Atlantic Coast Federal 10-Q 2007 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-50962

ATLANTIC COAST FEDERAL CORPORATION (Exact name of registrant as specified in its charter)
FEDERAL (State or other jurisdiction of  incorporation or organization)	59-3764686 (I.R.S. Employer Identification Number)
505 Haines Avenue Waycross, Georgia (Address of principal Executive Offices)	31501 (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

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

Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer 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 8, 2007
Common Stock, $0.01 Par Value	13,675,025 shares

ATLANTIC COAST FEDERAL CORPORATION

Form 10-Q Quarterly Report

Table of Contents

		Page Number
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	2
Item 2.	Management’s Discussion and Analysis of
	Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	30
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 1A	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults upon Senior Securities	31
Item 4.	Submission of Matters to a Vote of Security Holders	31
Item 5.	Other Information	31
Item 6.	Exhibits	31
Form 10-Q	Signature Page	32
Ex-31.1	Section 302 Certification of CEO	33
Ex-31.2	Section 302 Certification of CFO	34
Ex-32	Section 906 Certification of CEO and CFO	35

ATLANTIC COAST FEDERAL CORPORATION

CONSOLIDATED BALANCE SHEETS

June 30, 2007 (unaudited) and December 31, 2006

(Dollars in Thousands, Except Share Information)

	2007			2006
ASSETS
Cash and due from financial institutions	$	8,129		$	10,571
Short-term interest earning deposits		31,907			30,486
Total cash and cash equivalents		40,036			41,057
Other interest earning deposits in other financial institutions		-			1,200
Securities available for sale		126,857			99,231
Real estate mortgages held for sale		2,332			4,365
Loans, net of allowance for loan losses of $5,071 at June 30, 2007 and
$4,705 at December 31, 2006		668,837			639,517
Federal Home Loan Bank stock		7,988			7,948
Accrued interest receivable		3,706			3,499
Land, premises and equipment		17,225			17,610
Bank owned life insurance		21,794			21,366
Other real estate owned		1,753			286
Goodwill		2,661			2,661
Other assets		5,226			4,339
Total assets	$	898,415		$	843,079
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest-bearing demand	$	42,298		$	38,301
Interest-bearing demand		50,325			52,895
Savings and money market		211,284			158,229
Time		294,184			323,627
Total deposits		598,091			573,052
Securities sold under agreements to repurchase		63,500			29,000
Federal Home Loan Bank advances		142,000			144,000
Accrued expenses and other liabilities		5,727			5,940
Total liabilities		809,318			751,992
Commitments and contingencies		-			-
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 of 14,813,469 at June 30, 2007 and December 31, 2006; shares
outstanding of 13,676,071 at June 30, 2007 and 13,784,330 at December 31, 2006		148			148
Additional paid in capital		58,428			57,708
Unearned employee stock ownership plan (ESOP) shares of 302,588 at
June 30, 2007 and 325,864 at December 31, 2006		(3,026	)		(3,259	)
Retained earnings		52,882			52,711
Accumulated other comprehensive income		(1,380	)		(204	)
Treasury stock, at cost, 1,137,398 shares at June 30, 2007 and
1,029,139 at December 31, 2006		(17,955	)		(16,017	)
Total stockholders' equity		89,097			91,087
Total liabilities and stockholders' equity	$	898,415		$	843,079

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

2

ATLANTIC COAST FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, Except Share Information)

(unaudited)

	Three months ended June 30,					Six months ended June 30,
	2007			2006		2007			2006
Interest and dividend income
Loans, including fees	$	11,481		$	9,995	$	22,533		$	19,402
Securities and interest-earning deposits
in other financial institutions		2,285			1,161		4,489			2,268
Total interest and dividend income		13,766			11,156		27,022			21,670
Interest expense
Deposits		5,994			4,249		11,814			8,101
Federal Home Loan Bank advances		1,601			1,348		3,209			2,716
Securities sold under agreements to repurchase		633			137		1,108			195
Total interest expense		8,228			5,734		16,131			11,012
Net interest income		5,538			5,422		10,891			10,658
Provision for loan losses		509			204		805			280
Net interest income after provision for loan losses		5,029			5,218		10,086			10,378
Noninterest income
Service charges and fees		1,313			1,502		2,540			2,844
Gain on sale of real estate mortgages held for sale		5			13		15			16
Loss on sale of securities available for sale		(38	)		11		(46	)		(165	)
Commission income		63			68		137			149
Interchange fees		233			199		443			394
Bank owned life insurance earnings		217			211		428			415
Other		266			114		371			424
		2,059			2,118		3,888			4,077
Noninterest expense
Compensation and benefits		3,154			2,617		6,170			5,244
Occupancy and equipment		603			490		1,191			997
Data processing		270			440		604			806
Advertising		150			215		296			430
Outside professional services		741			456		1,372			950
Interchange charges		93			161		193			328
Collection expense and repossessed asset losses		87			81		133			163
Telephone		113			120		227			243
Other		973			674		1,733			1,327
		6,184			5,254		11,919			10,488
Income before income tax expense		904			2,082		2,055			3,967
Income tax expense		269			672		635			1,266
Net income	$	635		$	1,410	$	1,420		$	2,701
Earnings per common share:
Basic	$	0.05		$	0.10	$	0.11		$	0.20
Diluted	$	0.05		$	0.10	$	0.11		$	0.20
Dividends declared per common share	$	0.14		$	0.10	$	0.27		$	0.19

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

3

ATLANTIC COAST FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Six Months Ended June 30, 2007 and June 30, 2006

(Dollars in Thousands, Except Share Information)

(unaudited)

											ACCUMULATED
			ADDITIONAL		UNEARNED						OTHER
	COMMON		PAID IN		ESOP			RETAINED			COMPREHENSIVE			TREASURY			TOTAL
	STOCK		CAPITAL		STOCK			EARNINGS			INCOME			STOCK			EQUITY
For the six months ended June 30, 2007
Balance at January 1, 2007	$	148	$	57,708	$	(3,259	)	$	52,711		$	(204	)	$	(16,017	)	$	91,087
ESOP shares earned, 23,276 shares				196		233												429
Stock options exercised															52			52
Management restricted stock expense				221											116			337
Stock options expense				303											(139	)		164
Dividends declared ( $.27 per share)									(1,249	)								(1,249	)
Treasury stock purchased at cost, 105,838 shares															(1,967	)		(1,967	)
Comprehensive income:
Net income									1,420									1,420
Other comprehensive loss												(1,176	)					(1,176	)
Total comprehensive income																		244
Balance at June 30, 2007	$	148	$	58,428	$	(3,026	)	$	52,882		$	(1,380	)	$	(17,955	)	$	89,097
For the six months ended June 30, 2006
Balance at January 1, 2006	$	148	$	56,876	$	(3,724	)	$	49,629		$	(408	)		($9,603	)	$	92,918
ESOP shares earned, 23,276 shares				113		233												346
Management restricted stock expense				294														294
Stock options expense				152														152
Dividend declared ($.19 per share)									(962	)								(962	)
Comprehensive income:
Net income									2,701									2,701
Other comprehensive loss												(352	)					(352	)
Total comprehensive income																		2,349
Balance at June 30, 2006	$	148	$	57,435	$	(3,491	)	$	51,368		$	(760	)	$	(9,603	)	$	95,097

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

4

ATLANTIC COAST FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(unaudited)

	Six months ended June 30,
	2007			2006
Cash flows from operating activities
Net income	$	1,420		$	2,701
Adjustments to reconcile net income
to net cash from operating activities:
Provision for loan losses		805			280
Gain on sale of real estate mortgages held for sale		(15	)		(16	)
Loans originated for sale		(48,830	)		(2,248	)
Proceeds from loan sales		50,876			1,209
Gain on sale of other real estate owned		(2	)		1
Loss on sale of securities
available for sale		46			165
Loss on disposal of equipment		117			30
ESOP compensation expense		429			346
Share-based compensation expense		501			446
Net depreciation and amortization		925			965
Net change in accrued interest receivable		(207	)		(214	)
Increase in cash surrender value of bank owned life insurance		(428	)		(415	)
Net change in other assets		(187	)		111
Net change in accrued expenses
and other liabilities		(291	)		(912	)
Net cash from operating activites		5,159			2,449
Cash flows from investing activities
Proceeds from maturities and payments
of securites available for sale		9,026			8,873
Proceeds from the sales of securities
available for sale		14,619			15,935
Purchase of securities available for sale		(53,197	)		(22,768	)
Loans purchased		(13,041	)		(16,314	)
Net change in loans		(19,017	)		(18,099	)
Expenditures on premises and equipment		(449	)		(1,357	)
Proceeds from the sale of other real estate owned		263			390
Purchase of FHLB stock		(40	)		252
Net change in other investments		1,200			300
Net cash from investing activities		(60,636	)		(32,788	)

(Continued)

5

ATLANTIC COAST FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(unaudited)

	Six months ended June 30,
	2007			2006
Cash flows from financing activities
Net increase in deposits	$	25,039		$	31,722
FHLB advances		20,000			-
Proceeds from sale of securities
under agreements to repurchase		34,500			12,000
Repayment of FHLB advances		(22,000	)		(10,000	)
Proceeds from exercise of stock options		52			-
Treasury stock repurchased		(1,967	)		-
Dividends paid		(1,168	)		(872	)
Net cash from financing activities		54,456			32,850
Net change in cash and cash equivalents		(1,021	)		2,511
Cash and equivalents beginning of period		41,057			37,959
Cash and equivalents at end of period	$	40,036		$	40,470
Supplemental information:
Interest paid	$	15,951		$	10,779
Income taxes paid		1,520			2,207
Supplemental noncash disclosures:
Loans transferred to other real estate	$	1,730		$	401

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

6

ATLANTIC COAST FEDERAL CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include Atlantic Coast Federal Corporation (or the “Company”) and its wholly owned subsidiary, Atlantic Coast Bank (the “Bank”), which was formerly known as Atlantic Coast Federal. The Company changed the name of the Bank on July 17, 2006 to better reflect the nature of the Bank’s operations. Also included in the unaudited consolidated financial statements is Atlantic Coast Holdings, Inc. (“Holdings”) a wholly owned subsidiary of the Bank, which manages and invests in certain securities, and owns 100% of the common stock and 85% of the Preferred Stock of Coastal Properties, Inc., a real estate investment trust (the “REIT”). All significant inter-company balances and transactions have been eliminated in consolidation. The principal activity of the Company is the ownership of the Bank, as such, the terms “Company” and “Bank” may be used interchangeably throughout this Form 10-Q.

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with 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 a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. The 2006 Atlantic Coast Federal Corporation consolidated financial statements, as restated to change the Company’s accounting for certain interest rate swap derivatives previously designated and accounted for as cash flow hedges under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), as presented in the Company’s Form 10-K/A, should be read in conjunction with these statements.

Certain items in the June 30, 2006 Form 10-Q were reclassified/restated to conform to the current presentation.

NOTE 2. USE OF ESTIMATES

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

NOTE 3. IMPACT OF CERTAIN ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”), which permits companies to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Company is presently assessing the impact FAS 159 may have on its financial statements, but no determination has been made at this time.

The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes-An Interpretation of FASB No. 109, which prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return, on January 1, 2007. The adoption of FIN 48 had no affect on the Company’s financial statements. The Company has no unrecognized tax benefits or liabilities and does not anticipate any increase in unrecognized benefits or liabilities during 2007 relative to any positions taken prior to January 1, 2007.

7

ATLANTIC COAST FEDERAL CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

NOTE 3. IMPACT OF CERTAIN ACCOUNTING PRONOUNCEMENTS (Continued)

It is the Company’s policy to recognize interest and penalties accrued relative to unrecognized tax benefits in their respective federal or state income tax expense accounts. The Company had no amounts accrued as of January 1, 2007. The Company and its subsidiaries file U.S. Corporation federal income tax returns and Georgia and Florida Corporation income tax returns. These returns are subject to examination by taxing authorities for all years after 2002.

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.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“FAS 157”), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles (“GAAP”). FAS 157, which is effective for fiscal years beginning after November 15, 2007, does not require new fair value measurements, however it does establish a common definition of fair value and expands disclosures about fair value measurements. The Company is presently assessing the impact FAS 157 may have on its financial statements, but no determination has been made at this time.

NOTE 4. AVAILABLE FOR SALE SECURITIES

The Company evaluates securities for other-than-temporary impairment, at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been below cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer's financial condition, the Company may consider whether the securities are issued by the federal government or one of its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. As of June 30, 2007 gross unrealized losses on available for sale securities were $2.2 million and are largely due to the current interest rate environment relative to the interest rate of the securities. These unrealized losses are considered temporary as the fair value should return to par as the securities reach maturity.

NOTE 5. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase are secured by mortgage-backed securities with a carrying amount of $63.5 million at June 30, 2007. The Company had $29.0 million of such agreements as of December 31, 2006.

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 at June 30, 2007 is summarized as follows:

8

ATLANTIC COAST FEDERAL CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

NOTE 5. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Continued)

	(Dollars in Thousands)
Average daily balance	$	48,963
Average interest rate		4.56	%
Maximum month-end balance	$	63,500
Weighted average interest rate at period end		4.52	%

NOTE 6. DIVIDENDS

During the second quarter of 2007, the Company’s board of directors declared a regular quarterly cash dividend at a rate of $0.14 per share. The dividend was payable on July 30, 2007 for stockholders of record on July 13, 2007. Atlantic Coast Federal, MHC (“MHC”) which holds 8,728,500 shares, or approximately 63.8% of the Company’s total outstanding common stock has informed the Company that it will waive receipt of the second quarter dividend on its owned shares, as was done throughout 2006.

Total dividends charged to retained earnings for the six months ended June 30, 2007 were $1,249,000.

NOTE 7. EARNINGS PER COMMON SHARE

Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unearned restricted stock awards. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unvested stock options and stock awards. The dilutive effect of the unvested stock options and stock awards is calculated under the treasury stock method utilizing the average market value of the Company’s stock for the period. A reconciliation of the numerator and denominator of the basic and diluted earnings per common share computation for the three and six months ended June 30, 2007 and 2006, is as follows:

9

ATLANTIC COAST FEDERAL CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

NOTE 7. EARNINGS PER COMMON SHARE (Continued)

	For the three months						For the six months
	ended June 30,						ended June 30,
	2007			2006			2007			2006
Basic
Net income	$	635		$	1,410		$	1,420		$	2,701
Weighted average common shares outstanding		13,673,768			14,145,800			13,714,047			14,144,002
Less: Average unallocated ESOP shares		(325,864	)		(372,416	)		(325,864	)		(372,416	)
Average unvested restricted stock awards		(225,695	)		(262,919	)		(226,524	)		(261,121	)
Average Shares		13,122,209			13,510,465			13,161,659			13,510,465
Basic earnings per common share	$	0.05		$	0.10		$	0.11		$	0.20
Diluted
Net Income	$	635		$	1,410		$	1,420		$	2,701
Weighted average common shares outstanding
per common share		13,122,209			13,510,465			13,161,659			13,510,465
Add: Dilutive effects of assumed exercise of stock options		87,210			-			51,445			-
Dilutive effects of full vesting of stock awards		112,911			91,385			70,396			80,536
Average shares and dilutive potential common shares		13,322,330			13,601,850			13,283,500			13,591,001
Diluted earnings per common share	$	0.05		$	0.10		$	0.11		$	0.20

Stock options for 6,064 and 542,400 shares of common stock were not considered in computing diluted earnings per common share for the three and six months ended June 30, 2007 and 2006, respectively, because they were anti-dilutive.

10

NOTE 8. OTHER COMPREHENSIVE INCOME

Comprehensive income components and related taxes for the three and six months ended June 30, 2007 and 2006 were as follows:

	(Dollars in Thousands)
	Three months ended June 30,						Six months ended June 30,
	2007			2006			2007			2006
Unrealized holding losses
on securities available for sale	$	(2,061	)	$	(397	)	$	(1,829	)	$	(714	)
Less reclassification adjustments for (gains)
losses recognized in income		38			11			46			(165	)
Net unrealized losses		(2,099	)		(408	)		(1,875	)		(549	)
Tax effect		783			148			699			197
Net-of-tax amount		(1,316	)		(260	)		(1,176	)		(352	)
Other comprehensive loss	$	(1,316	)	$	(260	)	$	(1,176	)	$	(352	)

NOTE 9 - STOCK CONVERSION

On May 7, 2007, Board of Directors of Atlantic Coast Federal, MHC (the “Mutual Holding Company”) approved a plan of conversion and reorganization to convert the Mutual Holding Company from the mutual to stock form of organization. Pursuant to the plan of conversion and reorganization, on June 28, 2007 Atlantic Coast Financial Corporation filed a registration statement with Securities and Exchange Commission. Simultaneous to the filing of the registration statement, the Company filed an Application for Conversion with the OTS. Atlantic Coast Financial Corporation is a Maryland holding company that has been formed in connection with the stock conversion of Atlantic Coast Federal, MHC.

The Mutual Holding Company is a federally chartered mutual holding company and currently owns approximately 63.8%, 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. Under 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, Atlantic Coast Financial Corporation is offering for sale in a subscription offering, and possibly in a community and/or a syndicated community offering, the majority ownership interest of the Company that is currently owned by the Mutual Holding Company. Upon the completion of the conversion and offering, the Mutual Holding Company will cease to exist, and the Company 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).

11

NOTE 9 - STOCK CONVERSION (Continued)

In connection with the conversion, shares of common stock of Atlantic Coast Financial Corporation, 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 plans 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, 2006; (2) the Bank's tax qualified employee benefit plans, including the employee stock ownership plan and the 401(k) plan; (3) depositors of record as of the end of the calendar quarter preceding the commencement of the offering; and (4) depositors entitled to vote on the conversion proposal. If necessary, shares will be offered to the general public. In addition, upon completion of the conversion of the Mutual Holding Company, shares of the Company's common stock held by public stockholders will be exchanged for shares of a new corporation, which will become the Bank's new parent holding company. As a result of the conversion and offering, the Mutual Holding Company and Company will cease to exist.

The conversion is subject to approval by the Office of Thrift Supervision as well as approval by 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.

On August 13, 2007 the Company announced that Atlantic Coast Financial Corporation has temporarily postponed its planned stock offering as a result of current market conditions. Atlantic Coast Financial Corporation is a Maryland holding company that has been formed to become the new holding company of Atlantic Coast Bank in connection with the mutual-to-stock conversion of Atlantic Coast Federal, MHC. The conversion is expected to be completed in the fourth quarter of 2007 or the first quarter of 2008.

12

ATLANTIC COAST FEDERAL CORPORATION

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

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

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

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

Critical Accounting Policies

Certain accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances, including, but without limitation, changes in interest rates, performance of the economy, financial condition of borrowers and laws and regulations. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities, accounting for deferred income taxes, and the valuation of goodwill. Atlantic Coast Federal Corporation’s accounting policies are discussed in detail in Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission.

The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required by considering the past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated value of any underlying collateral, whether the loan was originated through the Bank’s retail network or through a broker, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

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The allowance consists of specific and general components. The specific component relates to loans that are individually evaluated and determined to be impaired. Loans individually evaluated are generally large balance and/or complex loans, such as multi-family and commercial real estate loans. This evaluation is often based on significant estimates and assumptions due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change. The general component relates to large groups of small balance homogeneous loans that are evaluated in the aggregate based on historical loss experience adjusted for current factors.

Management believes that the allowance for loan losses and related provision expense are particularly susceptible to material change in the near term as a result of significant changes in individual borrower circumstances on larger balance loans. The allowance for loan losses was $5.1 million at June 30, 2007, and $4.6 million at June 30, 2006. The provision for loan loss expense was $805,000 for the six months ended June 30, 2007, and $280,000 for the same period in 2006. The lower provision for loan losses in the first six months of 2006 reflected an improvement in asset quality resulting from the collection of a large commercial loan previously classified as impaired and the reversal of the associated reserve, along with the positive impact of credit improvements on several other loans. Management believes the current-year provision for loan losses is more indicative of a normalized level based on the overall credit quality of the portfolio at the end of the second quarter of 2007.

Securities available for sale are carried at fair value, with unrealized holding gains and losses reported separately in accumulated other comprehensive income (loss), net of tax. On a monthly basis, the Company adjusts the carrying value of the securities to fair value based on third-party market quotes. Other comprehensive loss resulting from changes in the fair market value of Atlantic Coast Federal Corporation’s available for sale securities portfolio totaled $1.3 million and $352,000 for the six months ended June 30, 2007 and 2006, 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, the extent of the decline and the duration of the decline.

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 $2.7 million as of June 30, 2007; therefore, if goodwill was determined to be impaired, the financial results 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.

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Comparison of Financial Condition at June 30, 2007 and December 31, 2006

General. Annualized asset growth at June 30, 2007 as compared to December 31, 2006 was approximately 13%. Loan growth slightly outpaced deposit growth, as the Bank continues to offer competitive rates within its geographic market. Prepayments decreased 28% in the three months ended June 30, 2007 as compared to the three months ended March 31, 2007, but were still above 2006 levels. Loan growth was slightly higher for the three months ended June 30, 2007 as compared to the three months ended March 31, 2007, which when combined with lower prepayment activity and the purchase of $13.9 million in loans, resulted in nearly 5% loan growth overall. As part of its ongoing asset and liability management strategy, the Company continued to leverage its growth in securities available for sale to take advantage of favorable interest rate spreads and to reduce our exposure to interest rate risk.

Following is a summarized comparative balance sheet as of June 30, 2007 and December 31, 2006:

	June 30,			December 31,			Increase (decrease)
	2007			2006			Dollars			Percentage
Assets	(Dollars in Thousands)
Cash and cash equivalents	$	40,036		$	41,057		$	(1,021	)		-2.5	%
Other interest earning investments		-			1,200			(1,200	)		-100.0	%
Securitites available for sale		126,857			99,231			27,626			27.8	%
Loans		673,908			644,222			29,686			4.6	%
Allowance for loan losses		(5,071	)		(4,705	)		(366	)		7.8	%
Loans, net		668,837			639,517			29,320			4.6	%
Loans held for sale		2,332			4,365			(2,033	)		-46.6	%
Other assets		60,353			57,709			2,644			4.6	%
Total assets	$	898,415		$	843,079		$	55,336			6.6	%
Liabilities and Stockholders' equity
Deposits
Non-interest bearing	$	42,298		$	38,301		$	3,997			10.4	%
Interest bearing transaction accounts		50,325			52,895			(2,570	)		-4.9	%
Savings and money market		211,284			158,229			53,055			33.5	%
Time		294,184			323,627			(29,443	)		-9.1	%
Total deposits		598,091			573,052			25,039			4.4	%
Federal Home Loan Bank advances		142,000			144,000			(2,000	)		-1.4	%
Securities sold under agreements to repurchase		63,500			29,000			34,500			119.0	%
Accrued expenses and other liabilities		5,727			5,940			(213	)		-3.6	%
Total liabilities		809,318			751,992			57,326			7.6	%
Stockholders' equity		89,097			91,087			(1,990	)		-2.2	%
Total liabilities and stockholders' equity	$	898,415		$	843,079		$	55,336			6.6	%

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. We expect the balances we maintain in cash and cash equivalents will fluctuate as our other interest earning assets mature, or we identify opportunities for longer-term investments that fit the Company’s growth strategy.

Securities available for sale. Securities available for sale are composed principally of debt securities of U.S. Government-sponsored organizations and mortgage-backed securities. In the near-term we expect the composition of our investment portfolio to continue to be heavily weighted in these types of securities. During the six months ended June 30, 2007, the Company purchased $53.1 million of investment securities, increasing the investment balance by approximately $27.6 million to $126.9 million, net of maturities and sales of $25.5 million at June 30, 2007.

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Loans. Following is a comparative composition of net loans as of June 30, 2007 and December 31, 2006:

	June 30, 2007			% of total loans			December 31, 2006			% of total loans
Real estate loans:	(Dollars In Thousands)
One-to-four family	$	349,412			52.1	%	$	334,000			52.2	%
Commercial		69,390			10.4	%		60,912			9.5	%
Other ( Land & Multifamily)		39,587			5.9	%		34,446			5.4	%
Total real estate loans		458,389			68.4	%		429,358			67.1	%
Construction loans:
One-to-four family		18,742			2.8	%		32,467			5.1	%
Commercial		13,040			1.9	%		2,862			0.4	%
Acquisition and development		3,453			0.5	%		2,103			0.3	%
Total real estate construction loans		35,235			5.3	%		37,432			5.8	%
Other loans:
Home equity		97,306			14.5	%		91,062			14.2	%
Consumer		63,662			9.5	%		63,630			9.9	%
Commercial		15,577			2.3	%		19,044			3.0	%
Total other loans		176,545			26.3	%		173,736			27.1	%
Total loans		670,169			100	%		640,526			100	%
Allowance for loan losses		(5,071	)					(4,705	)
Net deferred loan costs		3,476						3,348
Premiums on purchased loans		263						348
Loans, net	$	668,837					$	639,517

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 66% of our loans invested in those types of loans at both June 30, 2007, and December 31, 2006. As of June 30, 2007 our one- to four-family residential mortgages, as a percentage of total loans, was virtually flat compared to the year-end 2006 balance. Growth in the first mortgage loan portfolio 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 will be slow to moderate in the near term. As of June 30, 2007, the Company purchased $13.0 million of variable-rate one- to four-family residential loans, to supplement our internal loan originations. Depending on liquidity, earning needs, and the availability of high quality loans, management expects to continue to purchase adjustable rate one- to four-family residential mortgage loans to supplement our internal loan originations.

Total loan production of $104.4 million during the six months ended June 30, 2007 was derived from a diversified array of loan products including first mortgages, consumer, home equity, commercial, construction and other loans. The interest rate terms for most of these loan products are indexed to various indices, including the current prime rate and, as such, tend to have more favorable interest margins as compared to our cost of funds. Given the current interest rate environment, the Company expects to continue in the near term to focus its lending efforts on floating rate loan products.

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Allowance for loan losses. Our allowance for loan losses was 0.75% and 0.73% of total loans outstanding at June 30, 2007 and December 31, 2006, respectively. Allowance for loan losses activity for the six months ended June 30, 2007 and 2006 was as follows:

	At June 30,			At June 30,
	2007			2006
	(Dollars in Thousands)
Beginning balance	$	4,705		$	4,587
Loans charged-off		(950	)		(668	)
Recoveries		511			420
Net charge-offs		(439	)		(248	)
Provision for loan losses		805			280
Ending balance	$	5,071		$	4,619

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. Given the geographic concentration of the Company’s residential single-family loan portfolio in the northeast Florida and southeast Georgia market, overall credit quality continues to be strong relative to the southeast region and national markets in general. The stability of the residential real estate market is considered in management’s estimate of loan losses, as are the types of loan products within its portfolio. Moreover, the Company does not originate or purchase sub-prime loans for its portfolio.

Non-performing loans totaled $3.1 million, constant at 0.47% of total loans, at both June 30, 2007, and December 31, 2006, and total impaired loans increased to $2.2 million at June 30, 2007 from $2.0 million at December 31, 2006. The total allowance allocated for impaired loans was $593,000 at June 30, 2007 and $572,000 as of December 31, 2006. As of June 30, 2007, and December 31, 2006, all non-performing loans were classified as non-accrual, and we did not have any restructured loans or loans 90 days past due and accruing interest as of June 30, 2007, and December 31, 2006. Non-performing loans, excluding small balance homogeneous loans, were $1.0 and $1.1 million at June 30, 2007 and December 31, 2006, and all such non-performing loans were also reported as impaired loans.

Deposits. Savings and money market deposit account balances increased at June 30, 2007 from December 31, 2006 due primarily to a carryover into 2007 of the attractive pricing being offered on the Company’s money market accounts. The Company increased deposit rates in 2006 in response to competition within its market, to both protect and grow deposit balances and fund loan growth.

Securities sold under agreements to repurchase. Historically, the Company has only utilized advances from the Federal Home Loan Bank of Atlanta (“FHLB”) or broker originated certificates of deposit as an alternative to deposits for funding its lending and investment activities. While we expect FHLB advances to continue to be a significant source of funds in the future, during 2006, the Company initiated its first financing arrangement involving the sale of securities under an agreement to repurchase to take advantage of favorable interest rates relative to deposits with comparable maturities.

Securities sold under agreements to repurchase are secured by mortgage-backed securities with a carrying amount of $63.5 million at June 30, 2007. 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 June 30, 2007, the weighted average rate of the agreements was 4.52%.

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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 74 months and a weighted-average rate of 4.39% at June 30, 2007. The decrease in FHLB borrowings at June 30, 2007 as compared to December 31, 2006 was due to the maturity of $22.0 million of advances and additional borrowings of $20.0 million. The Company expects to continue to utilize FHLB advances to manage short and long- term liquidity needs to the extent it has borrowing capacity, needs funding and the interest cost of FHLB advances is attractive compared to deposits and other alternative source of funds.

Stockholders’ equity. Stockholders’ equity decreased to approximately $89.1 million at June 30, 2007 from $91.1 million at December 31, 2006 primarily because of cash dividends and share repurchases. In June 2007, the Company’s board of directors declared a regular quarterly cash dividend at a rate of $0.14 per share. The dividend was payable on July 30, 2007, for stockholders of record on July 13, 2007. Atlantic Coast Federal, MHC which holds 8,728,500 shares, or 63.8% of the Company’s total outstanding stock, has informed the Company that it will waive receipt of the first and second quarter dividend on its owned shares. Total dividends for the six months ended June 30, 2007 charged to stockholders’ equity was approximately $1.2 million, and approximately $2.4 million of dividend payments were waived by Atlantic Coast Federal, MHC. We expect Atlantic Coast Federal, MHC to waive receipt of payment on future dividends for its owned shares.

In September 2006 the Company’s Board of Directors approved a new 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. Since the approval of the new stock repurchase plan the Company repurchased approximately 295,000 shares at an average price of $18.16 per share, including approximately 106,000 shares repurchased at an average price of $18.59 during the six months ended June 30, 2007.

The equity to assets ratio decreased to 9.9% at June 30, 2007, from 10.8% at December 31, 2006. The decrease was primarily due to common stock repurchased under the Company’s stock repurchase plan, the change in the fair market value of available-for-sale securities, and the rate of asset growth through June 30, 2007. Despite this decrease, we continued to be well in excess of all minimum regulatory capital requirements, and are considered “well capitalized” under those formulas. Total risk-based capital to risk-weighted assets was 12.6%, Tier 1 capital to risk-weighted assets was 11.9%, and Tier 1 capital to total adjusted total assets was 8.2% at June 30, 2007. These ratios as of December 31, 2006 were 13.8%, 13.1% and 9.3%, respectively.

Comparison of Results of Operations for the Three Months Ended June 30, 2007 and 2006.

General.Our net income for the three months ended June 30, 2007, was $635,000, which was a decrease of $775,000 from $1.4 million for the same period in 2006 primarily due to an increase in the provision for loan losses together with higher non-interest expenses. Net interest income increased 2.1%, or $116,000 in the second quarter of 2007, compared to the same quarter in 2006, due primarily to the growth in interest-earning assets and to a lesser extent higher interest rates, which slightly outpaced the growth in interest-bearing liabilities and the associated cost of funds. Non-interest income for the three months ended June 30, 2007 was unchanged at $2.1 million as compared to the same three months in 2006. Non-interest expense grew $930,000, or 17.7%, to $6.2 million for the three months ended June 30, 2007, from $5.3 million for the same quarter in 2006.

Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following table sets forth certain information for the three months ended June 30, 2007 and 2006. 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.

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	For the three months ended June 30,
	2007								2006
	(Dollars in Thousands)
	Average Balance		Interest			Average Yield /Cost			Average Balance		Interest			Average Yield /Cost
INTEREST-EARNING ASSETS
Loans receivable(1)	$	658,023	$	11,481			6.98	%	$	610,060	$	9,995			6.55	%
Securites(2)		129,972		1,745			5.37	%		68,536		763			4.45	%
Other interest-earning assets(3)		39,357		540			5.49	%		30,690		398			5.19	%
Total interest-earning assets		827,352		13,766			6.65	%		709,286		11,156			6.30	%
Non-interest earning assets		58,951								55,146
Total assets	$	886,303							$	764,432
INTEREST-BEARING LIABILITIES
Savings deposits	$	41,230	$	39			0.38	%	$	52,072	$	51			0.39	%
Interest bearing demand accounts		52,250		398			3.05	%		57,219		341			2.38	%
Money market accounts		158,179		1,828			4.62	%		71,923		651			3.62	%
Time deposits		299,444		3,730			4.98	%		307,081		3,206			4.18	%
Federal Home Loan Bank advances		142,000		1,600			4.51	%		123,011		1,348			4.38	%
Securities sold under agreements to repurchase		55,698		633			4.55	%		12,000		137			4.57	%
Total interest-bearing liabilities		748,801		8,228			4.40	%		623,306		5,734			3.68	%
Non-interest bearing liabilities		46,218								47,397
Total liabilities		795,019								670,703
Stockholders' equity		91,284								93,729
Total liabilities and stockholders' equity	$	886,303							$	764,432
Net interest income			$	5,538							$	5,422
Net interest spread							2.25	%							2.62	%
Net earning assets	$	78,551							$	85,980
Net interest margin(4)							2.68	%							3.06	%
Average interest-earning assets to average interest-bearing liabilities				110.49	%							113.79	%

(1) Calculated net of deferred loan fees and loss reserve. Nonaccrual loans included as loans carrying a zero yield

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

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

(4) Net interest income divided by average interest-earning assets.

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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, 2007 as compared to the same period in 2006. 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)
INTEREST-EARNING ASSETS	(Dollars in Thousands)
Loans receivable	$	814		$	672		$	1,486
Securities		798			183			981
Other interest-earning assets		118			25			143
Total interest-earning assets		1,730			880			2,610
INTEREST-BEARING LIABILITIES
Savings deposits		(10	)		(3	)		(13	)
Interest bearing demand accounts		(32	)		88			56
Money market accounts		956			221			1,177
Time deposits		(81	)		606			525
Federal Home Loan Bank advances		213			40			253
Securities sold under agreements to repurchase		497			(1	)		496
Total interest-bearing liabilities		1,543			951			2,494
Net interest income	$	187		$	(71	)	$	116

Interest income. As shown in the table above the majority of the increase in interest income for the three months ended June 30, 2007, as compared to the same period in 2006, was attributed to growth in average outstanding interest-earning assets, although the rate on interest-earning assets also was a contributing factor. Loans accounted for approximately 57% of the interest income growth, or $1.5 million for the quarter ended June 30, 2007, as compared to the same quarter in 2006. The increased interest income from loans was due nearly equally to increased average outstanding balances and the yield earned on the loans balances as a result of growth in loans indexed to the prime rate. As discussed above in “Comparison of Financial Condition at June 30, 2007 and December 31, 2006 - Loans,” the flattening of the yield curve over the last 12 months and a softening in residential real estate sales has led the Company to increase its emphasis on floating rate interest-based loans, such as home equity lending, adjustable-rate first mortgages, construction loans and commercial real estate loans.

The growth in interest income from investment securities and other interest-earning assets for the quarter ended June 30, 2007, as compared to the same quarter in 2006 was mainly due to higher average balances as the Company continued to leverage its growth in securities available for sale to take advantage of favorable interest rate spreads and to reduce our exposure to interest rate risk. In addition yields on these assets have consistently tracked upward with increases to short-term interest rates.

Management expects interest income will increase as average interest-earning assets and interest rates on such assets increase. Growth in interest earnings assets is partly dependent on funding from deposit growth in existing markets as well as from new branches opened in the second-half of 2006. Our interest income could be adversely impacted by continued low interest rates on longer-term loans, such as one- to four-family residential loans and the availability of higher interest-earning assets.

Interest expense. The increase in interest expense for the three months ended June 30, 2007, as compared to the same period in 2006, was largely due to growth in average outstanding balances of interest-bearing deposit accounts, as well as higher cost of funds quarter to quarter of approximately 72 basis points. In order to fund loan growth and maintain deposit market share, the Company has continued to pay attractive interest rates on its money-market accounts, interest bearing demand accounts and time deposits. The rate of interest expense on our FHLB advances also increased for the second quarter of 2007 as compared to the same quarter of 2006, as new advances have generally been at higher rates due to the increase in short-term rates during the second quarter of 2006. Given the current rate environment, and the intense competition for deposits in our market, management does not expect interest rates paid on deposits to decline in the near term.

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Net interest income. Net interest income increased during the three months ended June 30, 2007, as compared to the same period in 2006, as the growth in interest income outpaced the growth in interest expense. As discussed above, increases in prime rate based loans and overall steady growth in average outstanding balances has enabled the Company to increase the overall yield of the loan portfolio. In addition, yields on securities have increased as short-term interest rates have tracked upward. However, net interest spread, which is the difference between the interest yield earned on interest earning assets and the interest rate paid on interest bearing liabilities, decreased 37 basis points for the second quarter of 2007 as compared to the same quarter in 2006. For the same comparative periods, our net interest margin, which is net interest income expressed as a percentage of our average interest earning assets decreased 38 basis points.

Our rapid loan growth which began during 2004, primarily in adjustable rate one- to four-family residential mortgages (ARMs), as well as the near-complete refinancing of our existing residential mortgage portfolio, occurred during a period of unprecedented low interest rates. Due to the various interest rate reset terms of our ARM products, increases in market interest rates do not generally result in immediate increases in interest rate yields. Given the delay in ARM product re-pricing to changes in market rates, a lending environment characterized by a flat yield curve combined with the fact that 41% of our loan portfolio is comprised of longer-term fixed rate one- to four-family residential loans, management believes the yield curve will continue to put pressure on net interest margin for the remainder of 2007, but does not expect the situation to worsen significantly. However, management also expects interest income to grow as the Company continues to emphasize loan growth in home equity, construction and commercial loans.

Provision for loan losses. We establish provisions for loan losses, which are charged to operations, at a level required to reflect probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, the source of origination of those loans, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. Large groups of smaller balance homogeneous loans, such as residential real estate, small commercial real estate, home equity and consumer loans, are evaluated in the aggregate using historical loss factors adjusted for current economic conditions, source of loan origination, and other relevant data. Larger non-homogeneous loans, such as commercial loans for which management has concerns about the borrowers’ ability to repay, are evaluated individually, and specific allowance allocations are provided for such loans when necessary.

Based on management’s evaluation of these factors, provisions of $509,000 and $204,000 were made during the three months ended June 30, 2007 and 2006, respectively. The year-over-year change was primarily due to growth in the Company’s loan portfolio. Net charge-offs for the quarter ended June 30, 2007, were $292,000. By comparison, net charge-offs for the same three months in 2006 were $93,000. The increase in net charge-offs was due primarily to the write-down and reclassification of previously impaired residential construction loans to other real estate owned during the quarter ended June 30, 2007.

Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the allowance for loan losses based on all known and inherent losses that are both probable and can be reasonably estimated. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions and changes in borrower situations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of June 30, 2007, is maintained at a level that represents management’s best estimate of probable losses in the loan portfolio.

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Non-interest income. The components of non-interest income for the three months ended June 30, 2007 and 2006 were as follows: 

						Increase(decrease)
	2007			2006		Dollars			Percentage
	(Dollars in Thousands)
Service charges and fees	$	1,313		$	1,502	$	(189	)		-12.6	%
Net loss on available for sale securities		(38	)		11		(49	)		-445.5	%
Gain on sale of real estate mortgages
held for sale		5			13		(8	)		-61.5	%
Commission income		63			68		(5	)		-7.4	%
Interchange fees		233			199		34			17.1	%
Bank owned life insurance earnings		217			211		6			2.8	%
Other		266			114		152			133.3	%
Total	$	2,059		$	2,118	$	(59	)		-2.8	%

The decrease in non-interest income was due primarily to a decline in service charges and fees offset by the increase in fair market value of interest rate swaps recorded in other non-interest income. Services charges and fees, which are transactional based charges accessed on deposit accounts, declined primarily due to a decrease in the number of returned items (i.e., non-sufficient funds or “NSF”) and the associated fees which more than offset the continued growth in ATM and check card overdraft fees.

Non-interest expense. The components of non-interest expense for the three months ended June 30, 2007 and 2006 were as follows:

					Increase(decrease)
	2007		2006		Dollars			Percentage
	(Dollars in Thousands)
Compensation and benefits	$	3,154	$	2,617	$	537			20.5	%
Occupancy and equipment		603		490		113			23.1	%
Data processing		270		440		(170	)		-38.6	%
Advertising		150		215		(65	)		-30.2	%
Outside professional services		741		456		285			62.5	%
Interchange charges		93		161		(68	)		-42.2	%
Collection expense and repossessed
asset losses		87		81		6			7.4	%
Telephone		113		120		(7	)		-5.8	%
Other		973		674		299			44.4	%
Total	$	6,184	$	5,254	$	930			17.7	%

Nearly 57% of the increase to compensation and benefit expense for the three months ended June 30, 2007, as compared to the same period in 2006, was due to increased salaries. This increase reflected higher salaries for regular annual salary increases, new executive additions, personnel costs associated with a new branch opened in Jacksonville in the fall of 2006, and the expansion of the Company's private banking activities. It also reflected higher legal and accounting fees related to the recent restatement of financial results and filings of amended reports with the Securities and Exchange Commission on Form 10-K/A for 2006 and Form 10-Q/A for the first quarter of 2007 to correct the accounting treatment for two interest rate swap agreements, as well as increased legal fees for newly required executive compensation disclosures that were implemented in the Company's most recent proxy statement. Occupancy costs also rose due to the opening of the new branch, as did Federal Deposit Insurance Corporation premiums due to an increase in the assessment rate and a change in the timing of assessments. These higher costs were offset to some extent by lower data processing costs and advertising expenses. In the near term, we expect that non-interest expenses will continue to put pressure on earnings as management continues to align the Company’s operations and organizational structure to meet its strategic growth and profitability objectives.

22

Income tax expense. Income tax expense decreased $403,000 to $269,000 for the three months ended June 30, 2007, from $672,000 for the same period in 2006 due to a decrease in net income. Management anticipates that income tax expense will continue to vary as income before income taxes varies.

Comparison of Results of Operations for the Six Months Ended June 30, 2007 and 2006.

General.Our net income for the six months ended June 30, 2007, was $1.4 million, which was a decrease of $1.3 million from $2.7 million for the same period in 2006 primarily due to an increase in the provision for loan losses together with higher non-interest expenses. Net interest income increased 2.2%, or $232,000 for the six months ended June 30, 2007, compared to the same period in 2006, due primarily to the growth in interest-earning assets and to a lesser extent higher interest rates, which slightly outpaced the growth in interest-bearing liabilities and the associated cost of funds. Non-interest income for the six months ended June 30, 2007 decreased by 4.6%, or $189,000, to $3.9 million as compared to $4.1 million for the same six months in 2006, due primarily to lower transactional based service charges and fees. Non-interest expense grew $1.4 million, or 13.7%, to $11.9 million for the six months ended June 30, 2007, from $10.5 million for the same period in 2006 due to increased compensation and benefit costs and other non-interest costs.

Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following table sets forth certain information for the six months ended June 30, 2007 and 2006. 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.

23

	For the six months ended June 30,
	2007								2006
	(Dollars in Thousands)
	Average Balance		Interest			Average Yield /Cost			Average Balance		Interest			Average Yield /Cost
INTEREST-EARNING ASSETS
Loans receivable(1)	$	648,712	$	22,533			6.95	%	$	600,179	$	19,402			6.47	%
Securites(2)		121,172		3,232			5.33	%		69,990		1,500			4.29	%
Other interest-earning assets(3)		46,711		1,257			5.38	%		31,222		768			4.92	%
Total interest-earning assets		816,595		27,022			6.62	%		701,391		21,670			6.18	%
Non-interest earning assets		58,775								57,799
Total assets	$	875,370							$	759,190
INTEREST-BEARING LIABILITIES
Savings deposits	$	41,531	$	83			0.40	%	$	52,596	$	105			0.40	%
Interest bearing demand accounts		51,649		788			3.05	%		66,326		800			2.41	%
Money market accounts		144,651		3,325			4.60	%		60,813		1,035			3.40	%
Time deposits		308,055		7,618			4.95	%		304,118		6,161			4.05	%
Federal Home Loan Bank advances		142,822		3,209			4.49	%		126,005		2,717			4.31	%
Securities sold under agreements to repurchase		48,963		1,108			4.53	%		8,517		194			4.56	%
Total interest-bearing liabilities		737,671		16,131			4.37	%		618,375		11,012			3.56	%
Non-interest bearing liabilities		46,379								46,821
Total liabilities		784,050								665,196
Stockholders' equity		91,320								93,994
Total liabilities and stockholders' equity	$	875,370							$	759,190
Net interest income			$	10,891							$	10,658
Net interest spread							2.24	%							2.62	%
Net earning assets	$	78,924							$	83,016
Net interest margin(4)							2.67	%							3.04	%
Average interest-earning assets to average interest-bearing liabilities				110.70	%							113.42	%

(1) Calculated net of deferred loan fees and loss reserve. Nonaccrual loans included as loans carrying a zero yield

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

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

(4) Net interest income divided by average interest-earning assets.

24

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, 2007 as compared to the same period in 2006. 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)
INTEREST-EARNING ASSETS	(Dollars in Thousands)
Loans receivable	$	1,630		$	1,501		$	3,131
Securities		1,298			434			1,732
Other interest-earning assets		411			78			489
Total interest-earning assets		3,339			2,013			5,352
INTEREST-BEARING LIABILITIES
Savings deposits		(22	)		-			(22	)
Interest bearing demand accounts		(198	)		186			(12	)
Money market accounts		1,826			465			2,291
Time deposits		81			1,376			1,457
Federal Home Loan Bank advances		374			118			492
Securities sold under agreements to repurchase		915			(2	)		913
Total interest-bearing liabilities		2,976			2,143			5,119
Net interest income	$	363		$	(130	)	$	233

Interest income. As shown in the table above the majority of the increase in interest income for the six months ended June 30, 2007, as compared to the same period in 2006, was attributed to growth in average outstanding interest-earning assets, although the rate on interest-earning assets also was a contributing factor. Loans accounted for approximately 58% of the interest income growth, or $3.1 million for the six months ended June 30, 2007, as compared to the same period in 2006. The increased interest income from loans was due nearly equally to increased average outstanding balances and the yield earned on the loans balances as a result of growth in loans indexed to the prime rate. As discussed above in “Comparison of Financial Condition at June 30, 2007 and December 31, 2006 - Loans,” the flattening of the yield curve over the last 12 months and a softening in residential real estate sales has led the Company to increase its emphasis on floating rate interest-based loans, such as home equity lending, adjustable-rate first mortgages, construction loans and commercial real estate loans. The growth in average outstanding balances of home equity loans, adjustable-rate first mortgages, construction loans and commercial real estate loans for the six months ended June 30, 2007, as compared to the same period in 2006, accounted for approximately 44%, or $21.5 million of the total $48.5 million in average loan growth. During the same periods, the prime rate increased 100 basis points from 7.25% to 8.25%.

The growth in interest income from investment securities and other interest-earning assets for the six ended June 30, 2007, as compared to the same period in 2006 was mainly due to higher average balances as the Company continued to leverage its growth in securities available for sale to take advantage of favorable interest rate spreads and to reduce our exposure to interest rate risk. In addition yields on these assets have consistently tracked upward with increases to short-term interest rates.

Management expects interest income will increase as average interest-earning assets and interest rates on such assets increase. Growth in interest earnings assets is partly dependent on funding from deposit growth in existing markets as well as from new branches opened in the second-half of 2006. Our interest income could be adversely impacted by continued low interest rates on longer-term loans, such as one- to four-family residential loans and the availability of higher interest-earning assets.

25

Interest expense. The increase in interest expense for the six months ended June 30, 2007, as compared to the same period in 2006, was largely due to growth in average outstanding balances of interest-bearing deposit accounts, as well as higher cost of funds period to period of approximately 81 basis points. In order to fund loan growth and maintain deposit market share, the Company has continued to pay attractive interest rates on its money-market accounts, interest bearing demand accounts and time deposits. The rate of interest expense on our FHLB advances remained relatively flat for the six months ended June 30, 2007 as compared to the same period in 2006, as new advances have generally had longer maturities and, therefore, we have benefited from the flattening of the yield curve. Given the current rate environment, and the intense competition for deposits in our market, management does not expect interest rates paid on deposits to decline in the near term.

Net interest income. Net interest income increased during the six months ended June 30, 2007, as compared to the same period in 2006, as the growth in interest income outpaced the growth in interest expense. As discussed above, increases in prime rate based loans and overall steady growth in average outstanding balances has enabled the Company to increase the overall yield of the loan portfolio. In addition, yields on securities have increased as short-term interest rates have tracked upward. However, net interest spread, which is the difference between the interest yield earned on interest earning assets and the interest rate paid on interest bearing liabilities, decreased 38 basis points for the six months ended June 30, 2007 as compared to the same period in 2006. For the same comparative periods, our net interest margin, which is net interest income, expressed as a percentage of our average interest earning assets decreased37 basis points.

Our rapid loan growth which began during 2004, primarily in adjustable rate one- to four-family residential mortgages (ARMs), as well as the near-complete refinancing of our existing residential mortgage portfolio, occurred during a period of unprecedented low interest rates. Due to the various interest rate reset terms of our ARM products, increases in market interest rates do not generally result in immediate increases in interest rate yields. Given the delay in ARM product re-pricing to changes in market rates, a lending environment characterized by a flat yield curve combined with the fact that 41% of our loan portfolio is comprised of longer-term fixed rate one- to four-family residential loans, management believes the yield curve will continue to put pressure on net interest margin for the rest of 2007, but does not expect the situation to worsen significantly. However, management also expects interest income to grow as the Company continues to emphasize loan growth in home equity, construction and commercial loans.

Provision for loan losses. We establish provisions for loan losses, which are charged to operations, at a level required to reflect probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, the source of origination of those loans, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. Large groups of smaller balance homogeneous loans, such as residential real estate, small commercial real estate, home equity and consumer loans, are evaluated in the aggregate using historical loss factors adjusted for current economic conditions, source of loan origination, and other relevant data. Larger non-homogeneous loans, such as commercial loans for which management has concerns about the borrowers’ ability to repay, are evaluated individually, and specific allowance allocations are provided for such loans when necessary.

Based on management’s evaluation of these factors, provisions of $805,000 and $280,000 were made during the six months ended June 30, 2007 and 2006, respectively. The year-over-year change was primarily due to the collection of a large commercial loan previously classified as impaired and the reversal of the associated reserve, along with the positive impact of credit improvements on several other loans during the first quarter of 2006, and to a lesser extent growth in the Company’s loan portfolio. Net charge-offs for the six months ended June 30, 2007, were $439,000. By comparison, net charge-offs for the same six months in 2006 were $248,000. The increase in net charge-offs was due primarily to the write-down and reclassification of previously impaired residential construction loans to other real estate owned during the quarter ended June 30, 2007.

26

Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the allowance for loan losses based on all known and inherent losses that are both probable and can be reasonably estimated. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions and changes in borrower situations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of June 30, 2007, is maintained at a level that represents management’s best estimate of probable losses in the loan portfolio.

Non-interest income. The components of non-interest income for the six months ended June 30, 2007 and 2006 were as follows:

							Increase(decrease)
	2007			2006			Dollars			Percentage
	(Dollars in Thousands)
Service charges and fees	$	2,540		$	2,844		$	(304	)		-10.7	%
Net loss on available for sale securities		(46	)		(165	)		119			-72.1	%
Gain on sale of real estate mortgages
held for sale		15			16			(1	)		-6.3	%
Commission income		137			149			(12	)		-8.1	%
Interchange fees		443			394			49			12.4	%
Bank owned life insurance earnings		428			415			13			3.1	%
Other		371			424			(53	)		-12.5	%
Total	$	3,888		$	4,077		$	(189	)		-4.6	%

The decrease in non-interest income, primarily as a result of a decrease in service charges and fees, was offset by lower net losses on available for sale securities. Services charges and fees, which are transactional based charges accessed on deposit accounts, declined primarily due to a decrease in the number of returned items (i.e., non-sufficient funds or “NSF”) and the associated fees which more than offset the continued growth in ATM and check card overdraft fees.

Non-interest expense. The components of non-interest expense for the six months ended June 30, 2007 and 2006 were as follows:

					Increase(decrease)
	2007		2006		Dollars			Percentage
	(Dollars in Thousands)
Compensation and benefits	$	6,170	$	5,244	$	926			17.7	%
Occupancy and equipment		1,191		997		194			19.5	%
Data processing		604		806		(202	)		-25.1	%
Advertising		296		430		(134	)		-31.2	%
Outside professional services		1,372		950		422			44.4	%
Interchange charges		193		328		(135	)		-41.2	%
Collection expense and repossessed
asset losses		133		163		(30	)		-18.4	%
Telephone		227		243		(16	)		-6.6	%
Other		1,733		1,327		406			30.6	%
Total	$	11,919	$	10,488	$	1,431			13.6	%

Approximately 59% of the increase to compensation and benefit expense for the six months ended June 30, 2007, as compared to the same period in 2006, was due to increased salaries. This increase reflected higher salaries for regular annual salary increases, new executive additions, personnel costs associated with a new branch opened in Jacksonville in the fall of 2006, and the expansion of the Company's private banking activities. It also reflected higher legal and accounting fees related to the recent restatement of financial results and filings of amended reports with the Securities and Exchange Commission on Form 10-K/A for 2006 and Form 10-Q/A for the first quarter of 2007 to correct the accounting treatment for two interest rate swap agreements, as well as increased legal fees for newly required executive compensation disclosures that were implemented in the Company's most recent proxy statement. Occupancy costs also rose due to the opening of the new branch, as did Federal Deposit Insurance Corporation premiums due to an increase in the assessment rate and a change in the timing of assessments. These higher costs were offset to some extent by lower data processing costs and advertising expenses. In the near term, we expect that non-interest expenses will continue to put pressure on earnings as management continues to align the Company’s operations and organizational structure to meet its strategic growth and profitability objectives.

27

Income tax expense. Income tax expense decreased $631,000 to $635,000 for the six months ended June 30, 2007, from $1.3 million for the same period in 2006 due to a decrease in net income. Management anticipates that income tax expense will continue to vary as income before income taxes varies.

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, we have 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 (“ALCO”).

The purpose of ALCO is to communicate, coordinate and control asset/liability management consistent with our business plan and board approved policies. ALCO 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.

ALCO generally meets on a quarterly basis to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate exposure limits versus current projections pursuant to market value of portfolio equity analysis and income simulations. The committee recommends appropriate strategy changes based on this review. ALCO 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.

28

As part of its efforts to monitor and manage interest rate risk, the Company uses a financial modeling tool that estimates the impact of different interest rate scenarios on the value of the Company’s equity. This financial modeling tool is referred to as Economic Value of Equity (“EVE”). In essence, this tool measures the changes in equity due to the impact on net interest margin, over a five-year horizon, from instantaneous and sustained parallel shifts in the yield curve, in 100 basis point increments, up and down 300 basis points. Management believes the use of EVE improves the visibility of the effect of current interest rate risk on future earnings under increasing or decreasing interest rate environments. Accordingly, the Company believes it is in a better position to be proactive in reducing future interest rate risk through management of the growth of interest-earning assets and interest-bearing liabilities within a meaningful time horizon. The EVE, considering the assumed changes in interest rates as of June 30, 2007, is as follows:

	Economic Value of Equity
	and Duration of Assets and Liabilities at June 30, 2007
	Change in Interest Rate
	(Dollars in Thousands)
	Decrease			Decrease			Decrease			Increase			Increase			Increase
	3%			2%			1%			1%			2%			3%
Duration of assets(1)		2.20			2.20			2.25			2.59			2.58			2.58
Duration of liabilities(1)		2.51			2.51			2.51			2.01			2.01			2.13
Differential in duration		-0.31			-0.31			-0.26			0.57			0.57			0.45
Amount of change in Economic Value of Equity(2)	$	(8,526	)	$	(5,684	)	$	(2,371	)	$	(5,223	)	$	(10,235	)	$	(12,134	)
Percentage change in Economic Value of Equity(2)		-9.05	%		-6.04	%		-2.52	%		-5.55	%		-10.87	%		-12.89	%

(1) Expressed as number of years before asset/liability reprices to achieve stated rate of interest rate increase.

(2) Represents the cumulative five year pre-tax impact on the Company’s equity due to increased or (decreased) net interest margin.

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

In evaluating Atlantic Coast Federal Corporation’s exposure to interest rate movements, certain shortcomings inherent in the EVE methodology must be considered. For example, although certain assets and liabilities may have similar maturities or re-pricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in interest rates. Additionally, certain assets, such as adjustable-rate mortgages, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in our EVE methodology. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. Atlantic Coast Federal Corporation considers all of these factors in monitoring its exposure to interest rate risk.

We believe that certain factors afford Atlantic Coast Federal Corporation the ability to operate successfully despite its exposure to interest rate risk. Atlantic Coast Federal Corporation manages its interest rate risk by originating and retaining adjustable-rate loans in its portfolio and by selling most of our currently originated fixed-rate, one- to four-family real estate loans. Also, to a limited degree, management has utilized interest rate swap agreements as a part of our asset/liability management strategy to mitigate the impact to our net interest margin of sudden and unplanned interest rate changes... As of June 30, 2007, the Company held interest rate swap agreements with a notional amount of $15 million and a fair value of approximately $836,000, which do not qualify for hedge accounting treatment. Finally, Atlantic Coast Federal Corporation’s investment strategy is to maintain a diversified portfolio of high quality investments that balances the goals of minimizing interest rate and credit risks while striving to maximize investment return and provide the liquidity necessary to meet funding needs.

29

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, 2007, 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, 2007

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

Our non-interest expense, which consists primarily of the costs associated with operating our business, represents a high percentage of the income we generate. The cost of generating our income is measured by our efficiency ratio, which represents non-interest expense divided by the sum of our net interest income and our non-interest income. Our efficiency ratio has been affected by our efforts to expand our branch network and the corresponding infrastructure, as well as by the inverted yield curve, which affects our ability to originate loans with interest rates sufficiently in excess of our deposit and borrowing costs. If we are able to lower our efficiency ratio, our ability to generate income from our operations will be more effective. For the years ended December 31, 2006 and 2005, our efficiency ratios were 73.1% and 69.9%, respectively. Generally, this means that we spent $0.73 and $0.70 during 2006 and 2005 to generate $1.00 of income. This reflects a trend where our efficiency ratio has deterioratedfrom 63.5% to 73.1% for the five-year period ended December 31, 2006. For the six months ended June 30, 2007 and 2006, our efficiency ratio was 80.6% and 71.2% respectively.

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

The table below sets forth information regarding the Company’s common stock repurchase plan that was approved by the Company’s Board of Directors on September 1, 2006. The purpose of the stock repurchase plan was to replace shares issued to key employees and outside directors under the Company’s Recognition Plan. Stock repurchased under this plan will be held as Treasury shares.

30

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1, 2007 through April 30, 2007		-		-		-		182,646
May 1, 2007 through May 31, 2007		-		-		-		182,646
June 1, 2007 through June 30, 2007		-		-		-		182,646
Total		-	$	-		-		182,646

Item 3. Defaults Upon Senior Securities

None

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

At the Company’s annual Stockholders’ Meeting (the “Meeting”) held on May 18, 2007, all nominees for director proposed by the Company were elected. The votes cast for each nominee were as follows:

	For		Withheld
Charles E. Martin, Jr.		12,659,209		34,496
Thomas F. Beeckler		12,649,085		44,620
Forrest W. Sweat, Jr.		12,660,096		33,609

Also at the Meeting, the stockholders ratified the appointment of Crowe Chizek and Company LLC as the independent registered public accounting firm for Atlantic Coast Federal Corporation for the fiscal year ending December 31, 2007. The votes cast for and against and the number of abstentions was as follows:

For	Against		Abstain		Broker Non-vote		Withheld
12,685,907		1,840		5,958		0		0

Item 5.Other Information

None

Item 6.Exhibits

a.Exhibits

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

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

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

31

ATLANTIC COAST FEDERAL CORPORATION

FORM 10-Q

June 30, 2007

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 14, 2007	/s/ Robert J. Larison, Jr
	Robert J. Larison, Jr., President and Chief Executive Officer
Date: August 14, 2007	/s/ Dawna R. Miller
	Dawna R. Miller, Senior Vice President and Chief Financial Officer

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