UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

Commission file number: 000-50962

ATLANTIC COAST FEDERAL CORPORATION

(Exact name of registrant as specified in its charter)

Federal	59-3764686
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

505 Haines Avenue Waycross, Georgia	31501
(Address of principal executive offices)	(Zip Code)

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

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

YES x NO ¨.

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

YES ¨ NO ¨.

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

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

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

YES ¨ NO x.

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

Class	Outstanding at November 8, 2010
Common Stock, $0.01 Par Value	13,415,874 shares

ATLANTIC COAST FEDERAL CORPORATION

Form 10-Q Quarterly Report

Table of Contents

		Page Number

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48
Item 4.	Controls and Procedures	49

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults upon Senior Securities	53
Item 4.	Removed and reserved	53
Item 5.	Other Information	53
Item 6.	Exhibits	53

Form 10-Q	Signature Page	54

Ex-31.1	Section 302 Certification of CEO
Ex-31.2	Section 302 Certification of CFO
Ex-32	Section 906 Certification of CEO and CFO

PART I. FINANCIAL INFORMATION

Item I. Financial Statements

ATLANTIC COAST FEDERAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2010 and December 31, 2009

(Dollars in Thousands, Except Share Information)

(unaudited)

	September 30,			December 31,
	2010			2009
ASSETS
Cash and due from financial institutions	$	6,042		$	8,211
Short-term interest-earning deposits		15,601			28,933
Total cash and cash equivalents		21,643			37,144
Securities available for sale		176,528			177,938
Loans held for sale		49,597			8,990
Loans, net of allowance of $10,955 in 2010 and $13,810 in 2009		575,780			614,371
Federal Home Loan Bank stock, at cost		9,798			10,023
Land, premises and equipment, net		15,854			16,014
Bank owned life insurance		23,377			22,806
Other real estate owned		8,604			5,028
Accrued interest receivable and other assets		11,431			13,247

Total assets	$	892,612		$	905,561

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest-bearing demand	$	37,046		$	34,988
Interest-bearing demand		71,773			79,192
Savings and money market		182,143			160,784
Time		279,401			280,480
Total deposits		570,363			555,444
Securities sold under agreement to repurchase		92,800			92,800
Federal Home Loan Bank advances		167,765			182,694
Other borrowings		5,000			12,200
Accrued expenses and other liabilities		5,279			5,882
Total liabilities		841,207			849,020

Commitments and contingent liabilities		-			-

Preferred stock: $0.01 par value; 2,000,000 shares authorized none issued		-			-
Common stock: $0.01 par value; 18,000,000 shares authorized, shares issued 14,813,469 at September 30, 2010 and December 31, 2009		148			148
Additional paid in capital		61,500			61,225
Unearned employee stock ownership plan (ESOP) shares of 151,294 at September 30, 2010 and 186,208 at December 31, 2009		(1,513	)		(1,862	)
Retained earnings		7,787			16,777
Accumulated other comprehensive income		3,413			152
Treasury stock, at cost, 1,397,595 shares at September 30, 2010 and 1,375,260 at December 31, 2009		(19,930	)		(19,899	)
Total stockholders' equity		51,405			56,541

Total liabilities and stockholders' equity	$	892,612		$	905,561

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

ATLANTIC COAST FEDERAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Share Information)

(unaudited)

	Three months ended Sept. 30,						Nine months ended Sept. 30,
	2010			2009			2010			2009
Interest and dividend income
Loans, including fees	$	9,316		$	10,094		$	27,997		$	31,183
Securities and interest-earning deposits in other financial institutions		1,883			2,123			6,096			5,987
Total interest and dividend income		11,199			12,217			34,093			37,170

Interest expense
Deposits		2,462			3,819			7,925			12,566
Federal Home Loan Bank advances		1,554			1,714			4,675			5,135
Securities sold under agreements to repurchase		1,186			1,085			3,508			3,085
Other borrowings		114			-			203			-
Total interest expense		5,316			6,618			16,311			20,786

Net interest income		5,883			5,599			17,782			16,384

Provision for loan losses		3,090			6,650			14,306			18,657

Net interest income (loss) after provision for loan losses		2,793			(1,051	)		3,476			(2,273	)

Non-interest income (loss)
Service charges and fees		1,032			1,099			2,864			3,119
Gain on sale of loans held for sale		349			147			531			448
Gain (loss) on sale of portfolio loans		46			(1,317	)		(114	)		(1,245	)
Gain (loss) on sale of securities available for sale		(397	)		117			831			333
Other than temporary impairment loss:
Total impairment loss		(444	)		(568	)		(1,154	)		(2,695	)
Gain (loss) recognized in other comprehensive income		444			316			1,073			1,122
Net impairment loss recognized in earnings		-			(252	)		(81	)		(1,573	)
Interchange fees		241			235			704			685
Other		287			2,210			849			2,762
Total non-interest income		1,558			2,239			5,584			4,529
Non-interest expense
Compensation and benefits		2,838			2,861			7,845			8,403
Occupancy and equipment		547			674			1,632			1,962
FDIC insurance premiums		400			422			1,246			1,435
Foreclosed assets, net		560			318			681			1,308
Data processing		309			251			966			760
Outside professional services		465			316			1,195			1,477
Collection expense and repossessed asset losses		326			355			1,324			831
Goodwill impairment		-			2,811			-			2,811
Other		1,060			864			3,161			2,837
Total non-interest expense		6,505			8,872			18,050			21,824

Loss before income tax expense		(2,154	)		(7,684	)		(8,990	)		(19,568	)

Income tax expense		-			4,472			-			282

Net loss	$	(2,154	)	$	(12,156	)	$	(8,990	)	$	(19,850	)

Loss per common share:
Basic	$	(0.16	)	$	(0.93	)	$	(0.68	)	$	(1.52	)
Diluted	$	(0.16	)	$	(0.93	)	$	(0.68	)	$	(1.52	)

Dividends declared per common share	$	-		$	-		$	-		$	0.02

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

ATLANTIC COAST FEDERAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME (LOSS)

For the Nine Months Ended September 30, 2010

(Dollars in Thousands, Except Share Information)

(unaudited)

												ACCUMULATED
			ADDITIONAL			UNEARNED						OTHER
	COMMON		PAID IN			ESOP			RETAINED			COMPREHENSIVE		TREASURY			TOTAL
	STOCK		CAPITAL			SHARES			EARNINGS			INCOME (LOSS)		STOCK			EQUITY
For the nine months ended September 30, 2010

Balance at January 1, 2010	$	148	$	61,225		$	(1,862	)	$	16,777		$	152	$	(19,899	)	$	56,541

ESOP shares earned, 34,914 shares		-		(267	)		349			-			-		-			82

Management restricted stock expense		-		356			-			-			-		-			356

Stock options expense		-		210			-			-			-		-			210

Management restricted stock granted		-		(99	)		-			-					99			-

Director's deferred compensation		-		75			-			-			-		(75	)		-

RRP shares relinquished, 6,671 shares		-		-			-			-			-		(21	)		(21	)

Treasury stock purchased at cost, 22,500 shares		-		-			-			-			-		(34	)		(34	)

Comprehensive income (loss):
Net loss		-		-			-			(8,990	)		-		-			(8,990	)
Other comprehensive income (loss)
Net change in unrealized losses on securities available-for-sale net of reclassification and taxes		-		-			-			-			2,188		-			2,188
Change in unrealized gains (losses) on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in earnings, net of reclassification and taxes		-		-			-			-			1,073		-			1,073
Total comprehensive income (loss)		-		-			-			(8,990	)		3,261		-			(5,729	)

Balance at September 30, 2010	$	148	$	61,500		$	(1,513	)	$	7,787		$	3,413	$	(19,930	)	$	51,405

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

ATLANTIC COAST FEDERAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME (LOSS)

For the Nine Months Ended September 30, 2009

(Dollars in Thousands, Except Share Information)

(unaudited)

												ACCUMULATED
			ADDITIONAL			UNEARNED						OTHER
	COMMON		PAID IN			ESOP			RETAINED			COMPREHENSIVE			TREASURY			TOTAL
	STOCK		CAPITAL			SHARES			EARNINGS			INCOME (LOSS)			STOCK			EQUITY

For the nine months ended September 30, 2009

Balance at January 1, 2009	$	148	$	60,061		$	(2,328	)	$	46,201		$	(308	)	$	(19,814	)	$	83,960

ESOP shares earned, 34,914 shares		-		(171	)		350			-			-			-			179

Management restricted stock expense		-		484			-			-			-			-			484

Stock options expense		-		236			-			-			-			-			236

Dividend declared ($0.02 per share)		-		-			-			(89	)		-			-			(89	)

Director's deferred compensation		-		16			-			-			-			(16	)		-

Capital contribution by parent		-		400			-			-			-			-			400

RRP shares reliquished, 6,227 shares		-		29			-			-			-			(45	)		(16	)

Treasury stock purchased at cost, 7,400 shares		-		-			-			-			-			(29	)		(29	)

Comprehensive income (loss):
Net loss		-		-			-			(19,850	)		-			-			(19,850	)
Other comprehensive income (loss)
Net change in unrealized gains on securities available-for-sale net of reclassification and taxes		-		-			-			-			1,188			-			1,188
Change in unrealized gains (losses) on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in earnings, net of reclassification and taxes		-		-			-			-			(668	)		-			(668	)
Total comprehensive income		-		-			-			(19,850	)		520			-			(19,330	)

Balance at September 30, 2009	$	148	$	61,055		$	(1,978	)	$	26,262		$	212		$	(19,904	)	$	65,795

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

ATLANTIC COAST FEDERAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(unaudited)

	Nine months ended Sept. 30,
	2010			2009

Cash flows from operating activities
Net loss		(8,990	)		(19,850	)
Adjustments to reconcile net loss to to net cash from operating activities:
Provision for loan losses		14,306			18,657
Gain on sale of loans held for sale		(531	)		(448	)
Loss on sale of portfolio loans		114			1,245
Loans originated for sale		(214,032	)		(69,199	)
Proceeds from sales of loans held for sale		180,390			63,067
Foreclosed assets, net		681			1,308
Gain on sale of securities available for sale		(831	)		(333	)
Other than temporary impairment loss on AFS securities		81			1,573
Loss on disposal of equipment		21			52
ESOP compensation expense		82			179
Share-based compensation expense		466			720
Net depreciation and amortization		1,918			1,691
Net change in accrued interest receivable		157			518
Net change in cash surrender value of bank owned life insurance		(571	)		(550	)
Goodwill impairment		-			2,811
Net change in other assets		1,752			183
Net change in accrued expenses and other liabilities		(602	)		(1,015	)
Net cash (used in) from operating activites		(25,589	)		609

Cash flows from investing activities
Proceeds from maturities and payments of securites available for sale		68,101			40,622
Proceeds from the sales of securities available for sale		40,958			47,295
Purchase of securities available for sale		(104,638	)		(113,674	)
Proceeds from sale of portfolio loans		7,025			16,020
Purchase of loans		(2,420	)		-
Net change in loans		6,480			54,982
Expenditures on premises and equipment		(572	)		(758	)
Proceeds from the sale of other real estate owned		2,095			2,226
Purchase of FHLB stock		(135	)		(1,028	)
Redemption of FHLB stock		360			1,063
Net cash from investing activities		17,254			46,748

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

ATLANTIC COAST FEDERAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(unaudited)

	Nine months ended September 30,
	2010			2009

Cash flows from financing activities
Net change in deposits	$	14,919		$	(24,449	)
Proceeds from FHLB advances		33,071			20,000
Repayment of FHLB advances		(48,000	)		(27,180	)
Proceeds from other borrowings		5,000			-
Repayment of other borrowings		(12,200	)		-
Capital contribution from parent		-			400
Share based compensation items		99			28
Treasury stock repurchased		(34	)		(29	)
RRP shares relinquished		(21	)		(45	)
Dividends paid		-			(89	)
Net cash from financing activities		(7,166	)		(31,364	)

Net change in cash and cash equivalents		(15,501	)		15,993

Cash and equivalents beginning of period		37,144			34,058

Cash and equivalents at end of period	$	21,643		$	50,051


Supplemental information:
Interest paid	$	16,384		$	20,973
Income tax paid		15			9

Supplemental noncash disclosures:
Loans transferred to other real estate	$	6,372		$	3,333
Loans transferred to held for sale		6,434			3,008

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

ATLANTIC COAST FEDERAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

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

The accompanying condensed consolidated balance sheet as of December 31, 2009, which was derived from our audited financial statements, and the unaudited condensed consolidated financial statements for the periods ended September 30, 2010 and September 30, 2009 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for (i) a fair presentation and (ii) to make such statements not misleading, have been included. Operating results for the nine month period ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. The 2009 Atlantic Coast Federal Corporation consolidated financial statements, as presented in the Company’s Annual Report on Form 10-K, should be read in conjunction with these statements.

Certain items in the September 30, 2009 financial statements have been reclassified to conform to the current presentation. The reclassifications have no effect on net income or stockholders’ equity as previously reported.

NOTE 2. USE OF ESTIMATES

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

NOTE 3. IMPACT OF CERTAIN ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

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

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

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

NOTE 3. IMPACT OF CERTAIN ACCOUNTING PRONOUNCEMENTS (continued)

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

On July 21, 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This new accounting guidance under Accounting Standards Codification (“ASC”) 310, Receivables, requires disclosure of additional information about the credit quality of an entity’s financing receivables and the allowance for credit losses. Disclosures must be disaggregated by class or portfolio segment and include, among other things, such items as a rollforward of the allowance for credit losses, certain credit quality indicators, past due and impaired loan information, and loan modification information. Except for the allowance rollforward and loan modification information, the new requirements will become effective for interim and annual reporting periods beginning with year-end December 31, 2010. Disclosure of the allowance rollforward and loan modification information will be required for the first quarter of 2011. The new guidance only relates to financial statement disclosures and will not affect the Company’s financial condition or results of operations.

NOTE 4. AVAILABLE FOR SALE SECURITIES

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

	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
September 30, 2010	(Dollars in Thousands)
U.S. Government-sponsored enterprises	$	2,000	$	-	$	-		$	2,000
State and municipal		946		15		(42	)		919
Mortgage-backed securities residential		53,583		1,796		(19	)		55,360
Collateralized mortgage obligations U.S. Govt.		108,600		2,003		(244	)		110,359
Collateralized mortgage obligations - other		7,986		114		(210	)		7,890

	$	173,115	$	3,928	$	(515	)	$	176,528

December 31, 2009	(Dollars in Thousands)
U.S. Government-sponsored enterprises	$	15,998	$	-	$	(246	)	$	15,752
State and municipal		947		-		(103	)		844
Mortgage-backed securities residential		37,390		1,028		(8	)		38,410
Collateralized mortgage obligations U.S. Govt.		101,236		1,530		(327	)		102,439
Collateralized mortgage obligations - other		22,116		534		(2,157	)		20,493

	$	177,687	$	3,092	$	(2,841	)	$	177,938

The amortized cost and fair value of debt securities segregated by contractual maturity as of September 30, 2010, is shown below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	September 30, 2010
	(Dollars in Thousands)
	Amortized		Fair
	Cost		Value
Due in one year or less	$	-	$	-
Due from one to five years		2,000		2,000
Due from five to ten years		-		-
Due after ten years		946		919
Mortgage-backed securities - residential		53,583		55,360
Collateralized mortgage obligations - U.S. Government		108,600		110,359
Collateralized mortgage obligations - other		7,986		7,890

Total	$	173,115	$	176,528

NOTE 4. AVAILABLE FOR SALE SECURITIES (continued)

The following table summarizes the investment securities with unrealized losses at September 30, 2010 and December 31, 2009, aggregated by investment category and length of time in a continuous unrealized loss position:

	(Dollars in Thousands)
	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Losses			Value		Losses			Value		Losses
September 30, 2010
Government-sponsored enterprises	$	-	$	-		$	-	$	-		$	-	$	-
State and municipal		-		-			420		(42	)		420		(42	)
Mortgage-backed securities - residential		10,293		(19	)		-		-			10,293		(19	)
Collateralized mortgage obligations - U.S. Govt.		31,651		(244	)		-		-			31,651		(244	)
Collateralized mortgage obligations - other		2,780		(210	)		-		-			2,780		(210	)

Total	$	44,724	$	(473	)	$	420	$	(42	)	$	45,144	$	(515	)

December 31, 2009
Government-sponsored enterprises	$	15,752	$	(246	)	$	-	$	-		$	15,752	$	(246	)
State and municipal		-		-			844		(103	)		844		(103	)
Mortgage-backed securities - residential		7,206		(8	)		-		-			7,206		(8	)
Collateralized mortgage obligations - U.S. Govt.		34,820		(327	)		-		-			34,820		(327	)
Collateralized mortgage obligations - other		7,118		(203	)		9,462		(1,954	)		16,580		(2,157	)

Total	$	64,896	$	(784	)	$	10,306	$	(2,057	)	$	75,202	$	(2,841	)

Proceeds from sales, maturities and calls of securities available for sale were $109.1 million and $87.9 million for the nine months ended September 30, 2010 and 2009, respectively. Gross gains of $2.1 million and $502,000 and gross losses of $1.3 million and $169,000 were realized on these sales during the nine months ended September 30, 2010 and 2009, respectively. Gross gains of $866,000 and $237,000 and gross losses of $1.3 million and $120,000 were realized on these sales during the three months ended September 30, 2010 and 2009, 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.

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

NOTE 4. AVAILABLE FOR SALE SECURITIES (continued)

amount representing the credit loss and the amount related to all other factors. The amount of the total related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized as a charge to earnings. The amount of the OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

As of September 30, 2010 the Company’s security portfolio consisted of 101 securities, 20 of which were in an unrealized loss position. Nearly all unrealized losses are related to debt securities whose underlying collateral is residential mortgages. However, the majority of these securities were issued by government sponsored organizations as discussed below.

At September 30, 2010, approximately $167.7 million, or approximately 95% of the debt securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2010.

Collateralized Mortgage Obligations - Other

The Company’s securities portfolio included 8 non-agency collateralized mortgage obligations with a fair value of $7.9 million at September 30, 2010. The Company evaluated the historical and expected future performance of the underlying collateral to determine if a future loss is expected which would result in a principal write-down. As a part of the evaluation, the Company reviewed deal specific data including loan-to-value (“LTV”), delinquency, foreclosures and cumulative loss to insure it has adequate credit support. This evaluation was completed utilizing a model to project future performance using collateral specific assumptions, such as expected future default rates, loss severity and prepayments.

The Company recorded an expense for other-than-temporary impairment of approximately $(81,000) in non-interest income on two private label mortgage-backed mezzanine (support) debt securities for the nine months ended September 30, 2010.

NOTE 4. AVAILABLE FOR SALE SECURITIES (continued)

The table below presents a reconciliation of the credit losses recognized in earnings for the nine month period ended September 30, 2010 and 2009:

	September 30,
	2010			2009
	(Dollars in Thousands)

Beginning balance, January 1	$	4,467		$	-

Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized		-			182
Amounts realized for securities sold during the period		(960	)		-
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 (decreases) to the amount related to the credit loss for which other-than-temporary impairment was previously recognized		(2,349	)		1,391

Ending balance, September 30	$	1,158		$	1,573

NOTE 5 - LOANS, NET

Loans. Following is a comparative composition of net loans as of September 30, 2010 and December 31, 2009:

	September 30, 2010			% of total loans			December 31, 2009			% of total loans
	(Dollars in Thousands)
Real estate loans:
One-to-four family	$	277,840			47.9	%	$	306,968			49.3	%
Commercial		73,196			12.6	%		77,403			12.4	%
Other ( land and multi-family)		32,567			5.6	%		37,591			6.0	%
Total real estate loans		383,603			66.1	%		421,962			67.7	%

Real estate construction loans:
One-to-four family		6,636			1.1	%		4,189			0.7	%
Commercial		5,684			1.0	%		8,022			1.3	%
Acquisition and development		2,358			0.4	%		3,148			0.5	%
Total real estate construction loans		14,678			2.5	%		15,359			2.5	%

Other loans:
Home equity		86,896			15.0	%		93,929			15.1	%
Consumer		75,296			13.0	%		73,870			11.9	%
Commercial		19,553			3.4	%		17,848			2.9	%
Total other loans		181,745			31.3	%		185,647			29.8	%

Total loans		580,026			100	%		622,968			100	%

Allowance for loan losses		(10,955	)					(13,810	)
Net deferred loan costs		6,823						5,122
Premiums (discounts) on purchased loans		(114	)					91

Loans, net	$	575,780					$	614,371

NOTE 5 - LOANS, NET (continued)

Allowance for loan losses activity for the nine months ended September 30, 2010 and 2009 was as follows:

	2010			2009
	(Dollars in Thousands)

Beginning balance, January 1	$	13,810		$	10,598
Loans charged-off		(18,240	)		(15,202	)
Recoveries		1,079			722
Net charge-offs		(17,161	)		(14,480	)

Provision for loan losses		14,306			18,657

Ending balance, September 30	$	10,955		$	14,775

Impaired loans as of September 30, 2010 and December 31, 2009 were as follows:

	September 30, 2010		December 31, 2009
	(Dollars in Thousands)

Loans with no allocated allowance for loan losses	$	23,134	$	27,692
Loans with an allocated allowance for loan losses		13,522		16,700
Total	$	36,656	$	44,392

Amount of the allowance for loan losses allocated to impaired loans	$	2,260	$	5,398

Amount of charge-offs taken on period-end impaired loans	$	3,307	$	2,157

Impaired loans included troubled debt restructurings of $20.9 million at September 30, 2010 and $22.7 million at December 31, 2009, of which $20.9 million and $19.9 million respectively, were performing according to the modified terms. Non-performing loans, including non-accrual loans, at September 30, 2010 and December 31, 2009 were $21.6 million and $35.2 million, respectively. There were no loans over 90 days past-due and still accruing interest as of September 30, 2010 and December 31, 2009. Non-performing loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified as impaired loans.

NOTE 6. INTEREST RATE SWAPS

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

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

NOTE 6. INTEREST RATE SWAPS (continued)

At September 30, 2010, summary information about these interest-rate swaps is as follows:

	September 30, 2010
	(Dollars in Thousands)
Notional amounts	$	25,000
Weighted average pay rates (3 month LIBOR, 2.50% floor)		2.50	%
Weighted average receive rates (3 month LIBOR, 4.37% cap)		0.29	%
Weighted average maturity (years)		1.0
Fair value of interest rate swaps		(267	)

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

	Liability Interest Rate Swaps
	September 30, 2010				December 31, 2009
	(Dollars in thousands)
	Balance Sheet				Balance Sheet
	Location	Fair Value			Location	Fair Value
Interest rate swaps not designated as hedging instruments under SFAS 133:
Interest rate contracts	Accrued expenses and other liabilities	$	(267	)	Accrued expenses and other liabilities	$	(520	)

Total interest rate swaps not designated as hedging instruments under SFAS 133:
Total interest rate swaps		$	(267	)		$	(520	)

The effect of interest rate swaps for the nine months ended September 30, 2010 and 2009 are as follows:

		Nine Months Ended
		September 30, 2010			September 30, 2009
	Location of Gain or (Loss)	(Dollars in Thousands)
	Recognized in Non-interest	Amount of the Gain or (Loss)
	Income	Recognized in Income
Interest rate swaps not designated as hedging instruments under SFAS 133:
Interest rate contracts	Other	$	(253	)	$	(237	)

Total		$	(253	)	$	(237	)

NOTE 7. FEDERAL HOME LOAN BANK ADVANCES

FHLB advances had a weighted-average maturity of 62 months and a weighted-average rate of 3.51% at September 30, 2010. The decrease in FHLB borrowings to $167.8 million at September 30, 2010 as compared to December 31, 2009 was due to repayments of $48.0 million which exceeded proceeds from advances of $33.1 million.

NOTE 8. OTHER BORROWINGS

Other borrowings were $5.0 million at June 30, 2010. The Company borrowed $5.0 million, at market rates, from another financial institution in June 2010 which is secured by shares of the Company’s common stock owned by Atlantic Coast Federal, MHC. The Company’s Executive Chairman of the Board also serves as the president and chief executive officer and a director of the financial institution from which the borrowing was obtained. The Company contributed $2.9 million to Atlantic Coast Bank as additional capital and used the remaining proceeds to pay off the remaining balance of $2.1 million of other borrowings.

NOTE 9. LOSS PER COMMON SHARE

Basic loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unearned restricted stock awards. Diluted loss per common share is computed by dividing net loss by the average number of common shares outstanding for the period increased for the dilutive effect of unvested stock options and stock awards. The dilutive effect of the unvested stock options and stock awards is calculated under the treasury stock method utilizing the average market value of the Company’s stock for the period. A reconciliation of the numerator and denominator of the basic and diluted loss per common share computation for the three and nine months ended September 30, 2010 and 2009 is as follows:

	(Dollars in Thousands, except per share data)
	For the three months						For the nine months
	ended September 30,						ended September 30,
	2010			2009			2010			2009
Basic
Net loss	$	(2,154	)	$	(12,156	)	$	(8,990	)	$	(19,850	)
Weighted average common shares outstanding		13,375,999			13,419,026			13,381,965			13,427,182
Less: Average unallocated ESOP shares		(186,208	)		(232,760	)		(186,208	)		(232,760	)
Average unvested restricted stock awards		(21,117	)		(63,955	)		(44,922	)		(94,253	)

Average Shares		13,168,674			13,122,311			13,150,835			13,100,169

Basic loss per common share	$	(0.16	)	$	(0.93	)	$	(0.68	)	$	(1.52	)

Diluted
Net loss	$	(2,154	)	$	(12,156	)	$	(8,990	)	$	(19,850	)

Weighted average shares outstanding from above		13,168,674			13,122,311			13,150,835			13,100,169
Add:Dilutive effects of assumed exercise of stock options		-			-			-			-
Dilutive effects of full vesting of stock awards		-			-			-			-

Average shares and dilutive potential common shares		13,168,674			13,122,311			13,150,835			13,100,169

Diluted loss per common share	$	(0.16	)	$	(0.93	)	$	(0.68	)	$	(1.52	)

Stock options for shares of common stock were not considered in computing diluted earnings per common share for the three and nine months ended September 30, 2010 and 2009, respectively. There was no dilutive effect as each period reported a net loss.

NOTE 10. TOTAL COMPREHENSIVE LOSS

Comprehensive loss consists of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available-for-sale and unrealized gains and losses on cash flow hedges. Following is a summary of other comprehensive income (loss) for the three and nine months ended September 30, 2010 and 2009:

	(Dollars in Thousands)
	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009

Net loss	$	(2,154	)	$	(12,156	)	$	(8,990	)	$	(19,850	)
Other comprehensive income (loss):
Change in securities available for sale:
Unrealized holding gains (losses) arising during the period		(582	)		1,397			2,956			2,329
Less reclassification adjustments for (gains) losses recognized in income		398			(117	)		(831	)		(333	)
Net unrealized gains		(184	)		1,280			2,125			1,996
Income tax effect		(11	)		(486	)		63			(808	)
Net of tax effect		(195	)		794			2,188			1,188
Other-than-temporary-impairment on available-for-sale debt securities recorded in other comprehensive income		432			(696	)		1,123			451
Less other-than-temporary-impairment on available-for-sale debt securities associated with credit loss realized in income		-			(252	)		(81	)		(1,573	)
Income tax effect		12			360			31			454
Net of tax effect		444			(588	)		1,073			(668	)

Total other comprehensive income (loss)		249			206			3,261			520

Comprehensive loss	$	(1,905	)	$	(11,950	)	$	(5,729	)	$	(19,330	)

NOTE 11. FAIR VALUE

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

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

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

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

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

Investment Securities:

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

Interest Rate Swaps:

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

NOTE 11. FAIR VALUE (continued)

Assets and Liabilities Measured on a Recurring Basis

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

	Fair Value Measurements at September 30, 2010 Using:
				Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Assets:
Available for sale
U.S. government-sponsored entities and agencies	$	2,000			-	$	2,000			-
State and municipal		919			-		919			-
Mortgage-backed securities – residential		55,360			-		55,360			-
Collateralized mortgage obligations – U.S. Govt.		110,359			-		110,359
Collateralized mortgage obligations - other		7,890			-		4,991			2,899
Liabilities:
Interest rate swap	$	(267	)		-	$	(267	)

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

Fair value adjustments for interest rate swaps resulted in a gain of $253,000 for the nine months ended September 30, 2010.

NOTE 11. 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 nine month period ended September 30, 2010:

	Investment
	Securities
	Available-for-sale
	(Dollars in thousands)
Balance of recurring Level 3 assets at January 1, 2010	$	1,352
Total realized and unrealized gains (losses):
Included in earnings - realized		768
Included in earnings - unrealized		-
Included other comprehensive income		(740	)
Proceeds from maturities and payments, net		(7,738	)
Transfers in and/or out of Level 3		9,257
Balance of recurring Level 3 assets at September 30, 2010	$	2,899

Market conditions for certain debt securities has resulted in unreliable or unavailable fair values, often resulting in transfers in and / or out of Level 3. The Company determined that one debt security totaling $2.9 million was more appropriately evaluated as a Level 3 asset as of September 30, 2010. This one security was priced as a Level 2 asset at December 31, 2009. Three securities evaluated as Level 3 assets as of December 31, 2009 were priced as Level 2 assets as of September 30, 2010.

Level 3 assets were evaluated utilizing models, that included certain unobservable inputs, to project future performance using collateral assumptions, such as expected future default rates, expected future severity rates, prepayments and recoveries.

NOTE 11. FAIR VALUE (continued)

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

	Fair Value Measurements at September 30, 2010 Using:
			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Assets:
Other real estate owned	$	8,604	$	-	$	-	$	8,604
Impaired loans – collateral dependent		24,830	$	-	$	-		24,830

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

Other Real Estate Owned:

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

Impaired loans:

Impaired loans which are collateral dependent are measured for impairment using the fair value of the collateral. Collateral dependent loans had a carrying amount of $24.8 million and $28.8 million, net of a valuation allowance of $2.3 million and $5.4 million at September 30, 2010 and December 31, 2009, respectively. Provision for loan losses of $868,000 and $2.3 million was recorded on impaired loans during the nine months ended September 30, 2010 and 2009, respectively.

NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

	As of September 30,				As of December 31,
	2010				2009
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
	(Dollars in Thousands)
FINANCIAL ASSETS
Cash and cash equivalents	$	21,643	$	21,643	$	37,144	$	37,144
Loans held for sale		49,597		49,597		8,990		8,990
Loans, net		575,780		581,609		614,371		614,229
Federal Home Loan Bank stock		9,798		n/a		10,023		n/a
Accrued interest receivable		3,104		3,104		3,261		3,261

FINANCIAL LIABILITIES
Deposits		570,363		572,721		555,444		557,094
Securities sold under agreements to repurchase		92,800		106,739		92,800		102,537
Federal Home Loan Bank advances		167,765		184,746		182,694		201,227
Other borrowings		5,000		5,000		12,200		12,200
Accrued interest payable		1,245		1,245		1,318		1,318

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

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest, demand and savings deposits and variable rate loans or deposits that re-price frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent re-pricing or re-pricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of debt (FHLB advances, securities sold under agreements to repurchase and other borrowings) is based on current rates for similar financing. It was not practicable to determine the fair value 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.

The Bank is a member of the Federal Home Loan Bank of Atlanta and as such, is required to maintain a minimum investment in stock of the Federal Home Loan Bank that varies with the level of advances outstanding with the Federal Home Loan Bank. The stock is bought from and sold to the Federal Home Loan Bank based upon its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment. In accordance with this guidance, the stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) The significance of the decline in net assets of the Federal Home Loan Bank as compared to the capital stock amount and the length of time this situation has persisted (b) Commitments by the Federal Home Loan Bank to make payments required by law or regulation and the level of such payments in relation to the operating performance (c) The impact of legislative and regulatory changes on the customer base of the Federal Home Loan Bank and (d) The liquidity position of the Federal Home Loan Bank.

NOTE 13. INCOME TAXES

Under generally accepted accounting principles, the Company considers at each reporting period all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed to reduce its deferred tax asset to an amount that is more likely than not to be realized. A determination of the need for a valuation allowance for the deferred tax assets is dependent upon management’s evaluation of both positive and negative evidence. Positive evidence includes the probability of achieving forecasted future taxable income, applicable tax planning strategies and assessments of the current and future economic and business conditions. Negative evidence includes the Company’s cumulative losses and expiring tax credit carryforwards. At September 30, 2010, the Company evaluated the expected realization of its federal and state deferred tax assets which, prior to a valuation allowance, totaled $17.4 million and was primarily comprised of future tax benefits associated with the allowance for loan losses and net operating loss carryforwards. Based on this evaluation it was concluded that a valuation allowance continues to be required for the federal deferred tax asset. The realization of the deferred tax asset is dependent upon generating taxable income. The Company also continues to maintain a valuation allowance for the state deferred tax asset.

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

Income tax expense (benefit) was as follows:

	Year to date
	September 30, 2010			September 30, 2009

Pre-tax loss	$	(8,990	)	$	(19,568	)
Effective tax rate		37.8	%		38.1	%
Tax benefit		(3,398	)		(7,448	)
Increase in valuation allowance - federal		3,145			7,142
Increase in valuation allowance - state		253			588
Income tax expense (benefit)	$	-		$	282

NOTE 14 - STOCK CONVERSION

On August 2, 2010, the Board of Directors of Atlantic Coast Federal Corporation amended a plan originally approved on June 16, 2010, to convert the Mutual Holding Company from the mutual to stock form of organization. The Mutual Holding Company is a federally chartered mutual holding company and currently owns approximately 65%, of the outstanding shares of common stock of the Company, which owns 100% of the issued and outstanding shares of the capital stock of Atlantic Coast Bank (the "Bank"). Pursuant to the terms of Atlantic Coast Federal, MHC’s plan of conversion and reorganization, Atlantic Coast Federal, MHC will convert from the mutual holding company to the stock holding company corporate structure. As part of the conversion, we are offering for sale in a subscription offering, and possibly in a community and/or a syndicated community offering, the majority ownership interest of Atlantic Coast Federal Corporation that is currently owned by Atlantic Coast Federal, MHC. Upon the completion of the conversion and offering, Atlantic Coast Federal, MHC will cease to exist, and we will complete the transition from partial to full public stock ownership. Upon completion of the conversion, existing public stockholders of Atlantic Coast Federal Corporation will receive shares of common stock of Atlantic Coast Financial Corporation in exchange for their shares of Atlantic Coast Federal Corporation common stock in order to maintain the public stockholders’ existing percentage ownership in our organization (excluding any new shares purchased by them in the offering).

NOTE 14 - STOCK CONVERSION (continued)

In connection with the conversion, shares of common stock of a new successor holding company, representing the ownership interest of the Mutual Holding Company, will be offered for sale to depositors of the Bank. The following persons and employee benefit plan have subscription rights to purchase shares of common stock of the new holding company in the following order of priority: (1) depositors of record as of March 31, 2009; (2) the Bank's employee stock ownership plan; (3) depositors of record as of the end of the calendar quarter preceding the commencement of the offering; and (4) depositors entitled to vote on the conversion proposal. If necessary, shares will be offered to the general public. In addition, upon completion of the conversion of the Mutual Holding Company, shares of the Company's common stock held by public stockholders will be exchanged for shares of a new corporation, which will become the Bank's new parent holding company. As a result of the conversion and offering, the Mutual Holding Company and Company will cease to exist. The conversion is subject to approval of the Office of Thrift Supervision (“OTS”) as well as the approval of the Mutual Holding Company's members (depositors of the Bank) and the Company's stockholders. Proxy materials setting forth information relating to the conversion and offering will be sent to the members of the Mutual Holding Company and stockholders of the Company for their consideration. The offering will be made only by means of a prospectus in accordance with federal law and all applicable state securities laws. The conversion and offering are expected to be completed in the fourth quarter of 2010.

Expenses capitalized related to the stock conversion were $1.1 million as of September 30, 2010. Expenses capitalized will be netted from proceeds if the offering is successful. Alternatively, expenses capitalized will be expensed in the event the offering is terminated.

NOTE 15 SUBSEQUENT EVENT

Following its most recent examination, the Company was advised by the Office of Thrift Supervision (“OTS”) that it would require the Company and its banking subsidiary to enter into supervisory agreements with the agency containing certain provisions and restrictions as described below. The Company was also informed that in a separate informal agreement, the OTS will impose an Individual Minimum Capital Requirement (IMCR) for Atlantic Coast Bank that will require it to achieve and maintain levels of capital greater than those required for a federal savings bank to be classified as well-capitalized. The Company anticipates, based upon discussions with the OTS, that the IMCR will require that Atlantic Coast Bank reach a core capital level of up to 7% by March 30, 2011 or June 30, 2011 and a risk based capital level of up to 11% by March 30, 2011 or June 30, 2011 and maintain these levels until the OTS removes the requirement.

Based on discussions with the OTS the Company expects the supervisory agreement will require its board and management to prepare regular forecasts and projections regarding Bank earnings and capital, along with monitoring of various financial metrics. Further the Company expects to be subject to the following operating restrictions: (1) Atlantic Coast Federal Corporation and Atlantic Coast Bank may not increase their assets in any quarter greater than the amount of interest credited on its deposit accounts without prior written approval from the OTS; (2) Atlantic Coast Federal Corporation and Atlantic Coast Bank may not add any new director to their Boards of Directors, employ any new senior executive officer or change the duties of any senior executive officer without providing 30 days advance written notice to the OTS; (3) Atlantic Coast Federal Corporation and Atlantic Coast Bank may not make any payment or enter into an agreement to make a payment, to an officer or employee that is contingent upon their termination of service, subject to certain exceptions; (4) prior written approval of the OTS must be obtained before the payment of any dividend or other capital distribution by Atlantic Coast Federal Corporation or Atlantic Coast Bank; (5) Atlantic Coast Federal Corporation and Atlantic Coast Bank may not enter into, renew or revise any contractual arrangement related to compensation or benefits with any director or officer unless they receive prior approval of the Office of Thrift Supervision; (6) Atlantic Coast Federal Corporation and Atlantic Coast Bank may not enter

NOTE 15 SUBSEQUENT EVENT (continued)

into any third party contracts outside of the normal course of business without providing 30 days advance written notice to the OTS and receiving a written notice of non-objection; (7) Atlantic Coast Federal Corporation and Atlantic Coast Bank are not eligible to have applications or notices processed by the OTS on an expedited basis which would make executing future mergers and acquisitions more difficult; (8) Atlantic Coast Federal Corporation and Atlantic Coast Bank may not engage in transactions with any affiliate or subsidiary without providing 30 days advance written notice to the OTS and receiving a written notice of non-objection; and (9) Atlantic Coast Bank may not increase the level of brokered deposits, excluding interest credited, without the prior written approval of the OTS.

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

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

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

Critical Accounting Policies

Certain accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances, including, but without limitation, changes in interest rates, performance of the economy, financial condition of borrowers and laws and regulations. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and accounting for deferred income taxes. Atlantic Coast Federal Corporation’s accounting policies are discussed in detail in Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission.

Allowance for Loan Losses

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

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

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

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

Management also evaluates the allowance for loan losses based on a review of certain large balance individual loans. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows management expects to receive on impaired loans that may be susceptible to significant change. For all specifically reviewed loans where it is probable the Bank will be unable to collect all amounts due according to the terms of the loan agreement, impairment is determined by computing a fair value based on either discounted cash flows using the loan’s initial interest rate or the fair value of the collateral if the loan is collateral dependent. No specific allowance is recorded unless the fair value is less than the carrying value. Large groups of smaller balance homogeneous loans, such as individual consumer and residential loans are collectively evaluated for impairment and are excluded from the specific impairment evaluation; for these loans, the allowance for loan losses is calculated in accordance with the allowance for loan losses policy described above. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.

Fair Value of Securities Available for Sale

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

When OTTI is determined to have occurred, the amount of the OTTI recognized in earnings depends on whether we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI recognized in earnings is equal to the entire difference between its amortized cost basis and its fair value at the balance sheet date. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized as a charge to earnings. The amount of the OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. The Company recorded an other-than-temporary impairment charge of $81,000 in non-interest income on two private label mortgage-backed mezzanine (support) debt securities for the nine months ended September 30, 2010. The Company recorded an other-than-temporary impairment charge of $1.6 million for the nine months ended September 30, 2009.

Deferred Income Taxes

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

All available evidence, both positive and negative, is considered when determining whether or not a valuation allowance is necessary to reduce the carrying amount to a balance that is considered more likely than not to be realized. The determination of the realizability of deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of such evidence. Positive evidence considered includes the probability of achieving forecasted taxable income and the ability to implement tax planning strategies to accelerate taxable income recognition. Negative evidence includes the Company’s cumulative losses. Following the initial establishment of a valuation allowance, if the Company is unable to generate sufficient pre-tax income in future periods or otherwise fails to meet forecasted operating results, an additional valuation allowance may be required. Any valuation allowance is required to be recorded during the period identified. As of September 30, 2010, the Company had a valuation allowance of $17.4 million for the net deferred tax asset.

Comparison of Financial Condition at September 30, 2010 and December 31, 2009

General. Total assets decreased $13.0 million to $892.6 million at June 30, 2010 as compared to $905.6 million at December 31, 2009. The primary reason for the decrease in assets was a decrease in net loans of $38.6 million as well as a decrease in cash of $15.5 million, partially offset by the increase in loans held for sale of $40.6 million. Total deposits increased $14.9 million to $570.4 million at September 30, 2010 from $555.4 million at December 31, 2009. Core deposits grew by $16.0 million, while time deposits decreased by $1.0 million.

Following is a summarized comparative balance sheet as of September 30, 2010 and December 31, 2009:

	September 30,			December 31,			Increase (decrease)
	2010			2009			Dollars			Percentage
	(Dollars in Thousands)
Assets
Cash and cash equivalents	$	21,643		$	37,144		$	(15,501	)		-41.7	%
Securitites available for sale		176,528			177,938			(1,410	)		-0.8	%
Loans		586,735			628,181			(41,446	)		-6.6	%
Allowance for loan losses		(10,955	)		(13,810	)		2,855			-20.7	%
Loans, net		575,780			614,371			(38,591	)		-6.3	%
Loans held for sale		49,597			8,990			40,607			451.7	%
Other assets		69,064			67,118			1,946			2.9	%
Total assets	$	892,612		$	905,561		$	(12,949	)		-1.4	%

Liabilities and Stockholders' equity
Deposits
Non-interest bearing demand	$	37,046		$	34,988		$	2,058			5.9	%
Interest bearing demand		71,773			79,192			(7,419	)		-9.4	%
Savings and money market		182,143			160,784			21,359			13.3	%
Time		279,401			280,480			(1,079	)		-0.4	%
Total deposits		570,363			555,444			14,919			2.7	%
Federal Home Loan Bank advances		167,765			182,694			(14,929	)		-8.2	%
Securities sold under agreements to repurchase		92,800			92,800			-			0.0	%
Other borrowings		5,000			12,200			(7,200	)		-59.0	%
Accrued expenses and other liabilities		5,279			5,882			(603	)		-10.3	%
Total liabilities		841,207			849,020			(7,813	)		-0.9	%
Stockholders' equity		51,405			56,541			(5,136	)		-9.1	%
Total liabilities and stockholders' equity	$	892,612		$	905,561		$	(12,949	)		-1.4	%

Securities available for sale. Securities available for sale is comprised primarily of debt securities of U.S. Government-sponsored enterprises and mortgage-backed securities (MBS). The investment portfolio decreased approximately $1.4 million to $176.5 million at September 30, 2010, from $177.9 million at December 31, 2009. We recognized a charge for other-than-temporary impairment (OTTI) of approximately $(81,000) in non-interest income (loss) on two private label collateralized mortgage obligation mezzanine (support) debt securities for the nine months ended September 30, 2010. In order to reduce risk of additional OTTI charges the Company sold six securities totaling $3.4 million at a loss of $1.3 million during the third quarter ended September 30, 2010.

	At September 30, 2010

	Amortized		Fair		Number of		Cumulative
	Cost		Value		Securities		OTTI
	(Dollars in Thousands)

Private label collateralized mortgage obligations with OTTI	$	1,492	$	1,301		2	$	1,158
Private label collateralized mortgage obligations with no OTTI		6,494		6,588		6		-
Total private label collateralized mortgage obligations	$	7,986	$	7,889		8	$	1,158

At September 30, 2010, approximately $167.7 million, or 95%, of the debt securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2010.

Loans. Portfolio loans declined approximately 6.3% to $575.8 million at June 30, 2010 as compared to $614.4 million at December 31, 2009 due to increased payoffs of one- to four-family residential loans in the first nine months of 2010, the sale of approximately $7.2 million of non-performing loans in the first nine months of 2010, and the transfer of $6.4 million from portfolio loans to loans held for sale.

Total loan originations increased $168.2 million to $267.1 million for the nine months ended September 30, 2010 from $98.9 million for the same period in 2009. Origination of loans held for sale in the secondary market increased $144.9 million to $214.0 million during the first nine months of 2010, from $69.2 million for the same period in 2009. Portfolio loan production increased $23.3 million to $53.0 million for the nine months ended September 30, 2010 from $29.7 million for the same period in 2009. Origination of residential loans held for sale was strong as consumers took advantage of historically low interest rates and the availability of certain federal income tax credits. The balance of loans held for sale increased as the Company began to expand its mortgage lending business during the third quarter of 2010.

Until critical economic factors stabilize, such as unemployment and residential real estate values management believes portfolio loan balances will continue to decline as the Company emphasizes the sale of mortgages it originates in the secondary market rather than retaining them in its portfolio. Due to a favorable interest rate environment, production of one-to four-family residential loans held for sale in the secondary market is expected to continue its moderate pace. The strategy of selling the majority of originated loans in the secondary market also compliments the Bank’s desire to reduce portfolio loan balances in order to maximize capital efficiently.

Allowance for loan losses. The allowance for loan losses was $11.0 million, or 1.87% of total loans compared to $13.8 million or 2.22% of total loans outstanding at September 30, 2010 and December 31, 2009, respectively.

Non-performing assets:

ATLANTIC COAST FEDERAL CORP 10-Q