Forward-Looking Statements

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

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

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

Critical Accounting Policies

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

An allowance for loan losses is maintained to reflect probable incurred losses in the loan portfolio. The allowance is based on ongoing assessments of the estimated losses incurred in the loan portfolio. Management's methodology for assessing the appropriateness of the allowance consists of several key elements, which include a SFAS No. 5, Accounting for Contingencies ("SFAS 5") component by type of loan and specific allowances for identified problem loans. The allowance incorporates the results of measuring impaired loans as provided in SFAS 114 and SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. These accounting standards prescribe the measurement methods and disclosures related to impaired loans.

The SFAS 5 component is calculated by applying loss factors to outstanding loans based on the internal risk evaluation of the loans or pools of loans. Changes in risk evaluations of both performing and non-performing loans affect the amount of the SFAS 5 component. Loss factors are based on the Bank's historical loss experience, current market conditions that may impact real estate values within the Bank's primary lending areas, and on other significant factors that, in management's judgment, may affect the ability to collect loans in the portfolio as of the evaluation date. Other significant factors that exist as of the balance sheet date that may be considered in determining the adequacy of the allowance include credit quality trends (including trends in non-performing loans expected to result from existing conditions), collateral values, geographic foreclosure rates, new and existing home inventories, loan volumes and concentrations, specific industry conditions within portfolio segments and recent loss experience in particular segments of the portfolio. These factors weighed more prominently in the allowance calculation for 2007 and the first nine months of 2008, and management believes this trend will continue in the near term.

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

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

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

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

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

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

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

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

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

                                      September 30,      December 31,        Increase (decrease)
                                          2008              2007           Dollars       Percentage
Assets                                                     (Dollars in Thousands)
Cash and cash equivalents            $        44,626   $        29,310   $     15,316            52.3 %
Securitites available for sale               143,043           134,216          8,827             6.6 %
Loans                                        748,631           709,995         38,636             5.4 %
Allowance for loan losses                     (8,603 )          (6,482 )       (2,121 )          32.7 %
Loans, net                                   740,028           703,513         36,515             5.2 %
Real estate mortgages held for
sale                                             147               640           (493 )         -77.0 %
Other assets                                  72,139            63,347          8,792            13.9 %
Total assets                         $       999,983   $       931,026   $     68,957             7.4 %

Liabilities and Stockholders'
equity
Deposits
Non-interest bearing demand          $        36,324   $        35,284   $      1,040             2.9 %
Interest bearing demand                       64,658            45,893         18,765            40.9 %
Savings and money market                     156,946           184,899        (27,953 )         -15.1 %
Time                                         347,373           316,654         30,719             9.7 %
Total deposits                               605,301           582,730         22,571             3.9 %
Federal Home Loan Bank advances              207,576           173,000         34,576            20.0 %
Securities sold under agreements
to repurchase                                 92,800            78,500         14,300            18.2 %
Accrued expenses and other
liabilities                                    7,370             6,990            380             5.4 %
Total liabilities                            913,047           841,220         71,827             8.5 %
Stockholders' equity                          86,936            89,806         (2,870 )          -3.2 %
Total liabilities and
stockholders' equity                 $       999,983   $       931,026   $     68,957             7.4 %

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

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

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

                                        September 30,      % of total       December 31,     % of total
                                             2008             loans             2007            loans
                                                            (Dollars In Thousands)
Real estate loans:
One-to-four family                     $        373,812            50.4 %  $       377,956          53.5 %
Commercial                                       75,684            10.2 %           74,748          10.6 %
Other ( land & multifamily)                      46,756             6.3 %           40,698           5.8 %
Total real estate loans                         496,252            66.9 %          493,402          69.9 %

Real estate construction loans:
One-to-four family                               10,982             1.5 %           13,448           1.9 %
Commercial                                       15,746             2.1 %           11,129           1.6 %
Acquisition & development                         5,367             0.7 %            5,329           0.7 %
Total real estate construction loans             32,095             4.3 %           29,906           4.2 %

Other loans:
Home equity                                     107,894            14.6 %           98,410          13.9 %
Consumer                                         80,228            10.8 %           64,673           9.2 %
Commercial                                       24,960             3.4 %           20,009           2.8 %
Total other loans                               213,082            28.8 %          183,092          25.9 %

Total loans                                     741,429             100 %          706,400           100 %

Allowance for loan losses                        (8,603 )                           (6,482 )
Net deferred loan costs                           7,003                              3,256
Premiums on purchased loans                         199                                339

Loans, net                             $        740,028                    $       703,513

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

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

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

                                      At September 30,     At September 30,
                                            2008                 2007
                                             (Dollars in Thousands)

         Beginning balance           $            6,482   $            4,705
         Loans charged-off                       (8,051 )             (1,642 )
         Recoveries                                 932                1,496
         Net charge-offs                         (7,119 )               (146 )

         Provision for loan losses                9,240                1,243

         Ending balance              $            8,603   $            5,802

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

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

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

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

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

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

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

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

The Company's equity to assets ratio decreased to 8.69% at September 30, 2008, from 9.65% at December 31, 2007. The decrease was primarily due to the change in other comprehensive income, common stock repurchased under the Company's stock repurchase plan and the rate of asset growth through September 30, 2008. Despite this decrease, the Bank continued to be well in excess of all minimum regulatory capital requirements, and is considered "well capitalized" under those formulas. Total risk-based capital to risk-weighted assets was 11.5%, Tier 1 capital to risk-weighted assets was 10.7%, and Tier 1 capital to adjusted total assets was 7.4% at September 30, 2008. These ratios as of December 31, 2007 were 12.1%, 11.2% and 7.7%, respectively.

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