                                                        
                                                        
                                                        509
                                                        
                                                        
                                                        
                                                        483Outside
      professional services
                                                        
                                                        
                                                        736
                                                        
                                                        
                                                        
                                                        504
                                                        
                                                        
                                                        
                                                        1,161
                                                        
                                                        
                                                        
                                                        1,055Collection
      expense and repossessed asset losses
                                                        
                                                        
                                                        272
                                                        
                                                        
                                                        
                                                        91
                                                        
                                                        
                                                        
                                                        476
                                                        
                                                        
                                                        
                                                        233Other
                                                        
                                                        
                                                        1,756
                                                        
                                                        
                                                        
                                                        1,286
                                                        
                                                        
                                                        
                                                        2,985
                                                        
                                                        
                                                        
                                                        2,5466,647
                                                        
                                                        
                                                        
                                                        6,928
                                                        
                                                        
                                                        
                                                        11,961
                                                        
                                                        
                                                        
                                                        13,082Loss
      before income tax benefit
                                                        
                                                        
                                                        (7,167
                                                        )
                                                        
                                                        
                                                        (392
                                                        )
                                                        
                                                        
                                                        (11,884
                                                        )
                                                        
                                                        
                                                        (455
                                                        )Income
      tax benefit
                                                        
                                                        
                                                        (2,533
                                                        )
                                                        
                                                        
                                                        (1,102
                                                        )
                                                        
                                                        
                                                        (4,190
                                                        )
                                                        
                                                        
                                                        (1,189
                                                        )Net
      income (loss)
                                                        
                                                        $
                                                        (4,634
                                                        )
                                                        
                                                        $
                                                        710
                                                        
                                                        
                                                        $
                                                        (7,694
                                                        )
                                                        
                                                        $
                                                        734Earnings
      (loss) per common share:Basic
                                                        
                                                        $
                                                        (0.36
                                                        )
                                                        
                                                        $
                                                        0.05
                                                        
                                                        
                                                        $
                                                        (0.59
                                                        )
                                                        
                                                        $
                                                        0.06Diluted
                                                        
                                                        $
                                                        (0.36
                                                        )
                                                        
                                                        $
                                                        0.05
                                                        
                                                        
                                                        $
                                                        (0.59
                                                        )
                                                        
                                                        $
                                                        0.06Dividends
      declared per common share
                                                        
                                                        $
                                                        0.01
                                                        
                                                        
                                                        $
                                                        0.12
                                                        
                                                        
                                                        $
                                                        0.02
                                                        
                                                        
                                                        $
                                                        0.27







4




ATLANTIC
COAST FEDERAL CORPORATION


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


AND
COMPREHENSIVE INCOME (LOSS)


For
the Six Months Ended June 30, 2009 and 2008


(Dollars
in Thousands, Except Share Information)


(unaudited)





ACCUMULATEDADDITIONAL
                              
                              
                              UNEARNED
                              
                              
                              
                              
                              
                              OTHERCOMMON
                              
                              
                              PAID IN
                              
                              
                              ESOP
                              
                              
                              RETAINED
                              
                              
                              COMPREHENSIVE
                              
                              
                              TREASURY
                              
                              
                              TOTALSTOCK
                              
                              
                              CAPITAL
                              
                              
                              STOCK
                              
                              
                              EARNINGS
                              
                              
                              INCOME (LOSS)
                              
                              
                              STOCK
                              
                              
                              EQUITYFor
      the six months ended  June 30, 2009Balance
      at January 1, 2009
                              
                              $
                              148
                              
                              
                              $
                              60,061
                              
                              
                              $
                              (2,328
                              )
                              
                              $
                              46,201
                              
                              
                              $
                              (308
                              )
                              
                              $
                              (19,814
                              )
                              
                              $
                              83,960ESOP
      shares earned, 23,276 shares
                              
                              
                              -
                              
                              
                              
                              (110
                              )
                              
                              
                              233
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              123Management
      restricted stock expense
                              
                              
                              -
                              
                              
                              
                              319
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              319Stock
      options expense
                              
                              
                              -
                              
                              
                              
                              157
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              157Dividends
      declared ( $0.02 per share)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (90
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (90
                              )Director's
      deferred compensation
                              
                              
                              -
                              
                              
                              
                              3
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (3
                              )
                              
                              
                              -Capital
      contribution by parent
                              
                              
                              -
                              
                              
                              
                              400
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              400Treasury
      stock  purchased at cost, 7,400 shares
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (29
                              )
                              
                              
                              (29
                              )Comprehensive
      income:Net
      income (loss)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (7,694
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (7,694
                              )Other
      comprehensive incomeNet
      change in unrealized losses onsecurities
      available-for-sale net ofreclassification
      and taxes
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (70
                              )
                              
                              
                              -
                              
                              
                              
                              (70
                              )Change
      in unrealized gains (losses)on
      securities available-for-sale forwhich
      a portion of an other-than-temporaryimpairment
      has been recognized in earnings,net
      of reclassification and taxes
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              384
                              
                              
                              
                              -
                              
                              
                              
                              384Total
      comprehensive income (loss)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (7,694
                              )
                              
                              
                              314
                              
                              
                              
                              -
                              
                              
                              
                              (7,380
                              )Balance
      at June 30, 2009
                              
                              $
                              148
                              
                              
                              $
                              60,830
                              
                              
                              $
                              (2,095
                              )
                              
                              $
                              38,417
                              
                              
                              $
                              6
                              
                              
                              $
                              (19,846
                              )
                              
                              $
                              77,460








5




ATLANTIC COAST FEDERAL
CORPORATION


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


AND
COMPREHENSIVE INCOME (LOSS)


For
the Six Months Ended June 30, 2009 and 2008


(Dollars
in Thousands, Except Share Information)


(unaudited)





ACCUMULATEDADDITIONAL
                      
                      
                      UNEARNED
                      
                      
                      
                      
                      
                      OTHERCOMMON
                      
                      
                      PAID IN
                      
                      
                      ESOP
                      
                      
                      RETAINED
                      
                      
                      COMPREHENSIVE
                      
                      
                      TREASURY
                      
                      
                      TOTALSTOCK
                      
                      
                      CAPITAL
                      
                      
                      STOCK
                      
                      
                      EARNINGS
                      
                      
                      INCOME (LOSS)
                      
                      
                      STOCK
                      
                      
                      EQUITYFor
      the six months ended June 30, 2008Balance
      at January 1, 2008
                      
                      $
                      148
                      
                      
                      $
                      59,082
                      
                      
                      $
                      (2,793
                      )
                      
                      $
                      51,182
                      
                      
                      $
                      104
                      
                      
                      $
                      (17,917
                      )
                      
                      $
                      89,806ESOP
      shares earned, 23,276 shares
                      
                      
                      -
                      
                      
                      
                      (13
                      )
                      
                      
                      233
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      220Management
      restricted stock expense
                      
                      
                      -
                      
                      
                      
                      449
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      449Stock
      options expense
                      
                      
                      -
                      
                      
                      
                      240
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      240Dividend
      declared ($0.27 per share)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,238
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,238
                      )Director's
      deferred compensation
                      
                      
                      -
                      
                      
                      
                      12
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (12
                      )
                      
                      
                      -Shares
      relinquished
                      
                      
                      -
                      
                      
                      
                      7
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (32
                      )
                      
                      
                      (25
                      )Treasury
      stock  purchased at cost, 120,146 shares
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,133
                      )
                      
                      
                      (1,133
                      )Comprehensive
      income:Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      734
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      734Other
      comprehensive income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (2,183
                      )
                      
                      
                      -
                      
                      
                      
                      (2,183
                      )Total
      comprehensive income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      734
                      
                      
                      
                      (2,183
                      )
                      
                      
                      -
                      
                      
                      
                      (1,449
                      )Balance
      at June 30, 2008
                      
                      $
                      148
                      
                      
                      $
                      59,777
                      
                      
                      $
                      (2,560
                      )
                      
                      $
                      50,678
                      
                      
                      $
                      (2,079
                      )
                      
                      $
                      (19,094
                      )
                      
                      $
                      86,870




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)





Six months ended June 30,2009
                              
                              
                              2008Cash
      flows from operating activitiesNet
      (loss) income
                              
                              
                              (7,694
                              )
                              
                              
                              734Adjustments
      to reconcile net income toto
      net cash from operating activities:Provision
      for loan losses
                              
                              
                              12,007
                              
                              
                              
                              5,491Gain
      on sale of real estate mortgages held for sale
                              
                              
                              (374
                              )
                              
                              
                              (36
                              )Loans
      originated for sale
                              
                              
                              (46,532
                              )
                              
                              
                              (4,104
                              )Proceeds
      from loan sales
                              
                              
                              42,321
                              
                              
                              
                              4,658Loss
      on sale of other real estate owned
                              
                              
                              990
                              
                              
                              
                              176(Gain)
      loss on securities available for sale
                              
                              
                              (215
                              )
                              
                              
                              (83
                              )Other
      than temporary impairment loss on AFS securities
                              
                              
                              1,320
                              
                              
                              
                              -Loss
      on disposal of equipment
                              
                              
                              11
                              
                              
                              
                              -ESOP
      compensation expense
                              
                              
                              123
                              
                              
                              
                              220Share-based
      compensation expense
                              
                              
                              476
                              
                              
                              
                              689Net
      depreciation and amortization
                              
                              
                              1,053
                              
                              
                              
                              1,023Net
      change in accrued interest receivable
                              
                              
                              441
                              
                              
                              
                              (122
                              )(Increase)
      decrease in cash surrender value of bank owned life
    insurance
                              
                              
                              (354
                              )
                              
                              
                              487Net
      change in other assets
                              
                              
                              (3,924
                              )
                              
                              
                              (7,145
                              )Net
      change in accrued expensesand
      other liabilities
                              
                              
                              (695
                              )
                              
                              
                              971Net
      cash from operating activites
                              
                              
                              (1,046
                              )
                              
                              
                              2,959Cash
      flows from investing activitiesProceeds
      from maturities and paymentsof
      securites available for sale
                              
                              
                              28,093
                              
                              
                              
                              18,836Proceeds
      from the sales of securitiesavailable
      for sale
                              
                              
                              36,064
                              
                              
                              
                              32,190Purchase
      of securities available for sale
                              
                              
                              (95,332
                              )
                              
                              
                              (63,816
                              )Proceeds
      from sale of portfolio loans
                              
                              
                              13,013
                              
                              
                              
                              -Net
      change in loans
                              
                              
                              32,732
                              
                              
                              
                              (29,188
                              )Expenditures
      on premises and equipment
                              
                              
                              (357
                              )
                              
                              
                              (1,123
                              )Proceeds
      from the sale of other real estate owned
                              
                              
                              1,073
                              
                              
                              
                              243Purchase
      of residential mortgage brokerage operations
                              
                              
                              -
                              
                              
                              
                              (150
                              )Purchase
      of FHLB stock
                              
                              
                              (1,028
                              )
                              
                              
                              (1,052
                              )Redemption
      of FHLB stock
                              
                              
                              1,063
                              
                              
                              
                              -Net
      cash from investing activities
                              
                              
                              15,321
                              
                              
                              
                              (44,060
                              )




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




7


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


Six months ended June 30,2009
                        
                        
                        2008Cash
      flows from financing activitiesNet
      increase in deposits
                        
                        $
                        4,881
                        
                        
                        $
                        1,014Proceeds
      from FHLB advances
                        
                        
                        20,000
                        
                        
                        
                        43,000Proceeds
      from sale of securitiesunder
      agreements to repurchase
                        
                        
                        -
                        
                        
                        
                        14,300Repayment
      of FHLB advances
                        
                        
                        (27,203
                        )
                        
                        
                        (23,447
                        )Capital
      contribution from parent
                        
                        
                        400
                        
                        
                        
                        -Share
      based compensation items
                        
                        
                        (5
                        )
                        
                        
                        (25
                        )Treasury
      stock repurchased
                        
                        
                        (29
                        )
                        
                        
                        (1,133
                        )Dividends
      paid
                        
                        
                        (90
                        )
                        
                        
                        (1,238
                        )Net
      cash from financing activities
                        
                        
                        (2,046
                        )
                        
                        
                        32,471Net
      change in cash and cash equivalents
                        
                        
                        12,229
                        
                        
                        
                        (8,630
                        )Cash
      and equivalents beginning of period
                        
                        
                        34,058
                        
                        
                        
                        29,310Cash
      and equivalents at end of period
                        
                        $
                        46,287
                        
                        
                        $
                        20,680Supplemental
      information:Interest
      paid
                        
                        $
                        14,090
                        
                        
                        $
                        16,027Income
      tax paid
                        
                        
                        9
                        
                        
                        
                        1,586Supplemental
      noncash disclosures:Loans
      transferred to other real estate
                        
                        $
                        2,919
                        
                        
                        $
                        919







8





ATLANTIC
COAST FEDERAL CORPORATION


CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2009


(Unaudited)





NOTE
1.  BASIS OF PRESENTATION





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





The
unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions for Form
10-Q.  Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.  In the opinion
of management, all adjustments (all of which are normal and recurring in nature)
considered necessary for (i) a fair presentation and (ii) to make such
statements not misleading, have been included.  Operating results for
the six month period ended June 30, 2009 are not necessarily indicative of the
results that may be expected for the year ending December 31,
2009.  The 2008 Atlantic Coast Federal Corporation consolidated
financial statements, as presented in the Company’s Annual Report on Form 10-K,
should be read in conjunction with these statements.





Certain
items in the June 30, 2009 Form 10-Q have been reclassified to conform to the
current presentation.





These
financial statements consider events that occurred through August 13,
2009.





NOTE
2.  USE OF ESTIMATES





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




Adoption
of New Accounting Standards:  In April 2009, the FASB issued Staff
Position (FSP) No. 115-2 and No. 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments,which amends existing guidance for
determining whether impairment is other-than-temporary for debt
securities.  The FSP requires an entity to assess whether it intends
to sell, or it is more likely than not that it will be required to sell a
security in an unrealized loss position before recovery of its amortized cost
basis.  If either of these criteria is met, the entire difference
between amortized cost and fair value is recognized in earnings.  For
securities that do not meet the aforementioned criteria, the amount of
impairment recognized in earnings is limited to the amount related to credit
losses, while impairment related to other factors is recognized in other
comprehensive income.    Additionally, the FSP expands and
increases the frequency of existing disclosures about other-than-temporary
impairments for debt and equity securities.  This FSP is effective for
interim and annual reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009.  The
Company adopted this pronouncement for the interim reporting
period ending March 31, 2009, see Note 4 to the consolidated financial
statements for the impact on the Company.


9




NOTE 3.  IMPACT OF CERTAIN
ACCOUNTING PRONOUNCEMENTS(continued)





In
December 2007, the FASB issued FAS No. 141 (revised 2007), Business
Combinations (“FAS 141(R)”), which establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in an acquiree, including the recognition and measurement of goodwill
acquired in a business combination.  FAS No. 141(R) is effective for
fiscal years beginning on or after December 15, 2008.  Earlier adoption is
prohibited.  The adoption of this standard did not have a material effect
on the Company’s results of operations or financial position.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities - an amendment of SFAS No. 133”. FAS No. 161 amends and
expands the disclosure requirements of SFAS No. 133 for derivative instruments
and hedging activities. FAS No. 161 requires qualitative disclosure about
objectives and strategies for using derivative and hedging instruments,
quantitative disclosures about fair value amounts of the instruments and gains
and losses on such instruments, as well as disclosures about credit-risk
features in derivative agreements. FAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged.  The impact of adoption
on January 1, 2009 was not material to the Company’s results of operations or
financial position.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events”.  SFAS No. 165
establishes the period after the balance sheet date during which management
shall evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements and the circumstances under which an
entity shall recognize events or transactions that occur after the balance sheet
date.  SFAS No. 165 also requires disclosure of the date through which
subsequent events have been evaluated.  The new standard becomes
effective for interim and annual periods ending after June 15,
2009.  The impact of adoption was not material to the Company’s
results of operations or financial position.





In April
2009, the FASB issued Staff Position (FSP) No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset and Liability Have Significantly
Decreased and Identifying Transactions That Are Not
Orderly.  This FSP emphasizes that even if there has been a
significant decrease in the volume and level of activity, the objective of a
fair value measurement remains the same.  Fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction (that is, not a forced liquidation or distressed sale) between
market participants.  The FSP provides a number of factors to consider
when evaluating whether there has been a significant decrease in the volume and
level of activity for an asset or liability in relation to normal market
activity.   In addition, when transactions or quoted prices are
not considered orderly, adjustments to those prices based on the weight of
available information may be needed to determine the appropriate fair
value.  The FSP also requires increased disclosures.  This
FSP is effective for interim and annual reporting periods ending after June 15,
2009, and shall be applied prospectively.  The impact of adoption was
not material to the Company’s results of operations or financial
position.





In April
2009, the FASB issued Staff Position (FSP) No. 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments.  This FSP amends FASB Statement No.
107, Disclosures about Fair
Value of Financial Instruments, to
require disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies that were previously only
required in annual financial statements.  This FSP is effective for
interim reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009.  The impact of
adoption was not material to the Company’s results of operations or financial
position.





10
 
  NOTE
4.  AVAILABLE FOR SALE SECURITIES
 
 The
following table summarizes the amortized cost and fair value of the
available-for-sale investment securities and the corresponding amounts of
unrealized gains and losses therein:
 
 Amotized
                  Cost
                
                
                Unrealized
                  Gains
                
                Unrealized
      Losses
                
                
                Fair
      ValueJune
      30, 2009
                
                
                
                
                
                
                (Dollars
      in Thousands)U.S.
      Government-sponsored enterprises
                
                $
                994
                
                
                $
                -
                
                
                $
                (7
                )
                
                $
                987State
      and municipal
                
                
                2,668
                
                
                
                4
                
                
                
                (177
                )
                
                
                2,495Mortgage-backed
      securities residential
                
                
                46,350
                
                
                
                1,000
                
                
                
                (89
                )
                
                
                47,261Collateralized
      mortgage obligations U.S. Govt.
                
                
                104,967
                
                
                
                848
                
                
                
                (298
                )
                
                
                105,517Collateralized
      mortgage obligations - other
                
                
                22,817
                
                
                
                187
                
                
                
                (1,458
                )
                
                
                21,546$
                177,796
                
                
                $
                2,039
                
                
                $
                (2,029
                )
                
                $
                177,806December
      31, 2008
                
                
                
                
                
                (Dollars
      in Thousands)U.S.
      Government-sponsored enterprises
                
                $
                13,864
                
                
                $
                371
                
                
                $
                (35
                )
                
                $
                14,200State
      and municipal
                
                
                2,664
                
                
                
                7
                
                
                
                (158
                )
                
                
                2,513Mortgage-backed
                
                
                131,479
                
                
                
                1,063
                
                
                
                (1,781
                )
                
                
                130,761$
                148,007
                
                
                $
                1,441
                
                
                $
                (1,974
                )
                
                $
                147,474
 
 The
amortized cost and fair value of debt securities segregated by contractual
maturity as of June 30, 2009, is shown below.  Expected maturities may
differ from contractual maturities if borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.  Securities
not due at a single maturity date, primarily mortgage-backed securities, are
shown separately.
 June 30,
      2009(Dollars
      in Thousands)Amortized
                
                
                FairCost
                
                
                ValueDue
      in one year or less
                
                $
                -
                
                
                $
                -Due
      from one to five years
                
                
                -
                
                
                
                -Due
      from five to ten years
                
                
                434
                
                
                
                427Due
      after ten years
                
                
                3,228
                
                
                
                3,055Mortgage-backed
      securities - residential
                
                
                46,350
                
                
                
                47,261Collateralized
      mortgage obligations - U.S. Government
                
                
                104,967
                
                
                
                105,517Collateralized
      mortgage obligations - other
                
                
                22,817
                
                
                
                21,546Total
                
                $
                177,796
                
                
                $
                177,806


11




NOTE 4.  AVAILABLE FOR SALE
SECURITIES(continued)
  The
following table summarizes the investment securities with unrealized losses at
June 30, 2009 and December 31, 2008, aggregated by investment category and
length of time in a continuous unrealized loss position:
 
 (Dollars
      in Thousands)Less
      than 12 Months
                
                
                12
      Months or More
                
                
                TotalFair
                
                
                Unrealized
                
                
                Fair
                
                
                Unrealized
                
                
                Fair
                
                
                UnrealizedDescription of
      Securities
                
                Value
                
                
                Losses
                
                
                Value
                
                
                Losses
                
                
                Value
                
                
                LossesJune 30,
      2009Government-sponsoredenterprises
                
                $
                987
                
                
                $
                (7
                )
                
                $
                -
                
                
                $
                -
                
                
                $
                987
                
                
                $
                (7
                )State
      and municipal
                
                
                1,017
                
                
                
                (31
                )
                
                
                801
                
                
                
                (146
                )
                
                
                1,818
                
                
                
                (177
                )Mortgage-backed
      securities - residential
                
                
                5,997
                
                
                
                (73
                )
                
                
                895
                
                
                
                (16
                )
                
                
                6,892
                
                
                
                (89
                )Collateralized
      mortgage obligations - U.S. Govt.
                
                
                31,460
                
                
                
                (298
                )
                
                
                -
                
                
                
                -
                
                
                
                31,460
                
                
                
                (298
                )Collateralized
      mortgage obligations - other
                
                
                9,286
                
                
                
                (364
                )
                
                
                9,176
                
                
                
                (1,094
                )
                
                
                18,462
                
                
                
                (1,458
                )Total
                
                $
                48,747
                
                
                $
                (773
                )
                
                $
                10,872
                
                
                $
                (1,256
                )
                
                $
                59,619
                
                
                $
                (2,029
                )December 31,
      2008Government-sponsoredenterprises
                
                $
                940
                
                
                $
                (35
                )
                
                $
                -
                
                
                $
                -
                
                
                $
                940
                
                
                $
                (35
                )State
      and municipal
                
                
                1,015
                
                
                
                (33
                )
                
                
                823
                
                
                
                (125
                )
                
                
                1,838
                
                
                
                (158
                )Mortgage-backed
      securities
                
                
                30,149
                
                
                
                (724
                )
                
                
                14,796
                
                
                
                (1,057
                )
                
                
                44,945
                
                
                
                (1,781
                )Total
                
                $
                32,104
                
                
                $
                (792
                )
                
                $
                15,619
                
                
                $
                (1,182
                )
                
                $
                47,723
                
                
                $
                (1,974
                )
 Proceeds
from sales and calls of securities available for sale were $64.2 million
and $51.0 million for the six months ended June 30, 2009 and 2008, respectively.
Gross gains of $265,000 and $223,000 and gross losses of $50,000 and $140,000
were realized on these sales during the six months ended June 30, 2009 and 2008,
respectively.
  Proceeds
from sales and calls of securities available for sale were $35.5 million
and $32.3 million for the three months ended June 30, 2009 and 2008,
respectively. Gross gains of $157,000 and $154,000 and gross losses of $39,000
and $136,000 were realized on these sales during the three months ended
June 30, 2009 and 2008, respectively.
  Gains and
losses on sales of securities are recorded on the trade date and determined
using the specific identification method.
  Other-Than-Temporary-Impairment
  Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation. The investment securities portfolio is evaluated for
OTTI by segregating the portfolio into two general segments and applying the
appropriate OTTI model. Investment securities classified as available for sale
or held-to-maturity are generally evaluated for OTTI under Statement of
Financial Accounting Standards (“SFAS”) No. 115,Accounting for Certain Investments
in Debt and Equity Securities. However, certain purchased beneficial
interests, including non-agency mortgage-backed securities, asset-backed
securities, and collateralized debt obligations, that had credit ratings at the
time of purchase of below AA are evaluated using the model outlined in EITF
Issue No. 99-20,Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests
that Continue to be Held by a Transfer in Securitized Financial
Assets.


12




NOTE 4.  AVAILABLE FOR SALE
SECURITIES(continued)




In
determining OTTI under the SFAS No. 115 model, management considers many
factors, including: (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, (3) whether the market decline was affected by
macroeconomic conditions, and (4) whether the entity has the intent to sell
the debt security or more likely than not will be required to sell the debt
security before its anticipated recovery. The assessment of whether an
other-than-temporary decline exists involves a high degree of subjectivity and
judgment and is based on the information available to management at a point in
time.




The
second segment of the portfolio uses the OTTI guidance provided by EITF 99-20
that is specific to purchased beneficial interests that, on the purchase date,
were rated below AA. Under the EITF 99-20 model, the Company compares the
present value of the remaining cash flows as estimated at the preceding
evaluation date to the current expected remaining cash flows. An OTTI is deemed
to have occurred if there has been an adverse change in the remaining expected
future cash flows.




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




As of
June 30, 2009, the Company’s security portfolio consisted of 131 securities, 56
of which were in an unrealized loss position. The majority of unrealized losses
are related to the Company’s mortgage-backed securities, as discussed
below.




Mortgage-backed
Securities




At June
30, 2009, approximately $153.8 million, or 88% of the mortgage-backed securities
held by the Company were issued by U.S. government-sponsored entities and
agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which
the government has affirmed its commitment to support. Because the decline in
fair value is attributable to changes in interest rates and illiquidity, and not
credit quality, and because the Company does not have the intent to sell these
mortgage-backed securities and it is likely it will not be required to sell the
securities before their anticipated recovery, the Company does not consider
these securities to be other-than-temporarily impaired at June 30,
2009.




The
Company’s mortgage-backed securities portfolio also includes non-agency
collateralized mortgage obligations with a fair value of $21.5 million at
June 30, 2009. These non-agency mortgage-backed securities were rated AAA at
purchase and therefore are not within the scope of EITF 99-20 and were evaluated
under SFAS No 115 model. These securities were evaluated to determine if
the underlying collateral is expected to experience loss, resulting in a
principal write-down of the notes.  As part of the evaluation, the
Company monitors deal specific data including loan-to-value (“LTV”),
delinquency, foreclosures and cumulative loss to insure it has adequate credit
support.  The Company constructed a model to project future performance
using collateral specific assumptions, such as expected future default rates and
prepayments.


13




NOTE 4.  AVAILABLE FOR SALE
SECURITIES(continued)





The table
below presents a roll-forward of the credit losses recognized in earnings for
the three month period ended June 30, 2009:





(Dollars
      in Thousands)Beginning
      balance, April 1, 2009
                  
                  $
                  174Amounts
      related to credit loss for which  an other-than-temporary
      impairment  was not previously recognized
                  
                  
                  70Additions/SubtractionsAmounts
      realized for securities sold during the period
                  
                  
                  -Amounts
      related to securities for which the company  intends to sell or
      that it will be more likely than not  the company will be
      required to sell prior to  recovery of amortized cost
      basis
                  
                  
                  -Reductions
      for increase in cash flows expected to be collected that are recognized
      over the remaining  life of the security
                  
                  
                  -Increases
      to the amount related to the credit loss for which other-than-temporary
      impairment was previously recognized
                  
                  
                  1,076Ending
      balance, June 30, 2009
                  
                  $
                  1,320




14




NOTE
5 - LOANS, NET





Loans. Following is a
comparative composition of net loans as of June 30, 2009 and December 31,
2008:





June 30, 2009
                          
                          
                          % of total
                            loans
                          
                          
                          December 31,
                            2008
                          
                          
                          % of total
                            loans(Dollars
      In Thousands)Real estate loans:One-to-four
      family
                          
                          $
                          337,479
                          
                          
                          
                          49.3
                          %
                          
                          $
                          370,783
                          
                          
                          
                          49.9
                          %Commercial
                          
                          
                          80,775
                          
                          
                          
                          11.8
                          %
                          
                          
                          84,134
                          
                          
                          
                          11.3
                          %Other
      ( land & multifamily)
                          
                          
                          40,307
                          
                          
                          
                          5.9
                          %
                          
                          
                          43,901
                          
                          
                          
                          5.9
                          %Total
      real estate loans
                          
                          
                          458,561
                          
                          
                          
                          67.0
                          %
                          
                          
                          498,818
                          
                          
                          
                          67.1
                          %Real estate construction
    loans:One-to-four
      family
                          
                          
                          5,757
                          
                          
                          
                          0.8
                          %
                          
                          
                          8,974
                          
                          
                          
                          1.2
                          %Commercial
                          
                          
                          9,103
                          
                          
                          
                          1.3
                          %
                          
                          
                          10,883
                          
                          
                          
                          1.5
                          %Acquisition
      & development
                          
                          
                          4,195
                          
                          
                          
                          0.6
                          %
                          
                          
                          5,008
                          
                          
                          
                          0.6
                          %Total
      real estate construction loans
                          
                          
                          19,055
                          
                          
                          
                          2.7
                          %
                          
                          
                          24,865
                          
                          
                          
                          3.3
                          %Other loans:Home
      equity
                          
                          
                          103,783
                          
                          
                          
                          15.2
                          %
                          
                          
                          107,525
                          
                          
                          
                          14.5
                          %Consumer
                          
                          
                          80,798
                          
                          
                          
                          11.8
                          %
                          
                          
                          87,162
                          
                          
                          
                          11.7
                          %Commercial
                          
                          
                          22,285
                          
                          
                          
                          3.3
                          %
                          
                          
                          25,273
                          
                          
                          
                          3.4
                          %Total
      other loans
                          
                          
                          206,866
                          
                          
                          
                          30.3
                          %
                          
                          
                          219,960
                          
                          
                          
                          29.6
                          %Total
      loans
                          
                          
                          684,482
                          
                          
                          
                          100
                          %
                          
                          
                          743,643
                          
                          
                          
                          100
                          %Allowance
      for loan losses
                          
                          
                          (11,873
                          )
                          
                          
                          
                          
                          
                          
                          (10,598
                          )Net
      deferred loan costs
                          
                          
                          8,234
                          
                          
                          
                          
                          
                          
                          
                          8,662Premiums
      on purchased loans
                          
                          
                          116
                          
                          
                          
                          
                          
                          
                          
                          172Loans,
      net
                          
                          $
                          680,959
                          
                          
                          
                          
                          
                          
                          $
                          741,879




15




NOTE 5 - LOANS, NET(continued)





Allowance
for loan losses activity for the six months ended June 30, 2009 and 2008 was as
follows:





2009
                  
                  
                  2008(Dollars
      in Thousands)Beginning
      balance, January 1
                  
                  $
                  10,598
                  
                  
                  $
                  6,482Loans
      charged-off
                  
                  
                  (11,204
                  )
                  
                  
                  (4,572
                  )Recoveries
                  
                  
                  472
                  
                  
                  
                  778Net
      charge-offs
                  
                  
                  (10,732
                  )
                  
                  
                  (3,794
                  )Provision
      for loan losses
                  
                  
                  12,007
                  
                  
                  
                  5,491Ending
      balance, June 30
                  
                  $
                  11,873
                  
                  
                  $
                  8,179





Impaired
loans as of June 30, 2009 and December 31, 2008 were as follows:





(Dollars in Thousands)June 30,
                      2009
                    
                    
                    December
                      31, 2008Loans
      with no allocated allowance for loan losses
                    
                    $
                    7,973
                    
                    
                    $
                    -Loans
      with an allocated allowance for loan losses
                    
                    
                    32,838
                    
                    
                    
                    17,472Total
                    
                    $
                    40,811
                    
                    
                    $
                    17,472Amount
      of the allowance for loan losses allocated toimpaired
      loans
                    
                    $
                    5,440
                    
                    
                    $
                    3,525


Non-performing
loans, including non-accrual loans, at June 30, 2009 and December 31, 2008 were
$42.0 million and $25.5 million, respectively. Troubled debt restructurings at
June 30, 2009 and December 31, 2008 were $13.4 and $7.0 million, and are
included in impaired loans.  There were no loans over 90 days past-due
and still accruing interest as of June 30, 2009 and December 31,
2008.  Non-performing loans include both smaller balance homogeneous
loans that are collectively evaluated for impairment and individually classified
as impaired loans.





NOTE
6.  INTEREST RATE SWAPS





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





The
Company’s interest rate swap agreements do not qualify for hedge accounting
treatment under SFAS No. 133 “Accounting for Derivative Instruments and Hedging
Activities,” accordingly changes in fair value are reported in current period
earnings.





16





NOTE 6.  INTEREST RATE
SWAPS (continued)





At June
30, 2009, summary information about these interest-rate swaps is as
follows:





2009(Dollars
      in Thousands)Notional
      amounts
                  
                  $
                  50,000Weighted
      average pay rates (3 month LIBOR, 2.50% floor)
                  
                  
                  2.50
                  %Weighted
      average receive rates (3 month LIBOR, 4.37% cap)
                  
                  
                  0.61
                  %Weighted
      average maturity
                  
                  
                  1.75





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





Liability Interest Rate SwapsJune 30, 2009
                          
                          December 31, 2008(Dollars in thousands)Balance Sheet
                          
                          
                          
                          Balance SheetLocation
                          
                          Fair Value
                          
                          Location
                          
                          Fair ValueInterest
      rate swaps not designated as hedging instrumentsunder
      SFAS 133:Interest
      rate contracts
                          
                          Accrued
      expenses
                            and other liabilities
                          
                          $
                          551
                          
                          Accrued
      expenses
                            and other liabilities
                          
                          $
                          618Total
      interest rate swaps not designated as hedging instrumentsunder
      SFAS 133:Total
      interest rate swaps
                          
                          
                          
                          $
                          551
                          
                          
                          
                          $
                          618





The
effect of interest rate swaps for the six months ended June 30, 2009 and 2008
are as follows:


Six Months EndedJune 30, 2009
                      
                      
                      June 30, 2008Location of Gain or (Loss)
                      
                      (Dollars in thousands)Recognized in Non-interest
                      
                      Amount of the Gain or (Loss)Income
                      
                      Recognized in IncomeInterest
      rate swaps not designated as hedging instrumentsunder
      SFAS 133:Interest
      rate contracts
                      
                      Other
                      
                      $
                      (56
                      )
                      
                      $
                      -Total
                      
                      
                      
                      $
                      (56
                      )
                      
                      $
                      -





NOTE
7.  DIVIDENDS





During
the second quarter of 2009, the Company’s board of directors declared a regular
quarterly cash dividend at a rate of $0.01 per share. The dividend was payable
on July 27, 2009 for stockholders of record on July 10,
2009.  Atlantic Coast Federal, MHC (“MHC”) which holds 8,728,500
shares, or approximately 64.9% of the Company’s total outstanding common stock
at June 30, 2009 informed the Company it waived receipt of the first quarter
dividend on its owned shares, as was done throughout 2008.





Total
dividends charged to retained earnings for the six months ended June 30, 2009
were approximately $90,000.




17




NOTE
8.  EARNINGS (LOSS) PER COMMON SHARE





Basic
earnings (loss) per common share is computed by dividing net income (loss) by
the weighted-average number of common shares outstanding for the period, reduced
for average unallocated ESOP shares and average unearned restricted stock
awards. Diluted earnings (loss) per common share is computed by dividing net
income (loss) by the average number of common shares outstanding for the period
increased for the dilutive effect of unvested stock options and stock awards.
The dilutive effect of the unvested stock options and stock awards is calculated
under the treasury stock method utilizing the average market value of the
Company’s stock for the period. A reconciliation of the numerator and
denominator of the basic and diluted earnings (loss) per common share
computation for the three and six months ended June 30, 2009 and 2008 is as
follows:





(Dollars in Thousands, except per share data)For the three months
                                
                                
                                For the six monthsended June 30,
                                
                                
                                ended June 30,2009
                                
                                
                                2008
                                
                                
                                2009
                                
                                
                                2008BasicNet
      income (loss)
                                
                                $
                                (4,634
                                )
                                
                                $
                                710
                                
                                
                                $
                                (7,694
                                )
                                
                                $
                                734Weighted
      average common shares outstanding
                                
                                
                                13,428,263
                                
                                
                                
                                13,588,410
                                
                                
                                
                                13,431,670
                                
                                
                                
                                13,623,448Less:
      Average unallocated ESOP shares
                                
                                
                                (232,760
                                )
                                
                                
                                (279,312
                                )
                                
                                
                                (232,760
                                )
                                
                                
                                (279,312
                                )Average
      unvested restricted stock awards
                                
                                
                                (109,183
                                )
                                
                                
                                (166,484
                                )
                                
                                
                                (109,995
                                )
                                
                                
                                (172,099
                                )Average
      Shares
                                
                                
                                13,086,320
                                
                                
                                
                                13,142,614
                                
                                
                                
                                13,088,915
                                
                                
                                
                                13,172,037Basic
      earnings (loss) per common share
                                
                                $
                                (0.36
                                )
                                
                                $
                                0.05
                                
                                
                                $
                                (0.59
                                )
                                
                                $
                                0.06DilutedNet
      Income (loss)
                                
                                $
                                (4,634
                                )
                                
                                $
                                710
                                
                                
                                $
                                (7,694
                                )
                                
                                $
                                734Weighted
      average common shares outstanding
                                
                                
                                13,086,320
                                
                                
                                
                                13,142,614
                                
                                
                                
                                13,088,915
                                
                                
                                
                                13,172,037Add:Dilutive
      effects of assumed exercise of stock options
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Dilutive
      effects of full vesting of stock awards
                                
                                
                                -
                                
                                
                                
                                70,835
                                
                                
                                
                                -
                                
                                
                                
                                68,382Average
      shares and dilutive potential common shares
                                
                                
                                13,086,320
                                
                                
                                
                                13,213,449
                                
                                
                                
                                13,088,915
                                
                                
                                
                                13,240,419Diluted
      earnings (loss) per common share
                                
                                $
                                (0.36
                                )
                                
                                $
                                0.05
                                
                                
                                $
                                (0.59
                                )
                                
                                $
                                0.06





Stock
options for 559,101 and 428,591 shares of common stock were not considered in
computing diluted earnings per common share for the three and six months ended
June 30, 2009 and 2008, respectively, because they were
anti-dilutive.




18




NOTE
9.  TOTAL COMPREHENSIVE INCOME (LOSS)





Comprehensive
income consists of net income and other comprehensive income.  Other
comprehensive income includes unrealized gains and losses on securities
available-for-sale and unrealized gains and losses on cash flow
hedges.  Following is a summary  of other comprehensive
income (loss) for the three and six months ended June 30, 2009 and
2008:





(Dollars in Thousands)Three months ended June 30,
                                      
                                      
                                      Six months ended June 30,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2009
                                      
                                      
                                      2008Net
      income (loss)
                                      
                                      $
                                      (4,634
                                      )
                                      
                                      $
                                      710
                                      
                                      
                                      $
                                      (7,694
                                      )
                                      
                                      $
                                      734Other
      comprehensive income (loss)Change
      in securities available for sale:Unrealized
      holding gains (losses)arising
      during the period
                                      
                                      
                                      (576
                                      )
                                      
                                      
                                      (4,190
                                      )
                                      
                                      
                                      (1,369
                                      )
                                      
                                      
                                      (3,277
                                      )Other-than-temporary-impairment
      onavailable-for-sale
      debt securities recordedin
      other comprehensive income
                                      
                                      
                                      506
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      806
                                      
                                      
                                      
                                      -Other-than-temporary-impairment
      onavailable-for-sale
      debt securities associatedwith
      credit loss realized in income
                                      
                                      
                                      1,146
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,320
                                      
                                      
                                      
                                      -Less
      reclassification adjustments for (gains)losses
      recognized in income
                                      
                                      
                                      (118
                                      )
                                      
                                      
                                      (18
                                      )
                                      
                                      
                                      (215
                                      )
                                      
                                      
                                      (83
                                      )Income
      tax effect
                                      
                                      
                                      (395
                                      )
                                      
                                      
                                      1,560
                                      
                                      
                                      
                                      (228
                                      )
                                      
                                      
                                      1,203Change
      in fair value of derivatives usedfor
      cash flow hedges
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (309
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (309
                                      )Less
      reclassification adjustments for (gains)losses
      recognized in income
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Net
      unrealized gains and (losses)
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (309
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (309
                                      )Income
      tax effect
                                      
                                      
                                      -
                                      
                                      
                                      
                                      117
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      117Total
      other comprehensive income (loss)
                                      
                                      
                                      563
                                      
                                      
                                      
                                      (2,804
                                      )
                                      
                                      
                                      314
                                      
                                      
                                      
                                      (2,183
                                      )Comprehensive
      income (loss)
                                      
                                      $
                                      (4,071
                                      )
                                      
                                      $
                                      (2,094
                                      )
                                      
                                      $
                                      (7,380
                                      )
                                      
                                      $
                                      (1,449
                                      )





19





NOTE
10.  FAIR VALUE




SFAS
No. 157 defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS No. 157 also 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
values:





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





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





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





Investment
Securities:


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





Other Real Estate
Owned:


Assets
acquired through or in lieu of loan foreclosure are initially recorded at fair
value, less estimated selling costs, at the date of foreclosure, establishing a
new cost basis.  If fair value declines subsequent to foreclosure, a
charge is recorded through expense.  Costs relating to improvement of
property may be capitalized, whereas costs relating to the holding of property
are expensed.





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 3
inputs).





Interest Rate
Swaps:


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





20





NOTE 10.  FAIR VALUE(continued)





Assets and Liabilities
Measured on a Recurring Basis





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





Fair Value Measurements at June 30, 2009 Using:June 30, 2009
                
                
                Quoted
                  Prices in
                  Active
                  Markets
                  for
                  Identical
                  Assets
                  (Level 1)
                
                
                Significant
                  Other
                  Observable
                  Inputs
                  (Level 2)
                
                
                Significant
                  Unobservable
                  Inputs
                  (Level 3)(Dollars
      in Thousands)Assets:Available
      for saleU.S.
      government-sponsored entities and  agencies
                
                $
                987
                
                
                
                -
                
                
                $
                987
                
                
                
                -State
      and municipal
                
                
                2,495
                
                
                
                -
                
                
                
                2,495
                
                
                
                -Mortgage-backed
      securities – residential
                
                
                47,261
                
                
                
                -
                
                
                
                47,261
                
                
                
                -Collateralized
      mortgage obligations – U.S. Govt.
                
                
                105,517
                
                
                
                -
                
                
                
                105,517
                
                
                
                -Collateralized
      mortgage obligations - other
                
                
                21,546
                
                
                
                -
                
                
                
                -
                
                
                
                21,546Liabilities:Interest
      rate swap
                
                $
                (551
                )
                
                $
                -
                
                
                $
                (551
                )
                
                $
                -





Fair Value Measurements at December 31, 2008 Using:December 31,
                  2008
                
                
                Quoted
                  Prices in
                  Active
                  Markets
                  for
                  Identical
                  Assets
                  (Level 1)
                
                
                Significant
                  Other
                  Observable
                  Inputs
                  (Level 2)
                
                
                Significant
                  Unobservable
                  Inputs
                  (Level 3)(Dollars
      in Thousands)Assets:Available
      for sale securitiesU.S.
      government-sponsored entities and  agencies
                
                $
                14,200
                
                
                
                -
                
                
                $
                14,200
                
                
                
                -State
      and municipal
                
                
                2,513
                
                
                
                -
                
                
                
                2,513
                
                
                
                -Mortgage-backed
      securities – residential
                
                
                130,761
                
                
                
                -
                
                
                
                130,761
                
                
                
                -Liabilities:Interest
      rate swap
                
                $
                (618
                )
                
                $
                -
                
                
                $
                (618
                )
                
                $
                -





Fair
value adjustments for interest rate swaps resulted in a net loss of $56,000 for
the six months ended June 30, 2009.


21


NOTE 10.  FAIR VALUE(continued)





The table
below presents a reconciliation of all assets measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the three
and six month periods ended June 30, 2009:





InvestmentSecuritiesAvailable-for-sale(Dollars
      in thousands)Balance
      of recurring Level 3 assets at April 1, 2009
                  
                  $
                  -Total
      realized and unrealized gains (losses):
                  
                  
                  -Included
      in earnings - realized
                  
                  
                  -Included
      in earnings - unrealized
                  
                  
                  (1,146
                  )Included
      other comprehensive income
                  
                  
                  -Proceeds,
      net
                  
                  
                  -Transfers
      in and/or out of level 3
                  
                  
                  22,687Balance
      of recurring Level 3 assets at June 30, 2009
                  
                  $
                  21,541





InvestmentSecuritiesAvailable-for-saleBalance
      of recurring Level 3 assets at January 1, 2009
                  
                  $
                  -Total
      realized and unrealized gains (losses):
                  
                  
                  -Included
      in earnings - realized
                  
                  
                  -Included
      in earnings - unrealized
                  
                  
                  (1,320
                  )Included
      in other comprehensive income
                  
                  
                  -Proceeds,
      net
                  
                  
                  -Transfers
      in and/or out of level 3
                  
                  
                  22,861Balance
      of recurring Level 3 assets at June 30, 2009
                  
                  $
                  21,541





Continued
illiquidity in the market for certain types of mortgage-backed securities has
resulted in unreliable or unavailable fair values; accordingly the Company
determined that mortgage-backed securities totaling $21,541 were more
appropriately evaluated as Level 3 assets as of June 30, 2009.





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
$27.5 million, with a valuation allowance of $5.4 million at June 30,
2009.  Provision for loan losses of $1.1 million and $3.4 million was
recorded during the three months and six months ended June 30, 2009,
respectively.


22


NOTE
11.  FAIR VALUE OF FINANCIAL INSTRUMENTS





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





As of June 30,
                    
                    
                    As of December 31,2009
                    
                    
                    2008Carrying
                    
                    
                    Estimated
                    
                    
                    Carrying
                    
                    
                    EstimatedAmount
                    
                    
                    Fair Value
                    
                    
                    Amount
                    
                    
                    Fair ValueFINANCIAL
      ASSETS
                    
                    
                    
                    
                    
                    
                    
                    (Dollars
      in Thousands)Cash
      and cash equivalents
                    
                    $
                    46,287
                    
                    
                    $
                    46,287
                    
                    
                    $
                    34,058
                    
                    
                    $
                    34,058Real
      estate mortgages held for sale
                    
                    
                    5,345
                    
                    
                    
                    5,345
                    
                    
                    
                    736
                    
                    
                    
                    736Loans,
      net
                    
                    
                    680,959
                    
                    
                    
                    680,575
                    
                    
                    
                    741,879
                    
                    
                    
                    733,142Federal
      Home Loan Bank stock
                    
                    
                    9,961
                    
                    
                    
                    n/a
                    
                    
                    
                    9,996
                    
                    
                    
                    n/aAccrued
      interest receivable
                    
                    
                    3,493
                    
                    
                    
                    3,493
                    
                    
                    
                    3,934
                    
                    
                    
                    3,934FINANCIAL
      LIABILITIESDeposits
                    
                    
                    629,487
                    
                    
                    
                    634,730
                    
                    
                    
                    624,606
                    
                    
                    
                    627,049Securities
      sold under agreements to repurchase
                    
                    
                    92,800
                    
                    
                    
                    102,144
                    
                    
                    
                    92,800
                    
                    
                    
                    106,327Federal
      Home Loan Bank advances
                    
                    
                    177,647
                    
                    
                    
                    215,219
                    
                    
                    
                    184,850
                    
                    
                    
                    216,869Accrued
      interest payable
                    
                    
                    1,519
                    
                    
                    
                    1,519
                    
                    
                    
                    1,441
                    
                    
                    
                    1,441





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





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


23


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 the Consolidated Financial
Statements included in Item 8 of our Annual Report on Form 10-K for the year
ended December 31, 2008 filed with the Securities and Exchange
Commission.





Allowance
for Loan Losses





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


24


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,Accounting by Creditors for
Impairment of a Loan (“SFAS 114”) and SFAS No. 118, Accounting by Creditors for
Impairment of a Loan – Income Recognition and Disclosures ( “SFAS
118”).  These accounting standards prescribe the measurement
methods and disclosures related to impaired loans.




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





Management
also evaluates the allowance for loan losses based on a review of 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.  Accordingly, we do not separately identify individual consumer
and residential loans for impairment disclosures.





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.





Securities
Available for Sale




Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation. The investment securities portfolio is evaluated for OTTI by
segregating the portfolio into two general segments and applying the appropriate
OTTI model. Investment securities classified as available for sale or
held-to-maturity are generally evaluated for OTTI under Statement of Financial
Accounting Standards (“SFAS”) No. 115,Accounting for Certain Investments
in Debt and Equity Securities. However, certain purchased beneficial
interests, including non-agency mortgage-backed securities, asset-backed
securities, and collateralized debt obligations, that had credit ratings at the
time of purchase of below AA are evaluated using the model outlined in EITF
Issue No. 99-20,Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests
that Continue to be Held by a Transfer in Securitized Financial
Assets.


25




In
determining OTTI under the SFAS No. 115 model, management considers many
factors, including: (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, (3) whether the market decline was affected by
macroeconomic conditions, and (4) whether the entity has the intent to sell
the debt security or more likely than not will be required to sell the debt
security before its anticipated recovery. The assessment of whether an
other-than-temporary decline exists involves a high degree of subjectivity and
judgment and is based on the information available to management at a point in
time.




The
second segment of the portfolio uses the OTTI guidance provided by EITF 99-20
that is specific to purchased beneficial interests that, on the purchase date,
were rated below AA. Under the EITF 99-20 model, the Company compares the
present value of the remaining cash flows as estimated at the preceding
evaluation date to the current expected remaining cash flows. An OTTI is deemed
to have occurred if there has been an adverse change in the remaining expected
future cash flows.




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





Valuation
of Goodwill





The Bank
assesses the carrying value of goodwill annually. This assessment is completed
more frequently if events or changes in circumstances indicate the asset might
be 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 recorded during the period it was
identified.  The Bank’s goodwill totaled $2.8 million as of June 30,
2009; therefore, if goodwill was determined to be impaired, the financial
results of the Company could be materially impacted.





Deferred
Income Taxes





After
converting to a federally chartered savings association, Atlantic Coast Bank
became a taxable organization.  Income tax expense (benefit) is the
total of the current year income tax due or refundable and the change in
deferred tax assets and liabilities.  Deferred tax assets and
liabilities are the expected future tax amounts for the temporary difference
between carrying amounts and tax basis of assets and liabilities, computed using
enacted tax rates.  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.


26


The Bank
assesses the carrying value of the deferred tax asset quarterly to determine if
a valuation allowance is appropriate.  Management has concluded the
probability of realization of the deferred tax asset to be more likely than
not.  Management has taken into account both positive and negative
evidence in reaching its conclusion, including prior operating profits and
forecasted financial information.  Realization of the deferred tax
asset is dependent upon the Company’s ability to generate pre-tax income in
future periods.  If the Company is unable to generate pre-tax income
in future periods or otherwise fails to meet forecasted operating results, a
valuation allowance may be required.  Any valuation allowance would be
required to be recorded during the period identified.  The Bank’s
deferred tax asset totaled $11.6 million as of June 30, 2009; therefore, if the
deferred tax asset required a valuation allowance, the financial results could
be materially impacted.





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





General.Total assets at June
30, 2009 as compared to December 31, 2008 decreased $9.5 million, to $986.6
million from $996.1 million.  Gross loans declined $59.7 million,
partially offset by higher investments in available for sale securities and cash
and cash equivalents. An increase in deposits nearly offset reduced borrowings
from FHLB of Atlanta.





June 30,
                
                
                December 31,
                
                
                Increase (decrease)2009
                
                
                2008
                
                
                Dollars
                
                
                PercentageAssets
                
                (Dollars
      in Thousands)Cash
      and cash equivalents
                
                $
                46,287
                
                
                $
                34,058
                
                
                $
                12,229
                
                
                
                35.9
                %Securitites
      available for sale
                
                
                177,806
                
                
                
                147,474
                
                
                
                30,332
                
                
                
                20.6
                %Loans
                
                
                692,832
                
                
                
                752,477
                
                
                
                (59,645
                )
                
                
                -7.9
                %Allowance
      for loan losses
                
                
                (11,873
                )
                
                
                (10,598
                )
                
                
                (1,275
                )
                
                
                12.0
                %Loans,
      net
                
                
                680,959
                
                
                
                741,879
                
                
                
                (60,920
                )
                
                
                -8.2
                %Real
      estate mortgages held for sale
                
                
                5,345
                
                
                
                736
                
                
                
                4,609
                
                
                
                626.2
                %Other
      assets
                
                
                76,175
                
                
                
                71,942
                
                
                
                4,233
                
                
                
                5.9
                %Total
      assets
                
                $
                986,572
                
                
                $
                996,089
                
                
                $
                (9,517
                )
                
                
                -1.0
                %Liabilities
      and Stockholders' equityDepositsNon-interest
      bearing demand
                
                $
                37,186
                
                
                $
                33,192
                
                
                $
                3,994
                
                
                
                12.0
                %Interest
      bearing demand
                
                
                77,497
                
                
                
                67,714
                
                
                
                9,783
                
                
                
                14.4
                %Savings
      and money market
                
                
                177,504
                
                
                
                164,388
                
                
                
                13,116
                
                
                
                8.0
                %Time
                
                
                337,300
                
                
                
                359,312
                
                
                
                (22,012
                )
                
                
                -6.1
                %Total
      deposits
                
                
                629,487
                
                
                
                624,606
                
                
                
                4,881
                
                
                
                0.8
                %Federal
      Home Loan Bank advances
                
                
                177,647
                
                
                
                184,850
                
                
                
                (7,203
                )
                
                
                -3.9
                %Securities
      sold under agreements to repurchase
                
                
                92,800
                
                
                
                92,800
                
                
                
                -
                
                
                
                0.0
                %Accrued
      expenses and other liabilities
                
                
                9,178
                
                
                
                9,873
                
                
                
                (695
                )
                
                
                -7.0
                %Total
      liabilities
                
                
                909,112
                
                
                
                912,129
                
                
                
                (3,017
                )
                
                
                -0.3
                %Stockholders'
      equity
                
                
                77,460
                
                
                
                83,960
                
                
                
                (6,500
                )
                
                
                -7.7
                %Total
      liabilities and stockholders' equity
                
                $
                986,572
                
                
                $
                996,089
                
                
                $
                (9,517
                )
                
                
                -1.0
                %





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





Cash and cash equivalents.
Cash and cash equivalents are comprised of cash-on-hand and interest earning and
non-interest earning balances held in other depository
institutions.  The increase in cash and cash equivalents during the
first six months of 2009 was due primarily to the decline in portfolio loans and
growth in deposits.  Management expects the balances in cash and cash
equivalents will fluctuate as other interest earning assets mature, as
management identifies opportunities for longer-term investments that fit the
Company’s growth strategy, and as daily operating liquidity increases or
decreases.


27


Securities available for
sale.  Securities available for sale is composed principally of
debt securities of U.S. Government-sponsored enterprises, and mortgage-backed
securities.  The investment portfolio increased approximately $30.3
million to $177.8 million at June 30, 2009, net of purchases, sales and
maturities.  Gain on sale of securities available for sale was
approximately $215,000.  Expense for other-than-temporary impairment
was approximately $1.3 million in non-interest income on three private label
mortgage-backed securities for the six months ended June 30, 2009.





The
assessment of whether an other-than-temporary decline exists involves a high
degree of subjectivity and judgment and is based on the information available to
management at a point in time.





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





Loans. Total loans declined approximately 8% to
$684.5 million at June 30, 2009 as compared to $743.6 million at December 31,
2008 due to increased payoffs of one- to four-family residential loans in the
second quarter of 2009, combined with the sale of approximately $13 million in
one-to four family residential loans near par in the first quarter of
2009.





Total
loan production decreased $30.4 million to $63.9 million for the six months
ended June 30, 2009 from $94.3 million for the six months ended June 30, 2008.
Production of loans held for sale in the secondary market increased $38.5
million, while portfolio loan production decreased $68.9 million to $21.8
million during the same period.  Portfolio loan production of all loan
types, and in particular one- to four-family residential loans have been
negatively impacted by the decline in real estate values, slowing residential
real estate sales activity and the overall recessionary economy in the Bank’s
markets.





Until
critical economic factors stabilize, such as unemployment and residential real
estate values, management believes portfolio loan balances will continue to
decline. However, due to a favorable interest rate environment, production of
one-to four-family loans held for sale on the secondary market is expected to
continue its moderate pace.





Allowance for loan losses. Our
allowance for loan losses was 1.71% and 1.43% of total loans outstanding at June
30, 2009 and December 31, 2008, respectively.




As shown
in the table below, non-performing assets totaled $42.0 million and $25.5
million at June 30, 2009, and December 31, 2008,
respectively.  Total impaired loans increased to $40.8 million at June
30, 2009 from $17.5 million at December 31, 2008.  As of June 30, 2009
non-performing one-to four-family residential loans of $10.2 million had been
written-down to the estimated fair value of their collateral and are expected to
be resolved with no additional material loss, absent further declines in the
fair value of collateral. The total allowance allocated for impaired loans
increased to $5.4 million at June 30, 2009 from $3.5 million at December 31,
2008. The increase in non-performing loans was primarily the result of general
deterioration in first and second residential mortgages as recessionary economic
conditions continued. The increase in impaired loans was primarily related to
certain commercial loan participations in our general market
area.  The Company ceased involvement in new loan participations
following a commitment made on December 31, 2006, and funded in May
2007.  As of June 30, 2009, and December 31, 2008, all
non-performing loans were classified as non-accrual, and there were no loans 90
days past due and accruing interest as of June 30, 2009, and December 31,
2008.  Non-performing loans, excluding small balance homogeneous
loans, increased to $19.5 million at June 30, 2009, from $8.3 million at
December 31, 2008.   Troubled debt restructured (TDR) loans
increased to $13.4 million as of June 30, 2009, from $7.0 at December 31, 2008;
these loans are primarily comprised of commercial loans collateralized by real
estate and were evaluated for impairment as required by SFAS 114.


28





Nonaccrualloans:
                              
                              June
                              
                              
                              Dec2009
                              
                              
                              2008Real EstateOne-to-four-family
                              
                              $
                              14,107
                              
                              
                              $
                              10,319Commercial
                              
                              
                              6,837
                              
                              
                              
                              5,126Other
                              
                              
                              7,157
                              
                              
                              
                              2,941Construction
      - One-to-four-family
                              
                              
                              -
                              
                              
                              
                              86Construction
      - Commercial
                              
                              
                              7,728
                              
                              
                              
                              3,169Construction
      - Acquisition & Development
                              
                              
                              404
                              
                              
                              
                              1,812Other Loans - ConsumerHome
      Equity
                              
                              
                              3,232
                              
                              
                              
                              1,525Other
                              
                              
                              2,252
                              
                              
                              
                              387Commercial
                              
                              
                              267
                              
                              
                              
                              170Total
      non-performing loans
                              
                              
                              41,984
                              
                              
                              
                              25,535Foreclosed
      assets
                              
                              
                              4,168
                              
                              
                              
                              3,332Total
      non-performing assets
                              
                              $
                              46,152
                              
                              
                              $
                              28,868Total
      troubled debt restructurings (TDR)
                              
                              $
                              13,400
                              
                              
                              $
                              7,004Total
      impaired loans (including TDR)
                              
                              $
                              40,811
                              
                              
                              $
                              17,472Non-performing
      loans to total loans
                              
                              
                              6.06
                              %
                              
                              
                              3.43
                              %Non-performing
      loans to total assets
                              
                              
                              4.26
                              %
                              
                              
                              2.56
                              %Non-performing
      assets to total assets
                              
                              
                              4.68
                              %
                              
                              
                              2.90
                              %





Loan
charge-offs include approximately $3.2 million in 2009 and $1.2 million in 2008
of partial charge-offs of one-to four- family residential loans identified as
non-performing. Due to the decline in real estate values over the last 12-18
months,  the Company believes, it  is appropriate and
prudent  to reduce the carrying balance of non-performing one-to
four-family residential loans by the expected loss amount rather than providing
a general allowance. Charge-offs in 2009 also included $ 3.3 million of specific
reserve on commercial loans transferred to other real estate or for which an
extended collection period is underway or expected.  The remaining
amounts charged-off in 2009 and 2008 principally represent losses on short-sales
or foreclosures of one-to four- family residential loans, home equity and other
consumer loans.   The increase in the provision for loan losses
in the first six months of 2009 was primarily due to residential charge-offs
described above as well as increased specific allowance due to the ongoing
deterioration of certain commercial loan participations in the Company's general
market area.


29


Deposits. Total deposit
account balances were $629.5 million at June 30, 2009, an increase of $4.9
million from $624.6 million at December 31, 2008.   Non-interest
bearing demand accounts increased $4.0 million.  Interest bearing
demand accounts increased $9.8 million, while time deposit accounts decreased
$22.0 million, offset by a $13.1 million increase in savings and money market
accounts due partially to disintermediation between these products. Management
believes future deposit growth will be limited as the Company attempts to level
deposit balances with declines in loan balances.




Federal Home Loan Bank
advances. FHLB advances had a weighted-average maturity of 68 months and
a weighted-average rate of 3.75% at June 30, 2009.   The $7.2
million decrease in FHLB borrowings at June 30, 2009 as compared to December 31,
2008 was due to repayments of $27.2 million partially offset by additional
borrowings of $20.0 million.   The Company expects to continue to
utilize FHLB advances to manage short and long- term liquidity needs to the
extent it has borrowing capacity, needs funding and the interest expense of FHLB
advances is attractive compared to deposits and other alternative sources of
funds. However, with the FDIC’s new deposit insurance premium raising deposit
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 from the
FHLB.




Securities sold under agreements to
repurchase. Securities sold under agreements to repurchase are secured by
mortgage-backed securities with a carrying amount of $114.6 million at June 30,
2009.  The agreements carry various periods of fixed interest rates
that convert to callable floating rates in the future.  Upon
conversion, each agreement may be terminated in whole by the lender each
following quarter.  At maturity or termination, the securities
underlying the agreements will be returned to the Company.  The
Company had $92.8 million of such agreements as of June 30, 2009 and
December 31, 2008.





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





(Dollars in Thousands)Average
      daily balance during the period
                  
                  $
                  92,800Average
      interest rate during the period
                  
                  
                  4.27
                  %Maximum
      month-end balance
                  
                  $
                  92,800Weighted
      average interest rate at period end
                  
                  
                  4.27
                  %





Certain
of the Company’s securities sold under agreements to repurchase contain
provisions that require the Company to maintain capital levels meeting
regulatory guidelines for “well-capitalized” institutions. If the Company’s
capital levels were to fall below “well-capitalized,” the agreements provide
that it would be in violation of these provisions, and the counterparties to the
securities sold under agreements to repurchase could request immediate payment
on securities sold under agreements to repurchase in net liability positions.
The aggregate fair value of all securities sold under agreements to repurchase
with credit-risk-related contingent features that are in a liability position on
June 30, 2009, was $86.0 million for which the Company has posted collateral of
$97.2 million in the normal course of business. If the credit-risk-related
contingent features underlying these agreements were triggered on June 30, 2009,
the Company would be required to make immediate payment of $86.0 million to its
counterparties.  The carrying value of these agreements was $77.8
million on June 30, 2009.  Depending on the availability of suitable
securities and the prevailing interest rates and terms of alternative sources of
funds, the Company may continue to sell securities under agreements to
repurchase in the future.


30





Stockholders’
equity.  Stockholders’ equity decreased by approximately $6.5
million to $77.5 million at June 30, 2009 from $84.0 million at December 31,
2008 primarily due to the net loss of $7.7 million, offset by the increase in
other comprehensive income.  In June 2009, the Company’s board of
directors declared a regular quarterly cash dividend at a rate of $0.01 per
share. The dividend was payable on July 27, 2009, for stockholders of record on
July 10, 2009. Atlantic Coast Federal, MHC which holds 8,728,500 shares, or
64.9% of the Company’s total outstanding stock, informed the Company it waived
receipt of this dividend as it had throughout 2008 on its owned
shares.  Total dividends for the six months ended June 30, 2009
charged to stockholders’ equity was approximately $90,000 and approximately
$175,000 of dividend payments were waived by the MHC. Management expects the MHC
to waive receipt of payment on future dividends for its owned
shares.




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 part of a
capital preservation plan, the Company suspended its repurchase activity in
March 2009.As of
June 30, 2009, approximately 172,000 shares of common stock remained to be
repurchased under this plan.




The
Company’s equity to assets ratio decreased to 7.85% at June 30, 2009, from 8.43%
at December 31, 2008. The decrease was primarily due to the net loss of $7.7
million for the six months ended June 30, 2009 partially offset by the increase
in other comprehensive income. Despite this decrease, the Bank continued to be
well in excess of all minimum regulatory capital requirements, and is considered
“well capitalized” under those formulas.  Total risk-based capital to
risk-weighted assets was 11.1%, Tier 1 capital to risk-weighted assets was
10.1%, and Tier 1 capital to adjusted total assets was 6.2% at June 30, 2009.
These ratios as of December 31, 2008 were 10.9%, 10.0% and 7.0%,
respectively.





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





General.Net loss for the three
months ended June 30, 2009, was $4.6 million, which was a decrease of $5.3
million from net income of $710,000 for the same period in 2008 due to an
increase in the provision for loan losses, a decline in net interest income and
an OTTI charge.




Average Balances, Net Interest
Income, Yields Earned and Rates Paid. The following table sets forth
certain information for the three months ended June 30, 2009 and 2008. The
average yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented.


31





For
      the three months ended June 30,2009
                              
                              
                              2008(Dollars
      in Thousands)Average
      Balance
                              
                              
                              Interest
                              
                              
                              Average
      Yield /Cost
                              
                              
                              Average
      Balance
                              
                              
                              Interest
                              
                              
                              Average
      Yield /CostINTEREST-EARNING
      ASSETSLoans
      receivable(1)
                              
                              $
                              716,871
                              
                              
                              $
                              10,266
                              
                              
                              
                              5.73
                              %
                              
                              $
                              723,163
                              
                              
                              $
                              11,497
                              
                              
                              
                              6.36
                              %Securites(2)
                              
                              
                              166,233
                              
                              
                              
                              1,838
                              
                              
                              
                              4.42
                              %
                              
                              
                              150,503
                              
                              
                              
                              2,018
                              
                              
                              
                              5.36
                              %Other interest-earning
      assets(3)
                              
                              
                              50,004
                              
                              
                              
                              23
                              
                              
                              
                              0.18
                              %
                              
                              
                              32,692
                              
                              
                              
                              261
                              
                              
                              
                              3.19
                              %Total
      interest-earning assets
                              
                              
                              933,108
                              
                              
                              
                              12,127
                              
                              
                              
                              5.20
                              %
                              
                              
                              906,358
                              
                              
                              
                              13,776
                              
                              
                              
                              6.08
                              %Non-interest
      earning assets
                              
                              
                              56,962
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              55,753Total
      assets
                              
                              $
                              990,070
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              962,111INTEREST-BEARING
      LIABILITIESSavings
      deposits
                              
                              $
                              35,161
                              
                              
                              $
                              33
                              
                              
                              
                              0.38
                              %
                              
                              $
                              35,951
                              
                              
                              $
                              33
                              
                              
                              
                              0.37
                              %Interest
      bearing demand accounts
                              
                              
                              74,228
                              
                              
                              
                              360
                              
                              
                              
                              1.94
                              %
                              
                              
                              56,133
                              
                              
                              
                              295
                              
                              
                              
                              2.10
                              %Money
      market accounts
                              
                              
                              140,485
                              
                              
                              
                              581
                              
                              
                              
                              1.65
                              %
                              
                              
                              133,977
                              
                              
                              
                              865
                              
                              
                              
                              2.58
                              %Time
      deposits
                              
                              
                              341,339
                              
                              
                              
                              3,216
                              
                              
                              
                              3.77
                              %
                              
                              
                              325,917
                              
                              
                              
                              3,717
                              
                              
                              
                              4.56
                              %Federal
      Home Loan Bank advances
                              
                              
                              177,631
                              
                              
                              
                              1,709
                              
                              
                              
                              3.85
                              %
                              
                              
                              182,427
                              
                              
                              
                              1,818
                              
                              
                              
                              3.99
                              %Securities
      sold under agreements to repurchase
                              
                              
                              92,800
                              
                              
                              
                              1,017
                              
                              
                              
                              4.38
                              %
                              
                              
                              91,025
                              
                              
                              
                              937
                              
                              
                              
                              4.12
                              %Total
      interest-bearing liabilities
                              
                              
                              861,644
                              
                              
                              
                              6,916
                              
                              
                              
                              3.21
                              %
                              
                              
                              825,430
                              
                              
                              
                              7,665
                              
                              
                              
                              3.72
                              %Non-interest
      bearing liabilities
                              
                              
                              48,648
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              46,918Total
      liabilities
                              
                              
                              910,292
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              872,348Stockholders'
      equity
                              
                              
                              79,778
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              89,763Total
      liabilities and stockholders' equity
                              
                              $
                              990,070
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              962,111Net
      interest income
                              
                              
                              
                              
                              
                              $
                              5,211
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              6,111Net
      interest spread
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1.99
                              %
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2.36
                              %Net
      earning assets
                              
                              $
                              71,464
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              80,928Net interest
      margin(4)
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2.23
                              %
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2.70
                              %Average
      interest-earning assets to average interest-bearing
      liabilities
                              
                              
                              
                              
                              
                              
                              108.29
                              %
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              109.80
                              %


(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.




32


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 June 30, 2009
as compared to the same period in 2008. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in volume multiplied by the old rate; and (2)
changes in rate, which are changes in rate multiplied by the old volume; and (3)
changes not solely attributable to rate or volume have been allocated
proportionately to the change due to volume and the change due to
rate.




Increase/(Decrease)
                          
                          
                          TotalDue to
                          
                          
                          IncreaseVolume
                          
                          
                          Rate
                          
                          
                          (Decrease)INTEREST-EARNING ASSETS
                          
                          
                          
                          
                          (Dollars
      in Thousands)Loans
      receivable
                          
                          $
                          (99
                          )
                          
                          $
                          (1,132
                          )
                          
                          $
                          (1,231
                          )Securities
                          
                          
                          197
                          
                          
                          
                          (377
                          )
                          
                          
                          (180
                          )Other
      interest-earning assets
                          
                          
                          91
                          
                          
                          
                          (329
                          )
                          
                          
                          (238
                          )Total
      interest-earning assets
                          
                          
                          189
                          
                          
                          
                          (1,838
                          )
                          
                          
                          (1,649
                          )INTEREST-BEARING
LIABILITIESSavings
      deposits
                          
                          
                          -
                          
                          
                          
                          1
                          
                          
                          
                          1Interest
      bearing demand accounts
                          
                          
                          89
                          
                          
                          
                          (25
                          )
                          
                          
                          64Money
      market accounts
                          
                          
                          40
                          
                          
                          
                          (324
                          )
                          
                          
                          (284
                          )Time
      deposits
                          
                          
                          169
                          
                          
                          
                          (671
                          )
                          
                          
                          (502
                          )Federal
      Home Loan Bank advances
                          
                          
                          (47
                          )
                          
                          
                          (61
                          )
                          
                          
                          (108
                          )Securities
      sold under agreements to repurchase
                          
                          
                          18
                          
                          
                          
                          62
                          
                          
                          
                          80Total
      interest-bearing liabilities
                          
                          
                          269
                          
                          
                          
                          (1,018
                          )
                          
                          
                          (749
                          )Net
      interest income
                          
                          $
                          (80
                          )
                          
                          $
                          (820
                          )
                          
                          $
                          (900
                          )





Interest income.Interest
income declined $1.6 million to $12.1 million for the three months ended June
30, 2009 from $13.8 million for the three months ended June 30, 2008 due
principally to an increase in non-performing loans, as well as a decline in
average interest rates on interest-earning assets to 5.20% from
6.08%.  The average daily prime rate decreased 175 basis points from
5.00% to 3.25% for the comparative three- month periods ended June 30, 2009 and
2008.   Approximately 15% of the Bank’s loans are indexed to the
prime rate.





Interest
income from loans decreased, due to the decrease in average balances on loans
and the decrease in average interest rates.  Interest income from
investment securities decreased, as the increase in average balances was more
than offset by the decrease in average interest rates.  The decline in
interest income from other interest-earning assets was due to a decline in
average interest rates, the suspension of quarterly dividend payments by the
Federal Home Loan Bank of Atlanta, partially offset by slightly higher average
balances for the three months ended June 30, 2009 as compared to the same three
month period in the prior year.





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





Interest expense. Interest
expense declined by $749,000 to $6.9 million for the three months ended June 30,
2009 from $7.7 million for the three months ended June 30, 2008.  The
decrease in interest expense for the three months ended June 30, 2009, as
compared to the same period in 2008, was due to lower average rates on
interest-bearing liabilities, partially offset by growth in average outstanding
balances of both deposits and securities sold under agreements to
repurchase.  Interest expense on FHLB borrowings declined for the
second quarter of 2009 as compared to the same quarter of 2008, as a result of
restructuring a number of advances at slightly lower rates during the latter
part of 2008.


33


Net interest
income.Net interest income decreased $900,000, to $5.2
million for the three months ended June 30, 2009, from $6.1 million for the
three months ended June 30, 2008, as the decrease in interest income outpaced
the decrease in interest expense. Our net interest rate spread, which is the
difference between the interest rate earned on interest-earning assets and the
interest rate paid on interest-bearing liabilities, decreased 38 basis points to
1.99% for the first quarter of 2009 as compared to 2.37% for the same quarter in
2008.  For the same comparative periods, our net interest margin,
which is net interest income expressed as a percentage of our average interest
earning assets, decreased 47 basis points to 2.23%.





Provision for loan
losses. Provision for loan losses of $6.2 million and $3.9
million were made during the three months ended June 30, 2009 and 2008,
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 June 30, 2009,
were $8.7 million, which included a partial charge-off of $3.2 million of
non-performing residential mortgage loans, $1.3 million of additional net
charge-offs of residential loans foreclosed on or sold in short-sales
transactions, and $3.7 million of non-performing commercial loans.  By
comparison, the Company had net charge-offs for the same three months in 2008 of
$2.2 million





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





Increase(decrease)2009
                    
                    
                    2008
                    
                    
                    Dollars
                    
                    
                    Percentage(Dollars
      in Thousands)Service
      charges and fees
                    
                    $
                    1,028
                    
                    
                    $
                    1,175
                    
                    
                    $
                    (147
                    )
                    
                    
                    -12.5
                    %Gain
      on sale of real estate mortgagesheld
      for sale
                    
                    
                    189
                    
                    
                    
                    36
                    
                    
                    
                    153
                    
                    
                    
                    425.0
                    %Loss
      on sale of foreclosed assets
                    
                    
                    (286
                    )
                    
                    
                    (157
                    )
                    
                    
                    (129
                    )
                    
                    
                    82.2
                    %Gain
      (loss) on available for sale securities
                    
                    
                    118
                    
                    
                    
                    18
                    
                    
                    
                    100
                    
                    
                    
                    555.6
                    %Other
      than temporary impairment losses
                    
                    
                    (1,146
                    )
                    
                    
                    –
                    
                    
                    
                    (1,146
                    )
                    
                    
                    –Interchange
      fees
                    
                    
                    235
                    
                    
                    
                    230
                    
                    
                    
                    5
                    
                    
                    
                    2.2
                    %Bank
      owned life insurance earnings
                    
                    
                    179
                    
                    
                    
                    278
                    
                    
                    
                    (99
                    )
                    
                    
                    -35.6
                    %Life
      insurance proceeds on deceased executive officer
                    
                    
                    –
                    
                    
                    
                    2,634
                    
                    
                    
                    (2,634
                    )
                    
                    
                    -100.0
                    %Other
                    
                    
                    147
                    
                    
                    
                    141
                    
                    
                    
                    6
                    
                    
                    
                    4.3
                    %$
                    464
                    
                    
                    $
                    4,355
                    
                    
                    $
                    (3,891
                    )
                    
                    
                    -89.3
                    %





Non-interest
income for the three months ended June 30, 2009 decreased $3.9 million to
$464,000 as compared to $3.9 million for the same three months in
2008.  The second quarter of 2008 included life insurance proceeds on
a deceased executive of $2.6 million. During the second quarter of 2009 the
Company recorded an other than temporary impairment loss of $1.1 million on
three private label mortgage-backed securities held as securities available for
sale.


34


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





Increase(decrease)2009
                    
                    
                    2008
                    
                    
                    Dollars
                    
                    
                    Percentage(Dollars
      in Thousands)Compensation
      and benefits
                    
                    $
                    2,967
                    
                    
                    $
                    3,121
                    
                    
                    $
                    (154
                    )
                    
                    
                    -4.9
                    %Final
      plan benefits for deceased executive
                    
                    
                    -
                    
                    
                    
                    1,032
                    
                    
                    
                    (1,032
                    )
                    
                    
                    -100.0
                    %Occupancy
      and equipment
                    
                    
                    667
                    
                    
                    
                    689
                    
                    
                    
                    (22
                    )
                    
                    
                    -3.2
                    %Data
      processing
                    
                    
                    249
                    
                    
                    
                    205
                    
                    
                    
                    44
                    
                    
                    
                    21.5
                    %Outside
      professional services
                    
                    
                    736
                    
                    
                    
                    504
                    
                    
                    
                    232
                    
                    
                    
                    46.0
                    %Collection
      expense and repossessedasset
      losses
                    
                    
                    272
                    
                    
                    
                    91
                    
                    
                    
                    181
                    
                    
                    
                    198.9
                    %Other
                    
                    
                    1,756
                    
                    
                    
                    1,286
                    
                    
                    
                    470
                    
                    
                    
                    36.5
                    %$
                    6,647
                    
                    
                    $
                    6,928
                    
                    
                    $
                    (281
                    )
                    
                    
                    -4.1
                    %





Non-interest
expense decreased by $281,000 to $6.6 million for the three months ended June
30, 2009 from $6.9 million for the same three months ended June 30,
2008.  The second quarter of 2008 included the payment of final plan
benefits on a deceased executive of $1.0 million.  Other components of
the decrease include lower compensation and benefits expense as result of our
previously announced cost reduction initiatives, partially offset by higher
other expense comprised primarily of the special assessment for FDIC deposit
insurance levied on all banks which amounted to $465,000 for us, higher outside
professional services, higher advertising expenses and higher collection expense
during the quarter.





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





Income tax benefit.Income tax
benefit increased $1.4 million to a tax benefit of $2.5 million for the three
months ended June 30, 2009, from a benefit of $1.1 million for the same period
in 2008 largely due to the net loss for the quarter.





Comparison of Results of Operations
for the Six Months Ended June 30, 2009 and 2008.





General.Net loss for the six
months ended June 30, 2009, was $7.7 million, which was a decrease of $8.4
million from net income of $734,000 for the same period in 2008 due to an
increase in the provision for loan losses, a decline in net interest income and
an OTTI charge.


35





Average Balances, Net Interest
Income, Yields Earned and Rates Paid. The following table sets forth
certain information for the six months ended June 30, 2009 and 2008. The average
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods
presented.





For the six months ended June 30,2009
                                    
                                    
                                    2008(Dollars in Thousands)Average
                                    
                                    
                                    
                                    
                                    
                                    Average Yield
                                    
                                    
                                    Average
                                    
                                    
                                    
                                    
                                    
                                    AverageBalance
                                    
                                    
                                    Interest
                                    
                                    
                                    /Cost
                                    
                                    
                                    Balance
                                    
                                    
                                    Interest
                                    
                                    
                                    Yield /CostINTEREST-EARNING
      ASSETSLoans
      receivable(1)
                                    
                                    $
                                    729,514
                                    
                                    
                                    $
                                    21,088
                                    
                                    
                                    
                                    5.78
                                    %
                                    
                                    $
                                    712,818
                                    
                                    
                                    $
                                    23,131
                                    
                                    
                                    
                                    6.49
                                    %Securites(2)
                                    
                                    
                                    163,875
                                    
                                    
                                    
                                    3,821
                                    
                                    
                                    
                                    4.66
                                    %
                                    
                                    
                                    148,483
                                    
                                    
                                    
                                    3,976
                                    
                                    
                                    
                                    5.36
                                    %Other
      interest-earning assets(3)
                                    
                                    
                                    47,572
                                    
                                    
                                    
                                    43
                                    
                                    
                                    
                                    0.18
                                    %
                                    
                                    
                                    39,259
                                    
                                    
                                    
                                    697
                                    
                                    
                                    
                                    3.55
                                    %Total
      interest-earning assets
                                    
                                    
                                    940,961
                                    
                                    
                                    
                                    24,952
                                    
                                    
                                    
                                    5.30
                                    %
                                    
                                    
                                    900,560
                                    
                                    
                                    
                                    27,804
                                    
                                    
                                    
                                    6.17
                                    %Non-interest
      earning assets
                                    
                                    
                                    57,997
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    55,754Total
      assets
                                    
                                    $
                                    998,958
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    956,314INTEREST-BEARING
      LIABILITIESSavings
      deposits
                                    
                                    $
                                    34,435
                                    
                                    
                                    $
                                    65
                                    
                                    
                                    
                                    0.38
                                    %
                                    
                                    $
                                    35,765
                                    
                                    
                                    $
                                    66
                                    
                                    
                                    
                                    0.37
                                    %Interest
      bearing demand accounts
                                    
                                    
                                    72,534
                                    
                                    
                                    
                                    723
                                    
                                    
                                    
                                    1.99
                                    %
                                    
                                    
                                    52,182
                                    
                                    
                                    
                                    552
                                    
                                    
                                    
                                    2.12
                                    %Money
      market accounts
                                    
                                    
                                    138,444
                                    
                                    
                                    
                                    1,309
                                    
                                    
                                    
                                    1.89
                                    %
                                    
                                    
                                    139,108
                                    
                                    
                                    
                                    2,065
                                    
                                    
                                    
                                    2.97
                                    %Time
      deposits
                                    
                                    
                                    345,974
                                    
                                    
                                    
                                    6,649
                                    
                                    
                                    
                                    3.84
                                    %
                                    
                                    
                                    329,256
                                    
                                    
                                    
                                    7,779
                                    
                                    
                                    
                                    4.73
                                    %Federal
      Home Loan Bank advances
                                    
                                    
                                    185,288
                                    
                                    
                                    
                                    3,421
                                    
                                    
                                    
                                    3.69
                                    %
                                    
                                    
                                    177,703
                                    
                                    
                                    
                                    3,613
                                    
                                    
                                    
                                    4.07
                                    %Securities
      sold under agreements to repurchase
                                    
                                    
                                    92,800
                                    
                                    
                                    
                                    2,000
                                    
                                    
                                    
                                    4.31
                                    %
                                    
                                    
                                    86,194
                                    
                                    
                                    
                                    1,799
                                    
                                    
                                    
                                    4.17
                                    %Total
      interest-bearing liabilities
                                    
                                    
                                    869,475
                                    
                                    
                                    
                                    14,167
                                    
                                    
                                    
                                    3.26
                                    %
                                    
                                    
                                    820,208
                                    
                                    
                                    
                                    15,874
                                    
                                    
                                    
                                    3.87
                                    %Non-interest
      bearing liabilities
                                    
                                    
                                    48,328
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    46,011Total
      liabilities
                                    
                                    
                                    917,803
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    866,219Stockholders'
      equity
                                    
                                    
                                    81,155
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    90,095Total
      liabilities and stockholders' equity
                                    
                                    $
                                    998,958
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    956,314Net
      interest income
                                    
                                    
                                    
                                    
                                    
                                    $
                                    10,785
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    11,930Net
      interest spread
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2.04
                                    %
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2.30
                                    %Net
      earning assets
                                    
                                    $
                                    71,486
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    80,352Net
      interest margin(4)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2.29
                                    %
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2.65
                                    %Average
      interest-earning assets to average interest-bearing
      liabilities
                                    
                                    
                                    
                                    
                                    
                                    
                                    108.22
                                    %
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    109.80
                                    %





(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.


36


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 six months ended June 30, 2009 as
compared to the same period in 2008. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in volume multiplied by the old rate; and (2)
changes in rate, which are changes in rate multiplied by the old volume; and (3)
changes not solely attributable to rate or volume have been allocated
proportionately to the change due to volume and the change due to
rate.




Increase/(Decrease)
                    
                    
                    TotalDueto
                    
                    
                    IncreaseVolume
                    
                    
                    Rate
                    
                    
                    (Decrease)INTEREST-EARNING ASSETS
                    
                    (Dollars
      in Thousands)Loans
      receivable
                    
                    $
                    531
                    
                    
                    $
                    (2,574
                    )
                    
                    $
                    (2,043
                    )Securities
                    
                    
                    389
                    
                    
                    
                    (543
                    )
                    
                    
                    (154
                    )Other
      interest-earning assets
                    
                    
                    122
                    
                    
                    
                    (777
                    )
                    
                    
                    (655
                    )Total
      interest-earning assets
                    
                    
                    1,042
                    
                    
                    
                    (3,894
                    )
                    
                    
                    (2,852
                    )INTEREST-BEARING
LIABILITIESSavings
      deposits
                    
                    
                    (2
                    )
                    
                    
                    1
                    
                    
                    
                    (1
                    )Interest
      bearing demand accounts
                    
                    
                    204
                    
                    
                    
                    (33
                    )
                    
                    
                    171Money
      market accounts
                    
                    
                    (10
                    )
                    
                    
                    (746
                    )
                    
                    
                    (756
                    )Time
      deposits
                    
                    
                    379
                    
                    
                    
                    (1,509
                    )
                    
                    
                    (1,130
                    )Federal
      Home Loan Bank advances
                    
                    
                    150
                    
                    
                    
                    (342
                    )
                    
                    
                    (192
                    )Securities
      sold under agreements to repurchase
                    
                    
                    141
                    
                    
                    
                    60
                    
                    
                    
                    201Total
      interest-bearing liabilities
                    
                    
                    862
                    
                    
                    
                    (2,569
                    )
                    
                    
                    (1,707
                    )Net
      interest income
                    
                    $
                    180
                    
                    
                    $
                    (1,325
                    )
                    
                    $
                    (1,145
                    )





Interest income.Interest
income declined $2.8 million to $25.0 million for the six months ended June 30,
2009 from $27.8 million for the six months ended June 30, 2008 due principally
to an increase in non-performing loans, as well as a decline in average interest
rates on interest-earning assets to 5.30% from 6.17%.  The average
daily prime rate has decreased 239 basis points from 5.64% to 3.25% for the
comparative six-month periods ended June 30, 2009 and 2008. Approximately 15% of
the Bank’s loans are indexed to the prime rate.





Interest
income from loans decreased, as the increase in average balances was more than
offset by the decrease in average interest rates.  Interest income
from investment securities decreased, as the increase in average balances was
more than offset by the decrease in average interest rates.  The
decline in interest income from other interest-earning assets was due to a
decline in average interest rates, the suspension of quarterly dividend payments
by the Federal Home Loan Bank of Atlanta, partially offset by higher average
balances for the six months ended June 30, 2009 as compared to the same six
month period in the prior year.





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


37


Interest expense. Interest
expense declined by $1.7 million to $14.2 million for the six months ended June
30, 2009 from $15.9 million for the six months ended June 30,
2008.  The decrease in interest expense for the six months ended June
30, 2009, as compared to the same period in 2008, was due to lower average rates
on interest-bearing liabilities, offset by growth in average outstanding
balances of both deposits and borrowings.  Interest expense on FHLB
borrowings declined for the first six months of 2009 as compared to the same
period of 2008, as a result of restructuring a number of advances at slightly
lower rates during the latter part of 2008.





Net interest
income.Net interest income decreased $1.1 million, to $10.8
million for the six months ended June 30, 2009, from $11.9 million for the six
months ended June 30, 2008, as the decrease in interest income outpaced the
decrease in interest expense. Our net interest rate spread, which is the
difference between the interest rate earned on interest-earning assets and the
interest rate paid on interest-bearing liabilities, decreased 26 basis points to
2.04% for the first six months of 2009 as compared to 2.30% for the same period
in 2008.  For the same comparative periods, our net interest margin,
which is net interest income expressed as a percentage of our average interest
earning assets, decreased 36 basis points to 2.29%.





Provision for loan
losses.Provision for loan losses of $12.0 million and $5.5
million were made during the six months ended June 30, 2009 and 2008,
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 six months ended June 30, 2009,
were $10.7 million  By comparison, the Company had net charge-offs for
the same six months in 2008 of $3.8 million.





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


Increase(decrease)2009
                
                
                2008
                
                
                Dollars
                
                
                Percentage(Dollars in Thousands)Service
      charges and fees
                
                $
                2,020
                
                
                $
                2,350
                
                
                $
                (330
                )
                
                
                -14.0
                %Gain
      on sale of real estate mortgages held for sale
                
                
                374
                
                
                
                36
                
                
                
                338
                
                
                
                938.9
                %Loss
      on sale of foreclosed assets
                
                
                (990
                )
                
                
                (176
                )
                
                
                (814
                )
                
                
                462.5
                %Gain
      (loss) on available for sale securities
                
                
                215
                
                
                
                83
                
                
                
                132
                
                
                
                159.0
                %Other
      than temporary impairment losses
                
                
                (1,320
                )
                
                
                -
                
                
                
                (1,320
                )
                
                
                -Gain
      on redemption of Visa class B common stock
                
                
                -
                
                
                
                79
                
                
                
                (79
                )
                
                
                -100.0
                %Interchange
      fees
                
                
                450
                
                
                
                451
                
                
                
                (1
                )
                
                
                -0.2
                %Bank
      owned life insurance earnings
                
                
                354
                
                
                
                487
                
                
                
                (133
                )
                
                
                -27.3
                %Life
      insurance proceeds on deceased executive officer
                
                
                -
                
                
                
                2,634
                
                
                
                (2,634
                )
                
                
                -100.0
                %Other
                
                
                196
                
                
                
                244
                
                
                
                (48
                )
                
                
                -19.7
                %$
                1,299
                
                
                $
                6,188
                
                
                $
                (4,889
                )
                
                
                -79.0
                %





Non-interest
income for the six months ended June 30, 2009 decreased $4.9 million to $1.3
million as compared to $6.2 million for the same three months in
2008.  The six months ended June 30, 2008 included life insurance
proceeds on a deceased executive of $2.6 million.  Other components of
the decrease in other income included an other than temporary impairment expense
of $1.3 million on three private label mortgage-backed securities held as
securities available for sale and higher loss on sale of foreclosed
assets.


38


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





Increase(decrease)2009
                                            
                                            
                                            2008
                                            
                                            
                                            Dollars
                                            
                                            
                                            Percentage(Dollars in Thousands)Compensation
      and benefits
                                            
                                            $
                                            5,542
                                            
                                            
                                            $
                                            6,401
                                            
                                            
                                            $
                                            (859
                                            )
                                            
                                            
                                            -13.4
                                            %Final
      plan benefits for deceased executive
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,032
                                            
                                            
                                            
                                            (1,032
                                            )
                                            
                                            
                                            -100.0
                                            %Occupancy
      and equipment
                                            
                                            
                                            1,288
                                            
                                            
                                            
                                            1,332
                                            
                                            
                                            
                                            (44
                                            )
                                            
                                            
                                            -3.3
                                            %Data
      processing
                                            
                                            
                                            509
                                            
                                            
                                            
                                            483
                                            
                                            
                                            
                                            26
                                            
                                            
                                            
                                            5.4
                                            %Outside
      professional services
                                            
                                            
                                            1,161
                                            
                                            
                                            
                                            1,055
                                            
                                            
                                            
                                            106
                                            
                                            
                                            
                                            10.0
                                            %Collection
      expense and repossessedasset losses
                                            
                                            
                                            476
                                            
                                            
                                            
                                            233
                                            
                                            
                                            
                                            243
                                            
                                            
                                            
                                            104.3
                                            %Other
                                            
                                            
                                            2,985
                                            
                                            
                                            
                                            2,546
                                            
                                            
                                            
                                            439
                                            
                                            
                                            
                                            17.2
                                            %$
                                            11,961
                                            
                                            
                                            $
                                            13,082
                                            
                                            
                                            $
                                            (1,121
                                            )
                                            
                                            
                                            -8.6
                                            %





Non-interest
expense decreased by $1.1 million to $12.0 million for the six months ended June
30, 2009 from $13.1 million for the six months ended June 30,
2008.  The first six months of 2008 included the payment of final plan
benefits on a deceased executive of $1.0 million.  Other components of
the decrease include lower compensation and benefits expense as result of our
previously announced cost reduction initiatives, partially offset by higher
other expense comprised primarily of the special assessment for FDIC deposit
insurance levied on all banks which amounted to $465,000 for us, higher outside
professional services, higher advertising expenses and higher collection expense
during the period.





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





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





Income tax benefit.Income tax
benefit increased $3.0 million to a tax benefit of $4.2 million for the six
months ended June 30, 2009, from a benefit of $1.2 million for the same period
in 2008 largely due to the net loss for the period.





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.


39


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





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





As part
of its efforts to monitor and manage interest rate risk, the Company uses a
financial modeling tool that estimates the impact of different interest rate
scenarios on the value of the Company’s equity. This financial modeling tool is
referred to as Economic Value of Equity (“EVE”). In essence, this tool measures
the changes in equity due to the impact on net interest margin, over a five-year
horizon, from instantaneous and sustained parallel shifts in the yield curve, in
100 basis point increments, up and down 300 basis points.  Given the
duration of the unusual interest rate environment, the Company currently
evaluates only the shift in yield curve up 300 basis points and down 100 basis
points. Management believes the use of EVE improves the visibility of the effect
of current interest rate risk on future earnings under increasing or decreasing
interest rate environments. Accordingly, the Company believes it is in a better
position to be proactive in reducing future interest rate risk through
management of the growth of interest-earning assets and interest-bearing
liabilities within a meaningful time horizon.   The EVE,
considering the assumed changes in interest rates as of June 30, 2009, is as
follows:





Economic Value of Equity and Duration of Assets
      and Liabilities at June 30, 2009Change in Interest RateDecrease
                          
                          
                          Increase
                          
                          
                          Increase
                          
                          
                          Increase1%
                          
                          
                          
                          1%
                          
                          
                          
                          2%
                          
                          
                          
                          3%Duration
      of assets(1)
                          
                          
                          2.92
                          
                          
                          
                          3.44
                          
                          
                          
                          3.44
                          
                          
                          
                          3.44Duration
      of liabilities(1)
                          
                          
                          3.05
                          
                          
                          
                          2.85
                          
                          
                          
                          2.81
                          
                          
                          
                          2.77Differential
      in duration
                          
                          
                          -0.13
                          
                          
                          
                          0.59
                          
                          
                          
                          0.63
                          
                          
                          
                          0.67Amount
      of change in  Economic Value of Equity(2)
                          
                          $
                          (1,296,868
                          )
                          
                          $
                          (5,809,558
                          )
                          
                          $
                          (12,430,425
                          )
                          
                          $
                          (19,843,613
                          )Percentage
      change in Economic Value of Equity(2)
                          
                          
                          -1.53
                          %
                          
                          
                          -6.84
                          %
                          
                          
                          -14.65
                          %
                          
                          
                          -23.38
                          %





(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.


40


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 June 30, 2009, that have materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.


41


ATLANTIC
COAST FEDERAL CORPORATION





FORM
10-Q





June
30, 2009





Part
II - Other Information


Item
1.        Legal
Proceedings


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





Item
1A.     Risk
Factors


In
addition to the other information contained this Quarterly Report on Form 10-Q,
the followingrisk factors represent material updates and additions to the risk
factor previously disclosed in theCompany’s Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 2008, as filed with the Securities and Exchange
Commission. Additional risks not presently known to us, or that we currently
deem immaterial, may also adversely affect our business, financial condition or
results of operations. Further, to the extent that any of the information
contained in this Quarterly Report on Form 10-Q constitutes forward-looking
statements, the risk factor set forth below also is a cautionary
statement identifying important factors that could cause our actual results to
differ materially from those expressed in any forward-looking statements made by
or on behalf of us.




Any Future FDIC Insurance Premiums Will
Adversely Impact Our Earnings.




On May
22, 2009, the FDIC adopted a final rule levying a five basis point special
assessment oneach insured depository institution's assets minus Tier 1 capital
as of June 30, 2009.  The specialassessment is payable on September
30, 2009.  We recorded an expense of $465,000 during the quarter ended
June 30, 2009, to reflect the special assessment.  The final rule
permits the FDIC’s Board of Directors to levy up to two additional special
assessments of up to five basis points each during 2009 if the FDIC estimates
that the Deposit Insurance Fund reserve ratio will fall to a level that the
FDIC’s Board of Directors believes would adversely affect public confidence or
to a level that will be close to or below zero.  The FDIC has publicly
announced that it is probable that it will levy an additional special assessment
of up to five basis points later in 2009, the amount and timing of which are
currently uncertain.  Any further special assessments that the FDIC
levies will be recorded as an expense during the appropriate
period.  In addition, the FDIC materially increased the general
assessment rate and, therefore, our FDIC general insurance premium expense will
increase substantially compared to prior periods.




A
Legislative Proposal Has Been Introduced That Would Eliminate our Primary
FederalRegulator, Require the Association to Convert to a National Bank or State
Bank, and RequireAtlantic Coast Federal, MHC and the Holding Company to Become
Bank Holding Companies.




The U.S.
Treasury Department recently released a legislative proposal that would
implementsweeping changes to the current bank regulatory
structure.  The proposal would create a newfederal banking regulator,
the National Bank Supervisor, and merge our current primary federal regulator,
the Office of Thrift Supervision, as well as the Office of the Comptroller of
the Currency (the primary federal regulator for national banks) into this new
federal bank regulator.  The proposal would also eliminate federal
savings associations and require all federal savings associations, such as
Atlantic Coast Bank, to elect, within six months of the effective date of the
legislation, to convert to either a national bank, state bank or state savings
association.  A federal savings association that does not make the
election would, by operation of law, be converted into a national bank within
one year of the effect date of the legislation.


42


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




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





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








Item
3.    Defaults Upon Senior
Securities


None





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


At the
Company’s annual Stockholders’ Meeting (the “Meeting”) held on May 15, 2009,
allnominees for director proposed by the Company were elected.  The
votes cast for eachnominee were as follows:





For
                  
                  
                  WithheldFrederick
      D. Franklin, Jr.
                  
                  
                  12,100,799
                  
                  
                  
                  380,307Robert
      J. Smith
                  
                  
                  12,014,405
                  
                  
                  
                  466,701H.
      Dennis Woods
                  
                  
                  12,012,144
                  
                  
                  
                  468,962





Also at
the Meeting, the stockholders ratified the appointment of Crowe Horwath LLP as
the independent registered public accounting firm for Atlantic Coast Federal
Corporation for the fiscal year ending December 31, 2009.  The votes
cast for and against and the number of abstentions was as follows:





For
              
              Against
              
              Abstain12,321,797
              
              153,981
              
              5,328


43


Item
5.     Other
Information


None





Item
      6.
              Exhibits


a.
              Exhibits


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


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


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


44


ATLANTIC
COAST FEDERAL CORPORATION





FORM
10-Q





June
30, 2009





Part
II - Other Information





Signatures





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





ATLANTIC
      COAST FEDERAL CORPORATION(Registrant)Date:  August
      13, 2009
              /s/ Robert J. Larison,
  Jr.Robert
      J. Larison, Jr., President and ChiefExecutive
      OfficerDate:  August
      13, 2009
              /s/ Thomas B. Wagers,
Sr.Thomas
      B. Wagers, Sr. Senior Vice–President andChief
      Financial Officer


45