Forward-Looking Statements

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

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

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

Critical Accounting Policies

Certain accounting policies are important to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances, including, but without limitation, changes in interest rates, performance of the economy, financial condition of borrowers and laws and regulations. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities, accounting for deferred income taxes, and the valuation of goodwill. Atlantic Coast Federal Corporation's accounting policies are discussed in detail in Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission.

Allowance for Loan Losses

An allowance for loan losses 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 2008 and the first three months of 2009, 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 $14.4 million at March 31, 2009, $10.6 million at December 31, 2008 and $6.4 million at March 31, 2008. The allowance for loan losses as a percentage of total loans was 1.99% at March 31, 2009, 1.43% at December 31, 2008 and 0.91% at March 31, 2008. The provision for loan losses was $5.8 million for the three months ended March 31, 2009, and $1.6 million for the same period in 2008. The increase in the provision for loan losses in the first three months of 2009 was primarily due to ongoing deterioration of certain commercial loan participations in the Company's general market area as well as continued weakness in the residential real estate segment of the Company's loan portfolio. In light of the overall decline in both credit quality and real estate values, the Company also applied greater loss factors to the outstanding loan portfolio.

Securities Available for Sale

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) gain, net of tax, resulting from changes in the fair market value of Atlantic Coast Federal Corporation's available for sale securities portfolio totaled $(249,000) and $621,000 for the three months ended March 31, 2009 and 2008, 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 recorded an other than temporary impairment expense of $175,000 on a private label mortgage-backed security during the quarter ended March 31, 2009. The Company does not have any equity investments in government sponsored entities FNMA or FHLMC, or any trust preferred securities.

Valuation of Goodwill

The Bank assesses the carrying value of goodwill annually, or more frequently if events or changes in circumstances indicate the asset might be impaired. In reviewing the carrying value of goodwill, management assesses the recoverability of such assets by evaluating the fair value of the Company's community banking segment, which is the Bank's only business segment. Any impairment would be required to be recorded during the period identified. The Bank's goodwill totaled $2.8 million as of March 31, 2009; therefore, if goodwill was determined to be impaired, the financial results of the Company could be materially impacted.

Deferred Income Taxes

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

The Bank assesses the carrying value of the deferred tax asset quarterly to determine if a valuation allowance is appropriate. Management has concluded the probability of realization of the deferred tax asset to be more likely than not. Management has taken into account both positive and negative evidence in reaching its conclusion, including prior operating profits and forecasted financial information. Realization of the deferred tax asset is dependent upon the Company's ability to generate pre-tax income in future periods. If the Company is unable to generate pre-tax income in future periods or otherwise fails to meet forecasted operating results, a valuation allowance may be required. Any valuation allowance would be required to be recorded during the period identified. The Bank's deferred tax asset totaled $12.1 million as of March 31, 2009; therefore, if the deferred tax asset required a valuation allowance, the financial results could be materially impacted.

Comparison of Financial Condition at March 31, 2009 and December 31, 2008

General. Year to date assets at March 31, 2009 as compared to December 31, 2008
were down $1.0 million, to $995.1 million from $996.1 million. Deposit growth
outpaced loan growth, allowing the Bank to pay down some of its borrowings from
FHLB of Atlanta.

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

                                           March 31,       December 31,           Increase (decrease)
                                              2009             2008            Dollars         Percentage
Assets                                                         (Dollars in Thousands)
Cash and cash equivalents                  $   35,390     $       34,058     $      1,332              3.9 %
Securitites available for sale                169,764            147,474           22,290             15.1 %
Loans                                         726,111            752,477          (26,366 )           -3.5 %
Allowance for loan losses                     (14,424 )          (10,598 )         (3,826 )           36.1 %
Loans, net                                    711,687            741,879          (30,192 )           -4.1 %
Real estate mortgages held for sale             4,266                736            3,530            479.6 %
Other assets                                   73,944             71,942            2,002              2.8 %
Total assets                               $  995,051     $      996,089     $     (1,038 )           -0.1 %

Liabilities and Stockholders' equity
Deposits
Non-interest bearing demand                $   37,522     $       33,192     $      4,330             13.0 %
Interest bearing demand                        72,251             67,714            4,537              6.7 %
Savings and money market                      176,256            164,388           11,868              7.2 %
Time                                          347,878            359,312          (11,434 )           -3.2 %
   Total deposits                             633,907            624,606            9,301              1.5 %
Federal Home Loan Bank advances               177,623            184,850           (7,227 )           -3.9 %
Securities sold under agreements to
repurchase                                     92,800             92,800                -              0.0 %
Accrued expenses and other liabilities          9,864              9,873               (9 )           -0.1 %
Total liabilities                             914,194            912,129            2,065              0.2 %
 Stockholders' equity                          80,857             83,960           (3,103 )           -3.7 %
Total liabilities and stockholders'
equity                                     $  995,051     $      996,089     $     (1,038 )           -0.1 %

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

Securities available for sale. Securities available for sale is composed principally of debt securities of U.S. Government-sponsored enterprises, or mortgage-backed securities. The investment portfolio increased approximately $22.3 million to $169.8 million at March 31, 2009, net of purchases, sales and maturities. Loss on sale of securities available for sale was approximately $78,000, including an other than temporary impairment expense of $175,000 in non-interest income on a private label mortgage-backed security for the three months ended March 31, 2009.

As part of our asset and liability management strategy, we leveraged our growth in securities available for sale via structured transactions to take advantage of favorable interest rate spreads and to reduce overall exposure to interest rate risk. However, given the unprecedented decline in interest rates during 2007 and 2008, illiquidity in the mortgage-backed securities market resulted in a significant and adverse decline in the value of these securities. Coupled with the overall decline in the Bank's credit quality, the Bank has been subject to margin and fair value calls from the third party counterparties to the repurchase agreements which has necessitated the Bank post additional collateral to cover the outstanding structured transaction positions. Additionally, given the collateral requirements of these transactions, the current interest rate environment and the illiquidity in the marketplace, the liquidity of the available for sale securities portfolio is currently limited. Management intends to hold these positions for the foreseeable future and will continue to evaluate its options as the economic environment improves and liquidity returns to the marketplace.

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

                                           March 31,       % of total       December        % of total
                                              2009           loans          31, 2008          loans
Real estate loans:                                            (Dollars In Thousands)
One-to-four family                         $  352,951             49.2 %   $   370,783             49.9 %
Commercial                                     82,600             11.5 %        84,134             11.3 %
Other ( land & multifamily)                    43,281              6.0 %        43,901              5.9 %
Total real estate loans                       478,832             66.7 %       498,818             67.1 %

Real estate construction loans:
One-to-four family                              8,484              1.2 %         8,974              1.2 %
Commercial                                     10,831              1.5 %        10,883              1.5 %
Acquisition & development                       5,018              0.7 %         5,008              0.6 %
Total real estate construction loans           24,333              3.4 %        24,865              3.3 %

Other loans:
Home equity                                   106,411             14.8 %       107,525             14.5 %
Consumer                                       83,404             11.6 %        87,162             11.7 %
Commercial                                     24,375              3.5 %        25,273              3.4 %
Total other loans                             214,190             29.9 %       219,960             29.6 %

Total loans                                   717,355              100 %       743,643              100 %

Allowance for loan losses                     (14,424 )                        (10,598 )
Net deferred loan costs                         8,614                            8,662
Premiums on purchased loans                       142                              172

Loans, net                                 $  711,687                      $   741,879

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 64% of our loans invested in those types of loans at both March 31, 2009, and December 31, 2008. As of March 31, 2009 our one- to four-family residential mortgages, as a percentage of total loans, decreased approximately 1% compared to the year-end 2008 balance, with new loan production more than offset by payments on existing loans as well as the sale of $13.0 million of conforming mortgage loans to FHLMC at approximately par, which resulted in a gain of $75,000 during the first quarter of 2009. Loan growth in one- to four-family residential mortgage loans has been negatively impacted by the decline in real estate values, slowing in residential real estate sales activity and the overall economic environment in the Bank's markets. Recent reports by state and national real estate organizations have reported substantial declines in residential real estate values and sales activity in the Northeast Florida markets, as well as in Florida in general. As a result of these factors, management believes growth in one- to four-family residential mortgages will be limited in the near term.

Total loan production increased $1.8 million to $29.2 million for the three months ended March 31, 2009 from $27.4 for the three months ended March 31, 2008.

Allowance for loan losses. Our allowance for loan losses was 1.99% and 1.43% of total loans outstanding at March 31, 2009 and December 31, 2008, respectively. Allowance for loan losses activity for the three months ended March 31, 2009 and December 31, 2008 was as follows:

                             At March 31,       At December 31,
                                 2009                2008
                                   (Dollars in Thousands)

Beginning balance           $       10,598     $           8,603
Loans charged-off                   (2,331 )              (2,938 )
Recoveries                             345                   224
Net charge-offs                     (1,986 )              (2,714 )

Provision for loan losses            5,812                 4,709

Ending balance              $       14,424     $          10,598

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 three months of 2009 was primarily due to ongoing deterioration of certain commercial loan participations in the Company's general market area as well as continued weakness in the residential real estate segment of the Company's loan portfolio. In light of the overall decline in both credit quality and real estate values, the Company also applied greater loss factors to the outstanding loan portfolio. Non-performing loans totaled $35.2 million and $25.5 million at March 31, 2009, and December 31, 2008, respectively. Total impaired loans increased to $26.5 million at March 31, 2009 from $17.5 million at December 31, 2008. The total allowance allocated for impaired loans increased to $5.8 million at March 31, 2009 from $3.5 million at December 31, 2008. The increase in non-performing loans was primarily the result of general deterioration in first and second residential mortgages as economic conditions continue to decline. The increase in impaired loans was primarily related to certain commercial loan participations in our general market area. The Company ceased involvement in new loan participations following a commitment made on December 31, 2006, and funded in May 2007. As of March 31, 2009, and December 31, 2008, all non-performing loans were classified as non-accrual, and there were no loans 90 days past due and accruing interest as of March 31, 2009, and December 31, 2008. Non-performing loans, excluding small balance homogeneous loans, decreased slightly to $8.2 million at March 31, 2009, from $8.3 million at December 31, 2008 due to the charge-off of a previously impaired commercial loan during the first quarter of 2009. Troubled debt restructured loans increased to $12.9 million as of March 31, 2009, from $7.0 at December 31, 2008.

Deposits. Total deposit account balances were $633.9 million at March 31, 2009, an increase of $9.3 million from $624.6 million at December 31, 2008. Non-interest bearing demand accounts increased $4.8 million. Interest bearing demand accounts increased $4.5 million, while time deposit accounts decreased $11.4 million, offset by a $11.9 million increase in savings and money market accounts due to disintermediation between these products. Management believes future deposit growth will be limited due to intense competition within our market areas.

Federal Home Loan Bank advances. FHLB advances had a weighted-average maturity of 68 months and a weighted- average rate of 3.89% at March 31, 2009. The $7.2 million decrease in FHLB borrowings at March 31, 2009 as compared to December 31, 2008 was due to additional borrowings of $20.0 million used to replace advances that matured, offset by repayments of $27.2 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 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. See Note 10 of the Condensed Notes to the Consolidated Financial Statements to this Form 10-Q.

Securities sold under agreements to repurchase. Securities sold under agreements to repurchase are secured by mortgage-backed securities with a carrying amount of $107.7 million at March 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. 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 December 31, 2008.

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

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

Certain of the Company's securities sold under agreements to repurchase contain provisions that require the Company to maintain capital levels meeting regulatory guidelines for "well-capitalized" institutions. If the Company's capital levels were to fall below "well-capitalized", it would be in violation of these provisions, and the counterparties to the securities sold under agreements to repurchase could request immediate payment on securities sold under agreements to repurchase in net liability positions. The aggregate fair value of all securities sold under agreements to repurchase with credit-risk-related contingent features that are in a liability position on March 31, 2009, is $88.9 million for which the Company has posted collateral of $89.1 million in the normal course of business. If the credit-risk-related . . .