Edgar Filing: ATLANTIC COAST FEDERAL CORP

Unassociated Document

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 June 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 o.

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 o NO o.

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 o Accelerated Filer o Non-Accelerated Filer o 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 o NO x.

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

Class	Outstanding at August 12, 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	27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	46
Item 4.	Controls and Procedures	47

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults upon Senior Securities	50
Item 4.	Removed and reserved	50
Item 5.	Other Information	50
Item 6.	Exhibits	50

Form 10-Q	Signature Page	51

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

June 30, 2010 and December 31, 2009

(Dollars in Thousands, Except Share Information)

(unaudited)

	June 30,			December 31,
	2010			2009
ASSETS
Cash and due from financial institutions	$	8,007		$	8,211
Short-term interest-earning deposits		21,885			28,933
Total cash and cash equivalents		29,892			37,144
Securities available for sale		200,040			177,938
Loans held for sale		17,086			8,990
Loans, net of allowance of $10,236 in 2010 and $13,810 in 2009		586,676			614,371
Federal Home Loan Bank stock, at cost		10,023			10,023
Land, premises and equipment, net		15,797			16,014
Bank owned life insurance		23,176			22,806
Other real estate owned		7,340			5,028
Accrued interest receivable and other assets		11,344			13,247

Total assets	$	901,374		$	905,561

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest-bearing demand	$	35,130		$	34,988
Interest-bearing demand		78,758			79,192
Savings and money market		169,260			160,784
Time		291,863			280,480
Total deposits		575,011			555,444
Securities sold under agreement to repurchase		92,800			92,800
Federal Home Loan Bank advances		170,741			182,694
Other borrowings		5,000			12,200
Accrued expenses and other liabilities		4,606			5,882
Total liabilities		848,158			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 June 30, 2010 and December 31, 2009		148			148
Additional paid in capital		61,494			61,225
Unearned employee stock ownership plan (ESOP) shares of 162,932 at June 30, 2010 and 186,208 at December 31, 2009		(1,629	)		(1,862	)
Retained earnings		9,940			16,777
Accumulated other comprehensive income		3,164			152
Treasury stock, at cost, 1,390,924 shares at June 30, 2010 and 1,375,260 at December 31, 2009		(19,901	)		(19,899	)
Total stockholders' equity		53,216			56,541

Total liabilities and stockholders' equity	$	901,374		$	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 June 30,						Six months ended June 30,
	2010			2009			2010			2009
Interest and dividend income
Loans, including fees	$	9,491		$	10,266		$	18,681		$	21,088
Securities and interest-earning deposits
in other financial institutions		2,201			1,861			4,213			3,864
		11,692			12,127			22,894			24,952

Interest expense
Deposits		2,643			4,190			5,463			8,746
Federal Home Loan Bank advances		1,567			1,709			3,121			3,421
Securities sold under agreements to repurchase		1,174			1,017			2,322			2,000
Other borrowings		44			-			88			-
		5,428			6,916			10,994			14,167

Net interest income		6,264			5,211			11,900			10,785

Provision for loan losses		7,494			6,195			11,217			12,007

Net interest income (loss) after provision for loan losses		(1,230	)		(984	)		683			(1,222	)

Non-interest income (loss)
Service charges and fees		963			1,040			1,832			2,042
Gain on sale of loans held for sale		78			189			182			374
Gain (loss) on sale of portfolio loans		113			-			(160	)		-
Gain on sale of securities available for sale		1,229			118			1,229			215
Other than temporary impairment loss:
Total impairment loss		(10	)		(2,465	)		(710	)		(3,200	)
Gain (loss) recognized in other comprehensive income		4			1,319			629			1,880
Net impairment loss recognized in earnings		(6	)		(1,146	)		(81	)		(1,320	)
Interchange fees		241			235			463			450
Other		319			326			560			551
		2,937			762			4,025			2,312
Non-interest expense
Compensation and benefits		2,437			2,967			5,007			5,542
Occupancy and equipment		531			667			1,084			1,288
FDIC insurance premiums		398			677			846			1,013
Foreclosed assets, net		30			286			121			990
Data processing		402			249			657			509
Outside professional services		371			736			730			1,161
Collection expense and repossessed asset losses		605			272			997			476
Other		1,011			1,091			2,103			1,995
		5,785			6,945			11,545			12,974

Loss before income tax benefit		(4,078	)		(7,167	)		(6,837	)		(11,884	)

Income tax benefit		-			(2,533	)		-			(4,190	)

Net loss	$	(4,078	)	$	(4,634	)	$	(6,837	)	$	(7,694	)

Loss per common share:
Basic	$	(0.31	)	$	(0.36	)	$	(0.52	)	$	(0.59	)
Diluted	$	(0.31	)	$	(0.36	)	$	(0.52	)	$	(0.59	)

Dividends declared per common share	$	-		$	0.01		$	-		$	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 Six Months Ended June 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 six months ended June 30, 2010

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

ESOP shares earned, 23,276 shares		-		(179	)		233			-			-		-			54

Management restricted stock expense		-		323			-			-			-		-			323

Stock options expense		-		157			-			-			-		-			157

Management restricted stock granted				(99	)										99			-

Director's deferred compensation		-		67			-			-			-		(67	)		-

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

Comprehensive income (loss):
Net loss		-		-			-			(6,837	)		-		-			(6,837	)
Other comprehensive income (loss)
Net change in unrealized losses on
securities available-for-sale net of
reclassification and taxes		-		-			-			-			2,383		-			2,383
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		-		-			-			-			629		-			629
Total comprehensive income (loss)		-		-			-			(6,837	)		3,012		-			(3,825	)

Balance at June 30, 2010	$	148	$	61,494		$	(1,629	)	$	9,940		$	3,164	$	(19,901	)	$	53,216

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 Six Months Ended June 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 six months ended June 30, 2009

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

ESOP shares earned, 23,276 shares		-		(110	)		233			-			-			-			123

Management restricted stock expense		-		319			-			-			-			-			319

Stock options expense		-		157			-			-			-			-			157

Dividend declared ($0.02 per share)		-		-			-			(90	)		-			-			(90	)

Director's deferred compensation		-		3			-			-			-			(3	)		-

Capital ontribution by parent		-		400			-			-			-			-			400

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

Comprehensive income (loss):
Net loss		-		-			-			(7,694	)		-			-			(7,694	)
Other comprehensive income (loss)
Net change in unrealized gains on
securities available-for-sale net of
reclassification and taxes		-		-			-			-			(70	)		-			(70	)
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		-		-			-			-			384			-			384
Total comprehensive income		-		-			-			(7,694	)		314			-			(7,380	)

Balance at June 30, 2009	$	148	$	60,830		$	(2,095	)	$	38,417		$	6		$	(19,846	)	$	77,460

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)

	Six months ended June 30,
	2010			2009

Cash flows from operating activities
Net loss		(6,837	)		(7,694	)
Adjustments to reconcile net loss to
to net cash from operating activities:
Provision for loan losses		11,217			12,007
Gain on sale of loans held for sale		(182	)		(374	)
Loss on sale of portfolio loans		160			-
Loans originated for sale		(62,564	)		(46,532	)
Proceeds from sales of loans held for sale		54,649			42,321
Foreclosed assets, net		121			990
Gain on sale of securities available for sale		(1,229	)		(215	)
Other than temporary impairment loss on AFS securities		81			1,320
Loss on disposal of equipment		-			11
ESOP compensation expense		55			123
Share-based compensation expense		480			476
Net depreciation and amortization		1,267			1,053
Net change in accrued interest receivable		51			441
Net change in cash surrender value of bank owned life insurance		(370	)		(354	)
Net change in other assets		1,945			(3,924	)
Net change in accrued expenses and other liabilities		(1,276	)		(695	)
Net cash from operating activites		(2,432	)		(1,046	)

Cash flows from investing activities
Proceeds from maturities and payments
of securites available for sale		39,768			28,093
Proceeds from the sales of securities
available for sale		17,901			36,064
Purchase of securities available for sale		(76,283	)		(95,332	)
Proceeds from sale of portfolio loans		7,173			13,013
Purchase of loans		(2,420	)		-
Net change in loans		7,596			32,732
Expenditures on premises and equipment		(259	)		(357	)
Proceeds from the sale of other real estate owned		1,324			1,073
Purchase of FHLB stock		-			(1,028	)
Redemption of FHLB stock		-			1,063
Net cash from investing activities		(5,200	)		15,321

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)

	Six months ended June 30,
	2010			2009

Cash flows from financing activities
Net change in deposits	$	19,567		$	4,881
Proceeds from FHLB advances		13,000			20,000
Repayment of FHLB advances		(24,953	)		(27,203	)
Proceeds from other borrowings		5,000			-
Repayment of other borrowings		(12,200	)		-
Capital contribution from parent		-			400
Share based compensation items		-			(5	)
Treasury stock repurchased		(34	)		(29	)
Dividends paid		-			(90	)
Net cash from financing activities		380			(2,046	)

Net change in cash and cash equivalents		(7,252	)		12,229

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

Cash and equivalents at end of period	$	29,892		$	46,287

Supplemental information:
Interest paid	$	11,074		$	14,090
Income tax paid		15			9

Supplemental noncash disclosures:
Loans transferred to other real estate	$	3,757		$	2,919

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

ATLANTIC COAST FEDERAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 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 June 30, 2010 and June 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 six month period ended June 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 June 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 FASB issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (ASC 810). The new accounting requirement amends previous guidance relating to the transfers of financial assets and eliminates the concept of a qualifying special purpose entity. This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. This Statement must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. Additionally, the disclosure provisions of this Statement were also amended and apply to transfers that occurred both before and after the effective date of this Statement. The adoption of this standard did not have a material effect on the Company’s consolidated financial position or results of operations.

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

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

1. Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately 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.

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
June 30, 2010	(Dollars in Thousands)
U.S. Government-sponsored enterprises	$	20,088	$	191	$	-		$	20,279
State and municipal		946		-		(61	)		885
Mortgage-backed securities residential		52,543		2,117		-			54,660
Collateralized mortgage obligations U.S. Govt.		109,868		1,701		(247	)		111,322
Collateralized mortgage obligations - other		13,431		712		(1,249	)		12,894

	$	196,876	$	4,721	$	(1,557	)	$	200,040

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 June 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.

NOTE 4. AVAILABLE FOR SALE SECURITIES (continued)

	June 30, 2010
	(Dollars in Thousands)
	Amortized		Fair
	Cost		Value
Due in one year or less	$	-	$	-
Due from one to five years		-		-
Due from five to ten years		-		-
Due after ten years		21,034		21,164
Mortgage-backed securities - residential		52,543		54,660
Collateralized mortgage obligations - U.S. Government		109,868		111,322
Collateralized mortgage obligations - other		13,431		12,894

Total	$	196,876	$	200,040

The following table summarizes the investment securities with unrealized losses at June 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
	Value		Losses			Value		Losses			Value		Losses
Description of Securities
June 30, 2010
Government-sponsored enterprises	$	-	$	-		$	-	$	-		$	-	$	-
State and municipal		885		(61	)		-		-			885		(61	)
Mortgage-backed securities - residential		-		-			-		-			-		-
Collateralized mortgage obligations - U.S. Govt.		39,100		(247	)		-		-			39,100		(247	)
Collateralized mortgage obligations - other		8,655		(1,249	)		-		-			8,655		(1,249	)

Total	$	48,640	$	(1,557	)	$	-	$	-		$	48,640	$	(1,557	)

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 $57.7 million and $64.2 million for the six months ended June 30, 2010 and 2009, respectively. Gross gains of $1.2 million and $265,000 and gross losses of $0 and $50,000 were realized on these sales during the six months ended June 30, 2010 and 2009, respectively. Gross gains of $1.2 million and $157,000 and gross losses of $0 and $39,000 were realized on these sales during the three months ended June 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.

NOTE 4. AVAILABLE FOR SALE SECURITIES (continued)

Other-Than-Temporary-Impairment

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

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

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

As of June 30, 2010 the Company’s security portfolio consisted of 109 securities, 25 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 June 30, 2010, approximately $186.3 million, or approximately 93% 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 June 30, 2010.

Collateralized Mortgage Obligations - Other

The Company’s securities portfolio included 14 non-agency collateralized mortgage obligations with a fair value of $12.9 million at June 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.

NOTE 4. AVAILABLE FOR SALE SECURITIES (continued)

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

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

	June 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		-		70
Amounts 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		81		1,250

Ending balance, June 30	$	4,548	$	1,320

NOTE 5 - LOANS, NET

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

	June 30, 2010			% of total loans			December 31, 2009			% of total loans
	(Dollars in Thousands)
Real estate loans:
One-to-four family	$	287,738			48.7	%	$	306,968			49.3	%
Commercial		78,085			13.2	%		77,403			12.4	%
Other ( land and multi-family)		32,690			5.5	%		37,591			6.0	%
Total real estate loans		398,513			67.4	%		421,962			67.7	%

Real estate construction loans:
One-to-four family		6,022			1.0	%		4,189			0.7	%
Commercial		3,910			0.7	%		8,022			1.3	%
Acquisition and development		2,737			0.5	%		3,148			0.5	%
Total real estate construction loans		12,669			2.1	%		15,359			2.5	%

Other loans:
Home equity		89,193			15.1	%		93,929			15.1	%
Consumer		72,972			12.3	%		73,870			11.9	%
Commercial		17,759			3.0	%		17,848			2.9	%
Total other loans		179,924			30.4	%		185,647			29.8	%

Total loans		591,106			100	%		622,968			100	%

Allowance for loan losses		(10,236	)					(13,810	)
Net deferred loan costs		5,912						5,122
Premiums (discounts) on purchased loans		(106	)					91

Loans, net	$	586,676					$	614,371

NOTE 5 - LOANS, NET (continued)

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

	2010			2009
	(Dollars in Thousands)

Beginning balance, January 1	$	13,810		$	10,598
Loans charged-off		(15,581	)		(11,204	)
Recoveries		790			472
Net charge-offs		(14,791	)		(10,732	)

Provision for loan losses		11,217			12,007

Ending balance, June 30	$	10,236		$	11,873

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

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

Loans with no allocated allowance for loan losses	$	24,798	$	27,692
Loans with an allocated allowance for loan losses		11,762		16,700
Total	$	36,560	$	44,392

Amount of the allowance for loan losses allocated to impaired loans	$	2,307	$	5,398

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

Impaired loans included troubled debt restructurings of $18.5 million at June 30, 2010 and $22.7 million at December 31, 2009, of which $16.6 million and $19.9 million respectively, were performing according to the modified terms. Non-performing loans, including non-accrual loans, at June 30, 2010 and December 31, 2009 were $21.7 million and $35.2 million, respectively. There were no loans over 90 days past-due and still accruing interest as of June 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 June 30, 2010, summary information about these interest-rate swaps is as follows:

	June 30, 2010
	(Dollars in Thousands)
Notional amounts	$	50,000
Weighted average pay rates (3 month LIBOR, 2.50% floor)		2.50	%
Weighted average receive rates (3 month LIBOR, 4.37% cap)		0.54	%
Weighted average maturity (years)		0.75
Fair value of interest rate swaps		(341	)

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

	Liability Interest Rate Swaps
	June 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	$	(341	)	Accrued expenses and other liabilities	$	(520	)

Total interest rate swaps not designated as hedging instruments under SFAS 133:
Total interest rate swaps		$	(341	)		$	(520	)

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

		Six Months Ended
		June 30, 2010			June 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	$	(79	)	$	(56	)

Total		$	(79	)	$	(56	)

NOTE 7. FEDERAL HOME LOAN BANK ADVANCES

FHLB advances had a weighted-average maturity of 58 months and a weighted-average rate of 3.58% at June 30, 2010. The decrease in FHLB borrowings to $170.7 million at June 30, 2010 as compared to December 31, 2009 was due to repayments of $25.0 million which exceeded proceeds from advances of $13.0 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 six months ended June 30, 2010 and 2009 is as follows:

	(Dollars in Thousands, except per share data)
	For the three months						For the six months
	ended June 30,						ended June 30,
	2010			2009			2010			2009
Basic
Net loss	$	(4,078	)	$	(4,634	)	$	(6,837	)	$	(7,694	)
Weighted average common shares outstanding		13,378,864			13,428,263			13,384,998			13,431,670
Less: Average unallocated ESOP shares		(186,208	)		(232,760	)		(186,208	)		(232,760	)
Average unvested restricted stock awards		(56,325	)		(109,183	)		(57,022	)		(109,995	)

Average Shares		13,136,331			13,086,320			13,141,768			13,088,915

Basic loss per common share	$	(0.31	)	$	(0.36	)	$	(0.52	)	$	(0.59	)

Diluted
Net loss	$	(4,078	)	$	(4,634	)	$	(6,837	)	$	(7,694	)

Weighted average shares outstanding from above		13,136,331			13,086,320			13,141,768			13,088,915
Add:Dilutive effects of assumed exercise of stock options		-			-			-			-
Dilutive effects of full vesting of stock awards		-			-			-			-

Average shares and dilutive potential common shares		13,136,331			13,086,320			13,141,768			13,088,915

Diluted loss per common share	$	(0.31	)	$	(0.36	)	$	(0.52	)	$	(0.59	)

Stock options for shares of common stock were not considered in computing diluted earnings per common share for the three and six months ended June 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 six months ended June 30, 2010 and 2009:

	(Dollars in Thousands)

	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009

Net loss	$	(4,078	)	$	(4,634	)	$	(6,837	)	$	(7,694	)
Other comprehensive income (loss):
Change in securities available for sale:
Unrealized holding gains (losses) arising during the period		1,900			(576	)		3,538			(1,369	)
Less reclassification adjustments for (gains) losses recognized in income		(1,229	)		(118	)		(1,229	)		(215	)
Net unrealized gains		671			(694	)		2,309			(1,584	)
Income tax effect		6			(62	)		74			18
Net of tax effect		677			(756	)		2,383			(1,566	)
Other-than-temporary-impairment on available-for-sale debt securities recorded in other comprehensive income		16			506			691			806
Less other-than-temporary-impairment on available-for-sale debt securities associated with credit loss realized in income		(6	)		1,146			(81	)		1,320
Income tax effect		(6	)		(333	)		19			(246	)
Net of tax effect		4			1,319			629			1,880

Total other comprehensive income (loss)		681			563			3,012			314

Comprehensive loss	$	(3,397	)	$	(4,071	)	$	(3,825	)	$	(7,380	)

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 June 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	$	20,279			-	$	20,279			-
State and municipal		885			-		885			-
Mortgage-backed securities – residential		54,660			-		54,660			-
Collateralized mortgage obligations – U.S. Govt.		111,322			-		111,322
Collateralized mortgage obligations - other		12,894			-		9,972			2,922
Liabilities:
Interest rate swap	$	(341	)		-	$	(341	)

	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 $179,000 for the six months ended June 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 six month period ended June 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		(781	)
Proceeds from maturities and payments, net		(7,674	)
Transfers in and/or out of Level 3		9,257
Balance of recurring Level 3 assets at June 30, 2010	$	2,922

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 June 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 June 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 June 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	$	7,340	$	-	$	-	$	7,340
Impaired loans – collateral dependent		21,998	$	-	$	-		21,998

	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 $22.0 million and $28.8 million, net of a valuation allowance of $2.3 million and $5.4 million at June 30, 2010 and December 31, 2009, respectively. Provision for loan losses of $610,000 and $2.3 million was recorded on impaired loans during the six months ended June 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 June 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	$	29,892	$	29,892	$	37,144	$	37,144
Loans held for sale		17,086		17,086		8,990		8,990
Loans, net		586,676		576,280		614,371		614,229
Federal Home Loan Bank stock		10,023		n/a		10,023		n/a
Accrued interest receivable		3,210		3,210		3,261		3,261

FINANCIAL LIABILITIES
Deposits		575,011		576,078		555,444		557,094
Securities sold under agreements to repurchase		92,800		104,611		92,800		102,537
Federal Home Loan Bank advances		170,741		184,243		182,694		201,227
Accrued interest payable		1,239		1,239		1,318		1,318

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

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

NOTE 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 June 30, 2010, the Company evaluated the expected realization of its federal and state deferred tax assets which, prior to a valuation allowance, totaled $17.1 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.

NOTE 13. INCOME TAXES (continued)

Income tax expense (benefit) was as follows:

	Year to date
	June 30, 2010			June 30, 2009

Pre-tax loss	$	(6,837	)	$	(11,884	)
Effective tax rate		38.0	%		38.6	%
Tax benefit		(2,598	)		(4,587	)
Increase in valuation allowance - federal		2,421			-
Increase in valuation allowance - state		177			397
Income tax expense (benefit)	$	-		$	(4,190	)

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).

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.

NOTE 14 - STOCK CONVERSION (continued)

The conversion is subject to approval of the Office of Thrift Supervision 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 $782,000 as of June 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.

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. 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.

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 June 30, 2010, the Company had a valuation allowance of $17.1 million for the net deferred tax asset.

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

General. Total assets decreased $4.2 million to $901.4 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 $27.7 million as well as a decrease in cash of $7.3 million, partially offset by the increase in available for sale securities of $22.1 million as well as an increase in loans held for sale of $8.1 million. Total deposits increased $19.6 million to $575.0 million at June 30, 2010 from $555.4 million at December 31, 2009. Core deposits grew by $8.2 million, while time deposits increased $11.4 million, primarily due to growth in brokered deposits.

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

	June 30,			December 31,			Increase (decrease)
	2010			2009			Dollars			Percentage
	(Dollars in Thousands)
Assets
Cash and cash equivalents	$	29,892		$	37,144		$	(7,252	)		-19.5	%
Securitites available for sale		200,040			177,938			22,102			12.4	%
Loans		596,912			628,181			(31,269	)		-5.0	%
Allowance for loan losses		(10,236	)		(13,810	)		3,574			-25.9	%
Loans, net		586,676			614,371			(27,695	)		-4.5	%
Loans held for sale		17,086			8,990			8,096			90.1	%
Other assets		67,680			67,118			562			0.8	%
Total assets	$	901,374		$	905,561		$	(4,187	)		-0.5	%

Liabilities and Stockholders' equity
Deposits
Non-interest bearing demand	$	35,130		$	34,988		$	142			0.4	%
Interest bearing demand		78,758			79,192			(434	)		-0.5	%
Savings and money market		169,260			160,784			8,476			5.3	%
Time		291,863			280,480			11,383			4.1	%
Total deposits		575,011			555,444			19,567			3.5	%
Federal Home Loan Bank advances		170,741			182,694			(11,953	)		-6.5	%
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		4,606			5,882			(1,276	)		-21.7	%
Total liabilities		848,158			849,020			(862	)		-0.1	%
Stockholders' equity		53,216			56,541			(3,325	)		-5.9	%
Total liabilities and stockholders' equity	$	901,374		$	905,561		$	(4,187	)		-0.5	%

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 increased approximately $22.1 million to $200.0 million at June 30, 2010, net of purchases, sales and maturities. The increase in securities available for sale was the result of the redeployment of proceeds received from the increased payoffs and amortization of one- to four-family residential loans as opportunities were limited for portfolio loan origination that were within the Company’s asset and liability targets. Expense for other-than-temporary impairment was approximately $(81,000) in non-interest income (loss) on two private label collateralized mortgage obligation mezzanine (support) debt securities for the six months ended June 30, 2010.

	At June 30, 2010
	Amortized		Fair		Number of		Cumulative
	Cost		Value		Securities		OTTI
	(Dollars in Thousands)

Private label collateralized mortgage obligations with OTTI	$	5,578	$	4,957		9	$	4,548
Private label collateralized mortgage obligations with no OTTI		7,853		7,937		5		-
Total private label collateralized mortgage obligations	$	13,431	$	12,894		14	$	4,548

At June 30, 2010, approximately $186.3. million, or 93% 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 June 30, 2010.

Loans. Portfolio loans declined approximately 5% to $586.7 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 six months of 2010, combined with the sale of approximately $7.2 million of non-performing loans in the first six months of 2010.

Total loan originations increased $35.4 million to $99.4 million for the six months ended June 30, 2010 from $63.9 million for the same period in 2009. Origination of loans held for sale in the secondary market increased $16.1 million to $62.6 million during the first six months of 2010, from $46.5 million for the same period in 2009, while portfolio loan production increased $15.3 million to $37.1 million for the six months ended June 30, 2010 from $21.8 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. However, the current level of interest rates limits opportunities for portfolio loan origination within the Company’s asset and liability management targets.

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 residential loans held for sale in the secondary market is expected to continue its moderate pace. This strategy of selling the majority of originated loans in the secondary market 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 $10.2 million, or 1.71% of total loans compared to $13.8 million or 2.22% of total loans outstanding at June 30, 2010 and December 31, 2009, respectively.


Non-performing assets:	June 30,			December 31,
	2010			2009
	(Dollars in Thousands)
Real Estate Loans
One-to-four-family	$	8,213		$	12,343
Commercial		1,433			3,895
Other		7,335			9,638

Construction - One-to-four-family		-			-
Construction - Commercial		1,682			4,988
Construction - Acquisition & Development		404			404

Other Loans - Consumer
Home Equity		1,976			2,973
Other		668			909
Commercial		14			-

Total non-performing loans		21,725			35,150
Foreclosed assets		7,340			5,028

Total non-performing assets	$	29,065		$	40,178

Total troubled debt restructurings (TDR)	$	18,459		$	22,660

Total impaired loans (including TDR)	$	36,560		$	44,392

Non-performing loans to total loans		3.64	%		5.64	%
Non-performing loans to total assets		2.41	%		3.85	%
Non-performing assets to total assets		3.22	%		4.44	%

Non-performing loans were $21.7 million or 3.64% of total loans and $35.2 million, or 5.64% of total loans at June 30, 2010, and December 31, 2009, respectively. The decrease was primarily due to the sale of $6.3 million of non-performing residential loans and a $3.3 million charge-off of a non-performing commercial real estate loan. Total impaired loans decreased $7.8 million to $36.6 million at June 30, 2010 from $44.4 million at December 31, 2009. As of June 30, 2010 total non-performing one- to four-family residential loans of $8.2 million included $6.1 million of one- to four-family residential loans that had been written-down to the estimated fair value of their collateral. Further declines in the fair value of the collateral, or a decision to sell loans as distressed assets, could result in additional losses. The total allowance allocated for impaired loans decreased to $2.3 million at June 30, 2010 from $5.4 million at December 31, 2009. As of June 30, 2010, and December 31, 2009, all non-performing loans were classified as non-accrual, and there were no loans 90 days past due and accruing interest as of June 30, 2010, and December 31, 2009. Non-performing loans, excluding small balance homogeneous loans, decreased to $9.5 million at June 30, 2010, from $17.2 million at December 31, 2009. Troubled debt restructured (“TDR”) loans were $18.5 million as of June 30, 2010, as compared to $22.7 million at December 31, 2009. These loans were primarily comprised of residential mortgage loans collateralized by real estate and were evaluated for impairment as required under GAAP.

The tables below compare the general component, which is available for the entire loan portfolio, and specific components of the allowance for loan losses to non-performing loans as of June 30, 2010 and December 31, 2009:

Comparison of Loan Loss Allowance to Non-Performing Loans

June 30, 2010

	Non- Performing Loans		Amount of General and Specific Loan Loss Allowance		Percent of General and Specific Loan Loss Allowance to Non- Performing Loans
	(Dollars in Thousands)
Real Estate Loans
One-to four-family	$	8,213	$	2,880		35.07	%
Commercial		1,433		835		58.27	%
Other (land & multi-family)		7,335		1,549		21.12	%

Real Estate Construction
Construction One-to four family		-		14		-
Construction Commercial		1,682		1		0.06	%
Acquistion & Development		404		110		27.23	%

Other Loans
Home Equity		1,976		1,887		95.50	%
Consumer		668		2,714		406.29	%
Commercial		14		246		1757.14	%
Totals	$	21,725	$	10,236		47.12	%

Comparison of Loan Loss Allowance to Non-Performing Loans

December 31, 2009

	Non- Performing Loans		Amount of Loan Loss Allowance		% of Loan Loss Allowance to Non- Performing Loans
	(Dollars in Thousands)
Real Estate Loans
One-to four-family	$	12,343	$	3,446		27.92	%
Commercial		3,895		575		14.76	%
Other (land & multi-family)		9,638		1,305		13.54	%

Real Estate Construction
Construction One-to four family		-		47		-
Construction Commercial		4,988		3,322		66.60	%
Acquistion & Development		404		110		27.23	%

Other Loans
Home Equity		2,973		2,240		75.34	%
Consumer		909		2,447		269.20	%
Commercial		-		318		-
Totals	$	35,150	$	13,810		39.29	%

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

	June 30,		June 30,
	2010		2009

Balance at beginning of period	$	13,810	$	10,598

Charge-offs:
Real Estate Loans
One-to four-family		6,759		3,989
Commercial		1,079		590
Other (Land & Multi-family)		873		3,393
Real Estate Construction Loans
Construction One-to four family		-		-
Construction Commercial		3,307		50
Acquistion & Development		-		-
Other Loans
Home equity		2,032		2,045
Consumer		833		587
Commercial		698		550
Total charge-offs		15,581		11,204

Recoveries:
Real Estate Loans
One-to four-family		548		145
Commercial		-		-
Other (Land & Multi-family)		2		16
Real Estate Construction Loans
Construction One-to four family		-		-
Construction Commercial		-		-
Acquistion & Develpoment		-		-
Other Loans
Home equity		87		121
Consumer		149		190
Commercial		4		-
Total recoveries		790		472

Net charge-offs		14,791		10,732
Provision for loan losses		11,217		12,007
Balance at end of period	$	10,236	$	11,873

During the six months ended June 30, 2010 loan charge-offs included approximately $4.5 million of partial charge-offs of one-to four- family residential loans identified as non-performing, of which $2.8 million was related to the sale of $6.3 million of non-performing one- to four-family residential loans. Charge-offs in 2010 also included $3.3 million on one commercial loan for which a specific allowance had previously been established. Due to the decline in real estate values over the past two years, the Company believes it is appropriate and prudent to reduce the carrying balance of non-performing one-to four-family residential loans by the expected loss amount rather than providing a general allowance.

Deferred Income Taxes. As of both June 30, 2010 and December 31, 2009 the Company concluded that, while improved operating results are expected as the economy begins to improve and the Bank’s non-performing assets decline, the variability of the credit related costs are such that a more likely than not conclusion of realization of the Company’s deferred tax asset could not be supported. Consequently the Company has recorded a valuation allowance of $17.1 million for the full amount of the net federal and state deferred tax assets as of June 30, 2010. Until such time as the Company determines it is more likely than not that it is able to generate taxable income, no tax benefits will be recorded in future periods to reduce net losses before taxes. However, at such time in the future that the Company records taxable income or determines that realization of the deferred tax asset is more likely than not, some or all of the valuation allowance may be available as a tax benefit.

Deposits. Total deposits were $575.0 million at June 30, 2010, an increase of $19.6 million from $555.4 million at December 31, 2009. The $11.4 million increase in time deposits was primarily due to higher brokered deposits acquired in conjunction with the sale of our Lake City, Florida branch on December 31, 2009. The relatively low rates on brokered deposits during the quarter also made them an attractive source of funds. The remainder of the increase in deposits was an increase in savings and money market accounts $8.5 million. As a part of its capital preservation strategy, the Bank intentionally lowered rates on time deposits in the second half of 2009 in order to reduce those deposits consistent with loan balances decreases. Management believes near term deposit growth will be moderate with an emphasis on core deposits to match asset growth expectations. Dramatic changes in the short-term interest rate environment could affect the availability of deposits in our local market and therefore cause the Bank to promote time deposit growth in order to meet liquidity needs.

Securities sold under agreements to repurchase. Securities sold under agreements to repurchase are secured by mortgage-backed securities with a carrying amount of $121.9 million at June 30, 2010, compared to $119.9 million at December 31, 2009. The agreements carry various periods of fixed interest rates that convert to callable floating rates in the future. Upon conversion, each agreement may be terminated in whole by the lender each following quarter; there is no termination penalty if terminated by the lender. There have been no early terminations as June 30, 2010. 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, 2010 and December 31, 2009.

Securities sold under agreements to repurchase are financing arrangements that mature within ten years, beginning in January 2014. At maturity, the securities underlying the agreements are returned to the Company. Information concerning securities sold under agreements to repurchase as of June 30, 2010 is summarized as follows:

	(Dollars in Thousands)
Average daily balance during the period	$	92,800
Average interest rate during the period		5.00	%
Maximum month-end balance	$	92,800
Weighted average interest rate at period end		5.04	%

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

Federal Home Loan Bank advances. FHLB advances had a weighted-average maturity of 58 months and a weighted-average rate of 3.58% at June 30, 2010. The decrease in FHLB borrowings to $170.7 million at June 30, 2010 as compared to December 31, 2009 was due to repayments of $25.0 million which exceeded proceeds from advances of $13.0 million. The Company expects to continue to utilize FHLB advances to manage short and long- term liquidity needs to the extent it has borrowing capacity, needs funding and the interest expense of FHLB advances is attractive compared to deposits and other alternative sources of funds. However, with the FDIC’s new deposit insurance premium assessment schedule raising assessment rates in order to recapitalize the Deposit Insurance Fund, which takes into consideration an institution’s FHLB borrowings, our FDIC assessment may increase, should any additional FHLB borrowings outpace deposit growth.

Other borrowings. Other borrowings were $5.0 million at June 30, 2010. The Company borrowed $5.0 million 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 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.

Stockholders’ equity. Stockholders’ equity decreased by approximately $3.3 million to $53.2 million at June 30, 2010 from $56.5 million at December 31, 2009 as the net loss of $6.8 million for the six months ended June 30, 2010 was partially offset by the $3.0 million increase in other comprehensive income. Other comprehensive income for the six months ended June 30, 2010 was $3.2 million due to higher market values on available-for-sale securities.

The Company’s equity to assets ratio decreased to 5.90% at June 30, 2010, from 6.24% at December 31, 2009. The decrease was due to the net loss of $6.8 million for the six months ended June 30, 2010, partially offset by the increase in other comprehensive income. Despite this decrease, Atlantic Coast 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 9.8%, and Tier 1 capital to adjusted total assets was 5.8% at June 30, 2010. These ratios as of December 31, 2009 were 11.4%, 10.2% and 6.1%, respectively.

Comparison of Results of Operations for the Three Months Ended June 30, 2010 and 2009.

General. Net loss for the three months ended June 30, 2010, was $4.1 million, which was a decrease of $556,000 from a net loss of $4.6 million for the same period in 2009. The net loss for the three months ended June 30, 2009 was net of a tax benefit of $2.5 million. The Company did not record any tax benefit for the three months ended June 30, 2010 following the establishment of a valuation allowance on the net deferred tax asset during 2009. The loss before income taxes was $4.1 million for the three months ended June 30, 2010 as compared to a loss before income taxes of $7.2 million for the same period in 2009. The reduction in loss before income taxes was primarily due to a $1.1 million increase in net interest income, a $2.2 million increase in non-interest income and a decrease in non-interest expense of $1.2 million, partially offset by an increase in provision for loan losses of $1.3 million.

Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following table sets forth certain information for the three months ended June 30, 2010 and 2009. The average yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.

	For the three months ended June 30,
	2010								2009
	(Dollars in Thousands)
	Average Balance		Interest			Average Yield /Cost			Average Balance		Interest			Average Yield /Cost

INTEREST-EARNING ASSETS
Loans receivable(1)	$	619,306	$	9,491			6.13	%	$	716,871	$	10,266			5.73	%
Securites(2)		210,134		2,155			4.10	%		166,233		1,838			4.42	%
Other interest-earning assets(3)		29,922		46			0.61	%		50,004		23			0.18	%
Total interest-earning assets		859,362		11,692			5.44	%		933,108		12,127			5.20	%
Non-interest earning assets		47,288								56,962
Total assets	$	906,650							$	990,070

INTEREST-BEARING LIABILITIES
Savings deposits	$	46,887	$	89			0.76	%	$	35,161	$	33			0.38	%
Interest bearing demand accounts		80,578		299			1.48	%		74,228		360			1.94	%
Money market accounts		120,468		322			1.07	%		140,485		581			1.65	%
Time deposits		296,162		1,933			2.61	%		341,339		3,216			3.77	%
Securities sold under agreements to repurchase		92,800		1,174			5.06	%		92,800		1,709			7.37	%
Federal Home Loan Bank advances		170,002		1,567			3.69	%		177,631		1,017			2.29	%
Other borrowings		2,095		44			8.40	%		-		-			-
Total interest-bearing liabilities		808,992		5,428			2.68	%		861,644		6,916			3.21	%
Non-interest bearing liabilities		40,183								48,648
Total liabilities		849,175								910,292
Stockholders' equity		57,475								79,778
Total liabilities and stockholders' equity	$	906,650							$	990,070

Net interest income			$	6,264							$	5,211
Net interest spread							2.76	%							1.99	%
Net earning assets	$	50,370							$	71,464
Net interest margin(4)							2.92	%							2.23	%
Average interest-earning assets to average interest-bearing liabilities				106.23	%							108.29	%

(1)

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

(2)

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

(3)

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

(4)

Net interest income divided by average interest-earning assets.

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, 2010 as compared to the same period in 2009. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume multiplied by the old rate; and (2) changes in rate, which are changes in rate multiplied by the old volume; and (3) changes not solely attributable to rate or volume have been allocated proportionately to the change due to volume and the change due to rate.

	Increase/(Decrease)						Total
	Due to						Increase
	Volume			Rate			(Decrease)
	(Dollars in Thousands)
INTEREST-EARNING ASSETS
Loans receivable	$	(1,462	)	$	687		$	(775	)
Securities		458			(141	)		317
Other interest-earning assets		(12	)		35			23
Total interest-earning assets		(1,016	)		581			(435	)

INTEREST-BEARING LIABILITIES
Savings deposits		14			42			56
Interest bearing demand accounts		29			(90	)		(61	)
Money market accounts		(74	)		(185	)		(259	)
Time deposits		(386	)		(897	)		(1,283	)
Securities sold under agreements to repurchase		-			157			157
Federal Home Loan Bank advances		(72	)		(70	)		(142	)
Other borrowings		44			-			44
Total interest-bearing liabilities		(445	)		(1,043	)		(1,488	)

Net interest income	$	(571	)	$	1,624		$	1,053

Interest income. Total interest income declined $435,000 to $11.7 million for the three months ended June 30, 2010 from $12.1 million for the three months ended June 30, 2009 primarily due the decrease in interest income on loans. Interest income on loans decreased to $9.5 million for the three months ended June 30, 2010 from $10.3 million for the same period in 2009. This decrease was due primarily to a decline in the average balance of loans, which decreased $97.6 million, to $619.3 million for the three months ended June 30, 2010 from $716.9 million for the prior year period. Interest income earned on securities increased for the three months ended June 30, 2010 as compared to the same period in 2009, due to increase in the average balance of $43.9 million, partially offset by lower interest rates on new purchases of comparable securities, which resulted in a 32 basis point decline in average rate.

Interest income was adversely impacted by continued low interest rates and the unavailability of higher yielding interest-earning assets.

Interest expense. Interest expense declined by $1.5 million to $5.4 million for the three months ended June 30, 2010 from $6.9 million for the three months ended June 30, 2009. The decrease in interest expense for the three months ended June 30, 2010, as compared to the same period in 2009, was due to lower average rates paid on interest-bearing liabilities, primarily time deposits, as well as the decrease in average outstanding balances of time deposits. The average rate paid on time deposits decreased 116 basis points to 2.61% for the three months ended June 30, 2010 as compared to 3.77% the same period in 2009.

Net interest income. Net interest income increased $1.1 million to $6.3 million for the three months ended June 30, 2010 from $5.2 million for the three months ended June 30, 2009, as the decrease in interest expense was greater than the decrease in interest income. Our net interest rate spread, which is the difference between the interest rate earned on interest-earning assets and the interest rate paid on interest-bearing liabilities, increased 77 basis points to 2.76% for the second quarter of 2010 as compared to 1.99% for the same quarter in 2009. For the same comparative periods, our net interest margin, which is net interest income expressed as a percentage of our average interest earning assets, increased 69 basis points to 2.92% as compared to 2.23% for the same quarter in 2009. The improvement in net interest margin was primarily due to the 88 basis point decrease in the average interest rate of deposits, to 1.94% for the three months ended June 30, 2010 as compared to 2.82% for the same period in 2009.

Provision for loan losses. Provision for loan losses of $7.5 million and $6.2 million were made during the three months ended June 30, 2010 and 2009, respectively. The increase in the provision for loan losses was due to higher charge-offs of one- to four-family residential loans of $4.9 million during the three months ended June 30, 2010 as compared to $3.4 million during the same period in 2009. This increase was due to a $2.8 million loss on a distressed loan sale of $6.3 million of non-performing one- to four-family residential loans in June 2010. Net charge-offs in 2010 also included a charge-off of $3.3 million on one commercial loan, for which a specific allowance had previously been established and $706,000 of partial write-downs on one- to four-family residential loans that became non-performing during the three months ended June 30, 2010. Net charge-offs for the three months ended June 30, 2010 were $10.6 million as compared to $8.7 million for the same period in 2009. Beginning in the second quarter of 2009 the Company adopted the policy of writing down loans when they are classified as non-performing rather than recording a general allocation.

Non-interest income. The components of non-interest income for the three months ended June 30, 2010 and 2009 were as follows:

							Increase(decrease)
	2010			2009			Dollars			Percentage
	(Dollars in Thousands)
Service charges and fees	$	963		$	1,040		$	(77	)		-7.4	%
Gain on sale of loans held for sale		78			189			(111	)		-58.7	%
Gain on sale of portfolio loans		113			-			113			-
Gain on available for sale securities		1,229			118			1,111			941.5	%
Other than temporary impairment losses		(6	)		(1,146	)		1,140			-99.5	%
Interchange fees		241			235			6			2.6	%
Other		319			326			(7	)		-2.1	%
	$	2,937		$	762		$	2,175			285.4	%

Non-interest income for the three months ended June 30, 2010 increased $2.2 million to $2.9 million as compared to $762,000 for the same three months in 2009. The increase was primarily due to the $1.1 million higher gain on sale of available-for-sale securities and the $1.1 million other-than-temporary-impairment loss recorded during the three months ended June 30, 2009.

Non-interest expense. The components of non-interest expense for the three months ended June 30, 2010 and 2009 were as follows:

					Increase(decrease)
	2010		2009		Dollars			Percentage
	(Dollars in Thousands)
Compensation and benefits	$	2,437	$	2,967	$	(530	)		-17.9	%
Occupancy and equipment		531		667		(136	)		-20.4	%
FDIC insurance premiums		398		677		(279	)		-41.2	%
Foreclosed assets, net		30		286		(256	)		-89.5	%
Data processing		402		249		153			61.4	%
Outside professional services		371		736		(365	)		-49.6	%
Collection expense and repossessed asset losses		605		272		333			122.4	%
Other		1,011		1,091		(80	)		-7.3	%
	$	5,785	$	6,945	$	(1,160	)		-16.7	%

Non-interest expense decreased $1.1 million to $5.8 million for the three months ended June 30, 2010 from $6.9 million for the same three months ended June 30, 2009. Components of the decrease included lower compensation and benefits due to expense reduction initiatives implemented during 2009, lower outside professional services, lower FDIC insurance premiums and a lower loss on foreclosed assets, partially offset by increased legal, collection and administrative expenses associated with other real estate owned and foreclosures.

Income tax. The Company recorded no income tax benefit for the three months ended June 30, 2010 as compared to a benefit of $2.5 million for the same period in 2009 due to the Company’s establishment of a valuation reserve for net deferred tax assets during 2009. The recognition of future tax benefits or the reversal of the valuation reserve is dependent upon the Company’s ability to generate future taxable income.

Comparison of Results of Operations for the Six Months Ended June 30, 2010 and 2009.

General. Net loss for the six months ended June 30, 2010, was $6.8 million, which was an improvement of $900,000 from a net loss of $7.7 million for the same period in 2009. The net loss for the six months ended June 30, 2009 was net of a tax benefit of $4.2 million. The Company did not record any tax benefit for the six months ended June 30, 2010 following the establishment of a valuation allowance on the net deferred tax asset during 2009. The loss before income taxes was $6.8 million for the six months ended June 30, 2010 as compared to a loss before income taxes of $11.9 million for the same period in 2009. The reduction in loss before income taxes was primarily due to a $1.1 million increase in net interest income, a reduction in provision for loans losses of $790,000, a $1.7 million increase in non-interest income and a decrease in non-interest expense of $1.4 million.

Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following table sets forth certain information for the six months ended June 30, 2010 and 2009. The average yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.

	For the six months ended June 30,
	2010								2009
	(Dollars in Thousands)
	Average Balance		Interest			Average Yield /Cost			Average Balance		Interest			Average Yield /Cost

INTEREST-EARNING ASSETS
Loans receivable(1)	$	623,879	$	18,681			5.99	%	$	729,514	$	21,088			5.78	%
Securites(2)		200,456		4,119			4.11	%		163,875		3,821			4.66	%
Other interest-earning assets(3)		31,660		94			0.59	%		47,572		43			0.18	%
Total interest-earning assets		855,995		22,894			5.35	%		940,961		24,952			5.30	%
Non-interest earning assets		50,643								57,997
Total assets	$	906,638							$	998,958

INTEREST-BEARING LIABILITIES
Savings deposits	$	42,695	$	142			0.67	%	$	34,435	$	65			0.38	%
Interest bearing demand accounts		79,334		644			1.62	%		72,534		723			1.99	%
Money market accounts		123,224		734			1.19	%		138,444		1,309			1.89	%
Time deposits		296,142		3,943			2.66	%		345,974		6,649			3.84	%
Securities sold under agreements to repurchase		92,800		2,322			5.00	%		92,800		3,421			7.37	%
Federal Home Loan Bank advances		172,130		3,121			3.63	%		185,288		2,000			2.16	%
Other borrowings		2,314		88			7.61	%		-		-			-
Total interest-bearing liabilities		808,639		10,994			2.72	%		869,475		14,167			3.26	%
Non-interest bearing liabilities		40,575								48,328
Total liabilities		849,214								917,803
Stockholders' equity		57,424								81,155
Total liabilities and stockholders' equity	$	906,638							$	998,958

Net interest income			$	11,900							$	10,785
Net interest spread							2.63	%							2.04	%
Net earning assets	$	47,356							$	71,486
Net interest margin(4)							2.78	%							2.29	%
Average interest-earning assets to average interest-bearing liabilities				105.86	%							108.22	%

(1)

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

(2)

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

(3)

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

(4)

Net interest income divided by average interest-earning assets.

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, 2010 as compared to the same period in 2009. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume multiplied by the old rate; and (2) changes in rate, which are changes in rate multiplied by the old volume; and (3) changes not solely attributable to rate or volume have been allocated proportionately to the change due to volume and the change due to rate.

	Increase/(Decrease)						Total
	Due to						Increase
	Volume			Rate			(Decrease)
	(Dollars in Thousands)
INTEREST-EARNING ASSETS
Loans receivable	$	(3,141	)	$	734		$	(2,407	)
Securities		787			(489	)		298
Other interest-earning assets		(18	)		69			51
Total interest-earning assets		(2,372	)		314			(2,058	)

INTEREST-BEARING LIABILITIES
Savings deposits		18			59			77
Interest bearing demand accounts		64			(143	)		(79	)
Money market accounts		(132	)		(443	)		(575	)
Time deposits		(864	)		(1,842	)		(2,706	)
Securities sold under agreements to repurchase		-			321			321
Federal Home Loan Bank advances		(239	)		(60	)		(299	)
Other borrowings		88			-			88
Total interest-bearing liabilities		(1,065	)		(2,108	)		(3,173	)

Net interest income	$	(1,307	)	$	2,422		$	1,115

Interest income. Total interest income declined $2.1 million to $22.9 million for the six months ended June 30, 2010 from $25.0 million for the six months ended June 30, 2009 because of a decrease in interest income on loans. Interest income on loans decreased to $18.7 million for the six months ended June 30, 2010 from $21.1 million for the same period in 2009. This decrease was due primarily to a decline in the average balance of loans, which decreased $105.6 million, to $623.9 million for the six months ended June 30, 2010 from $729.5 million for the prior year period. Interest income earned on securities increased for the six months ended June 30, 2010 as compared to the same period in 2009 due to an increase in the average balance of $36.6 million, partially offset by lower interest rates on new purchases of comparable securities, which resulted in a 55 basis point decline in average rate.

Interest income was adversely impacted by continued low interest rates and the unavailability of higher yielding interest-earning assets.

Interest expense. Interest expense declined by $3.2 million to $11.0 million for the six months ended June 30, 2010 from $14.2 million for the six months ended June 30, 2009. The decrease in interest expense for the six months ended June 30, 2010, as compared to the same period in 2009, was due to the combination of lower average rates paid on interest-bearing liabilities, primarily time deposits, as well as the decrease in average outstanding balances of time deposits. The average rate paid on time deposits decreased 118 basis points to 2.66% for the six months ended June 30, 2010 as compared to 3.84% the same period in 2009.

Net interest income. Net interest income increased $1.1 million to $11.9 million for the six months ended June 30, 2010 from $10.8 million for the six months ended June 30, 2009, as the decrease in interest expense was greater than the decrease in interest income. Our net interest rate spread, which is the difference between the interest rate earned on interest-earning assets and the interest rate paid on interest-bearing liabilities, increased 59 basis points to 2.63% for the six months ended June 30, 2010 as compared to 2.04% for the same period in 2009. For the same comparative periods, our net interest margin, which is net interest income expressed as a percentage of our average interest earning assets, increased 49 basis points to 2.78% as compared to 2.29% for the same period in 2009. The improvement in net interest margin was primarily due to the 94 basis point decrease in the average interest rate of deposits, to 2.02% for the six months ended June 30, 2010 as compared to 2.96% for the same period in 2009.

Provision for loan losses. Provision for loan losses of $11.2 million and $12.0 million were made during the six months ended June 30, 2010 and 2009, respectively. The decrease in provision for loan losses was primarily due to the $95.9 million decrease in the balance of portfolio loans as of June 30, 2010 as compared to June 30, 2009, offset by an increase in charge-offs. Net charge-offs for the six months ended June 30, 2010 were $14.8 million as compared to $10.7 million for the same period in 2009. The increased charge-offs included $2.8 million of loss on a distressed loan sale of $6.3 million of non-performing one- to four-family residential loans in June 2010. Net charge-offs in 2010 also included $2.0 million of partial write-downs on one- to four-family residential loans that became non-performing during the six months ended June 30, 2010 as well as a $3.3 million charge-off on one non-performing commercial loan, for which a specific allowance had previously been established. Beginning in the second quarter of 2009 the Company adopted the policy of writing down loans when they are classified as non-performing rather than recording a general allocation.

Non-interest income. The components of non-interest income for the six months ended June 30, 2010 and 2009 were as follows:

							Increase(decrease)
	2010			2009			Dollars			Percentage
	(Dollars in Thousands)
Service charges and fees	$	1,832		$	2,042		$	(210	)		-10.3	%
Gain on sale of loans held for sale		182			374			(192	)		-51.3	%
Loss on sale of portfolio loans		(160	)		-			(160	)		-
Gain on available for sale securities		1,229			215			1,014			471.6	%
Other than temporary impairment losses		(81	)		(1,320	)		1,239			-93.9	%
Interchange fees		463			450			13			2.9	%
Other		560			551			9			1.6	%
	$	4,025		$	2,312		$	1,713			74.1	%

Non-interest income for the six months ended June 30, 2010 increased $1.7 million to $4.0 million as compared to $2.3 million for the same six months in 2009. The increase was primarily due to the $1.0 million higher gain on sale of available-for-sale securities and the $1.3 million other-than-temporary-impairment loss recorded during the six months ended June 30, 2009, partially offset by lower service fees, lower gain on sale of loans held for sale and the loss on sale of portfolio loans.

Non-interest expense. The components of non-interest expense for the six months ended June 30, 2010 and 2009 were as follows:

					Increase(decrease)
	2010		2009		Dollars			Percentage
	(Dollars in Thousands)
Compensation and benefits	$	5,007	$	5,542	$	(535	)		-9.7	%
Occupancy and equipment		1,084		1,288		(204	)		-15.8	%
FDIC insurance premiums		846		1,013		(167	)		-16.5	%
Foreclosed assets, net		121		990		(869	)		-87.8	%
Data processing		657		509		148			29.1	%
Outside professional services		730		1,161		(431	)		-37.1	%
Collection expense and repossessed asset losses		997		476		521			109.5	%
Other		2,103		1,995		108			5.4	%
	$	11,545	$	12,974	$	(1,429	)		-11.0	%

Non-interest expense decreased $1.4 million to $11.5 million for the six months ended June 30, 2010 from $13.0 million for the same six months ended June 30, 2009. Components of the decrease included lower compensation and benefits due to expense reduction initiatives implemented during 2009, lower outside professional services and a lower loss on foreclosed assets, partially offset by increased legal, collection and administrative expenses associated with other real estate owned and foreclosures.

Income tax. The Company recorded no income tax benefit for the six months ended June 30, 2010 as compared to a benefit of $4.2 million for the same period in 2009 due to the Company’s establishment of a valuation reserve for net deferred tax assets during 2009. The recognition of future tax benefits or the reversal of the valuation reserve is dependent upon the Company’s ability to generate future taxable income.

Liquidity

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

During the six months ended June 30, 2010, cash and cash equivalents decreased $7.2 million from $37.1 million as of December 31, 2009, to $29.9 million as of June 30, 2010. Cash used in operating activities of $2.3 million, combined with cash used in investing activities of $5.3 million, was more than cash from financing activities of $400,000. Primary sources of cash were from proceeds from maturities and payments of available-for-sale securities of $39.8 million, net increases in deposits of $19.6 million, proceeds from sales of securities available-for-sale of $17.9 million, proceeds from FHLB advances of $13.0 million, proceeds from sale of portfolio loans of $7.2 million, net decreases in loans of $5.1 million and proceeds from other borrowings of $5.0 million. Primary uses of cash included purchases of available-for-sale securities of $76.3 million and repayments of FHLB borrowings of $25.0 million and repayments of other borrowings of $12.2 million.

During 2009, cash and cash equivalents increased $12.2 million from $34.1 million as of December 31, 2008, to $46.3 million as of June 30, 2009. Cash from investing activities of $15.3 million was more than cash used in operating activities of $1.0 million and cash used in financing activities of $2.0 million. Primary sources of cash were proceeds from sales of securities available-for-sale of $36.1 million, net decreases in loans of $32.7 million, proceeds from maturities and payments of available-for-sale securities of $28.1 million, FHLB borrowings of $20.0 million, proceeds from sale of portfolio loans of $13.0 million and net increases in deposit accounts of $4.9 million. Primary uses of cash included purchases of available-for-sale securities of $95.3 million. The additional borrowings from the FHLB as well as some cash were used to replace maturing FHLB debt of $27.2 million.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

The Committee generally meets at least monthly to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate exposure limits versus current projections pursuant to market value of portfolio equity analysis and income simulations. The Committee utilizes two models, a Net Portfolio Value model and a Net Interest Income Sensitivity model, as discussed below. 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.

Net Portfolio Value. The Office of Thrift Supervision requires the computation of amounts by which the net present value of an institution’s cash flow from assets, liabilities and off-balance sheet items (the institution’s net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. Given the current relatively low level of market interest rates, an NPV calculation for an interest rate decrease of greater than 100 basis points has not been prepared. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.

Net Interest Income Sensitivity. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. In our model, we estimate what our net interest income would be for a rolling forward twelve-month period using historical data for assumptions such as loan prepayment rates and deposit decay rates, the current term structure for interest rates, and current deposit and loan offering rates. We then calculate what the net interest income would be for the same period in the event of an instantaneous 100, 200 and 300 basis point increase or a 100 basis point decrease in market interest rates.

At June 30, 2010
									NPV as a Percentage of Present Value of Assets (3)						Net Interest Income
Change in Interest Rates (basis points)	Estimated		Estimated (Decrease) in NPV									Increase (Decrease)			Estimated Net Interest		Increase (Decrease) in Estimated Net Interest Income
(1)	NPV (2)		Amount			Percent			NPV Ratio (4)			(basis points)			Income		Amount			Percent
	(Dollars in Thousands)

+300	$	36,315	$	(27,486	)		(43.1	)%		4.29	%		(264	)	$	22,038	$	(2,359	)		(9.67	)%
+200		50,023		(13,778	)		(21.6	)%		5.73	%		(120	)		23,807		(590	)		(2.42	)%
+100		60,950		(2,851	)		(4.5	)%		6.77	%		(15	)		24,102		(295	)		(1.21	)%
0		63,801		-			-			6.93	%		-			24,397		-			-
-100		61,322		(2,479	)		(3.9	)%		6.57	%		(36	)		24,284		(113	)		(0.45	)%

(1)	Assumes an instantaneous uniform change in interest rates at all maturities.

(2)	NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

(3)	Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.

(4)	NPV Ratio represents NPV divided by the present value of assets.

In managing its asset/liability mix the Company, depending on the relationship between long and short-term interest rates, market conditions and consumer preference, may place somewhat greater emphasis on maximizing its net interest margin than on strictly matching the interest rate sensitivity of its assets and liabilities. Management believes that the increased net income which may result from an acceptable mismatch in the actual maturity or re-pricing of its asset and liability portfolios can, during periods of declining or stable interest rates, provide sufficient returns to justify the increased exposure to sudden and unexpected increases in interest rates which may result from such a mismatch. Management believes that Atlantic Coast Federal Corporation’s level of interest rate risk is acceptable under this approach. In evaluating Atlantic Coast Federal Corporation’s exposure to interest rate movements, certain shortcomings inherent in the NII/NPV 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 NII/NPV 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, 2010, that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ATLANTIC COAST FEDERAL CORPORATION

FORM 10-Q

June 30, 2010

Part II - Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

We have experienced net losses for the six months of 2010 and each of the last two fiscal years and we may not return to profitability in the near future.

We have experienced net losses of $6.8 million for the first six months of 2010 and $29.3 million and $2.8 million for the years ended December 31, 2009 and 2008, respectively. The losses have been primarily related to non-performing assets, which necessitated a provision for loan losses of $24.9 million for the year ended December 31, 2009, compared to a provision of $13.9 million for the year ended December 31, 2008. We charged off $21.7 million of loans during 2009 as compared to $9.8 million during 2008. Non-accrual loans (generally loans 90 days or more past due in principal or interest payments) decreased to $21.7 million, or 3.64% of total loans at June 30, 2010, compared to $25.5 million, or 3.43% of total loans at December 31, 2008. We experienced other than temporary impairment losses in the investment portfolio of $4.5 million and $81,000 for the year ended December 31, 2009 and for the first six months of 2010, respectively. In addition, during the year ended December 31, 2009, management deemed it appropriate to write off our entire goodwill balance of $2.8 million, and establish a valuation allowance of $16.2 million, or 100% of our net deferred tax asset. As a result of these factors and other conditions such as weakness in our local economy, we may not be able to generate sustainable net income or achieve profitability in the near future.

Our memorandum of understanding with the Office of Thrift Supervision imposes certain limits on our operations and could affect our liquidity.

In August 2009, Atlantic Coast Bank entered into a memorandum of understanding with the Office of Thrift Supervision addressing certain areas of our operations. Under the memorandum we are required to (1) utilize a four quarter roll forward budget to address, among other things, capital adequacy, appropriate allowances for loan and lease losses and a liquidity analysis, (2) ensure that the book value of our bank owned life insurance does not exceed 25% of our total capital, (3) review and enhance our liquidity policy, (4) develop a written plan to mitigate any risks to our capital and liquidity from our repurchase agreements, (5) reduce our brokered deposits to not more than $52.5 million by June 30, 2011, (6) obtain Office of Thrift Supervision approval for the payment of any dividends, (7) develop a plan to enhance our compliance management program (including Bank Secrecy Act and anti-money laundering programs) and (8) correct all deficiencies and weaknesses identified in our 2009 Report of Examination. The requirement to reduce the level of brokered deposits may affect our ability to have sufficient liquid assets for our operations. It may also cause us to pay higher rates on retail deposits to replace our use of brokered deposits. We may not increase our level of brokered deposits above the limit permitted by the Office of Thrift Supervision without the prior approval of the agency. We believe we will be able to reduce the level of our brokered deposits from $69.9 million as of June 30, 2010 to the level required by the memorandum of understanding within the required time period. The restriction on the payment of dividends without Office of Thrift Supervision approval will affect our ability to pay dividends in the future unless we have sufficient assets at Atlantic Coast Financial Corporation to pay dividends without reliance on dividends from Atlantic Coast Bank. We have addressed all the corrective actions mandated in the memorandum and we believe we are in compliance with the requirements of the memorandum. In the event that Atlantic Coast Bank should become in material non-compliance with the memorandum of understanding, the Office of Thrift Supervision has the authority to subject us to a more formal enforcement action, such as a cease and desist order.

Financial reform legislation recently enacted by Congress will, among other things, eliminate the Office of Thrift Supervision, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new laws and regulations that are expected to increase our costs of operations.

Congress has recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which will significantly change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act will eliminate our current primary federal regulator, the Office of Thrift Supervision, and require Atlantic Coast Bank to be regulated by the Office of the Comptroller of the Currency (the primary federal regulator for national banks). The Dodd-Frank Act also authorizes the Board of Governors of the Federal Reserve System to supervise and regulate all savings and loan holding companies like Atlantic Coast Financial Corporation, in addition to bank holding companies which it currently regulates. As a result, the Federal Reserve Board’s current regulations applicable to bank holding companies, including holding company capital requirements, will apply to savings and loan holding companies like Atlantic Coast Financial Corporation. These capital requirements are substantially similar to the capital requirements currently applicable to Atlantic Coast Bank, as described in “Supervision and Regulation— Federal Banking Regulation—Capital Requirements.” The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives. The Dodd-Frank Act also creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Atlantic Coast Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators. The new legislation also weakens the federal preemption available for national banks and federal savings associations, and gives state attorney generals the ability to enforce applicable federal consumer protection laws.

The legislation also broadens the base for Federal Deposit Insurance Corporation insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013. Lastly, the Dodd-Frank Act will increase stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and by authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

It is difficult to predict at this time what effect the new legislation and implementing regulations will have on community banks with regards to the lending and credit practices of such banks. Moreover, many of the provisions of the Dodd-Frank Act will not take effect for at least a year, and the legislation requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years. Although the substance and scope of these regulations cannot be determined at this time, it is expected that the legislation and implementing regulations, particularly those relating to the new Consumer Financial Protection Bureau, will increase our operating and compliance costs.

Our Executive Chairman of the Board also serves as the president and chief executive officer of another financial institution and such responsibilities could affect his ability to devote sufficient time to his position with Atlantic Coast Financial Corporation.

Our Executive Chairman of the Board, Jay S. Sidhu, also serves as the president and chief executive officer and a director of New Century Bank, located in Phoenixville, Pennsylvania. As the president and chief executive officer of New Century Bank, Mr. Sidhu is a full-time employee. Mr. Sidhu’s duties at New Century Bank have the potential to cause him to devote less of his time to his responsibilities at Atlantic Coast Financial Corporation, thereby potentially reducing his effectiveness in overseeing our strategic plan. A reduction in the time that Mr. Sidhu may devote to our operations could adversely affect our ability to successfully implement our strategic plan and our results of operations.

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.

Removed and reserved

Item 5.

Other Information

None

Item 6.

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

ATLANTIC COAST FEDERAL CORPORATION

FORM 10-Q

June 30, 2010

Part II - Other Information

Signatures

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

	ATLANTIC COAST FEDERAL CORPORATION
	(Registrant)

Date: August 16, 2010	/s/ Robert J. Larison, Jr.
	Robert J. Larison, Jr., President and Chief
	Executive Officer

Date: August 16, 2010	/s/ Thomas B. Wagers, Sr.
	Thomas B. Wagers, Sr. Senior Vice–President and
	Chief Financial Officer