##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 OR [  ]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  FEDERAL
(State or other jurisdiction of
incorporation or organization)
    
    59-3764686
(I.R.S. Employer
Identification Number)
 505 Haines AvenueWaycross, Georgia
    
    
    31501(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code (912)284-2213 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.  Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).  Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the last practicable date. Class
Common Stock, $.01 Par Value
    
    Outstanding at November 12, 2004
14,547,500
 oPAGE o1o




---



ATLANTIC COAST FEDERAL CORPORATION Form 10-Q Quarterly Report Table of Contents Page NumberPART I.Item 1. Consolidated Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    11Item 3.
Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    30PART II.Item 1. Legal Proceedings
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults Upon Senior Securities
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    
    31Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    31Form 10-Q Signature Page
    
    
    32Ex-31.1: Section 302 Certification of CEOEx-31.2: Section 302 Certification of CFOEx-32.1: Section 906 Certification of CEOEx-32.2: Section 906 Certification of CFO
  oPAGE o2o




---



##### Table of Contents



Part 1
ATLANTIC COAST FEDERAL CORPORATION 
  ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2004(unaudited) and December 31,2003 September 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCash and due from financial institutions
    
    $
    6,803,609
    
    
    $
    6,692,068Short-term interest-bearing deposits in other financial institutions
    
    
    36,819,061
    
    
    
    2,303,756Total cash and cash equivalents
    
    
    43,622,670
    
    
    
    8,995,824Other interest bearing deposits in other financial institutions
    
    
    
    
    
    
    500,000Securities purchased under agreement to resell
    
    
    10,300,000
    
    
    
    Securities available for sale
    
    
    31,592,344
    
    
    
    26,038,755Real estate mortgages held for sale
    
    
    
    
    
    
    487,183Loans,net of allowance for loan losses of $4,116,654 at September 30,
2004(unaudited) and $6,593,329 at December 31, 2003
    
    
    508,040,342
    
    
    
    435,621,551Federal Home Loan Bank stock
    
    
    4,548,600
    
    
    
    3,081,500Accrued interest receivable
    
    
    2,094,947
    
    
    
    2,040,953Land, premises and equipment, net
    
    
    10,562,562
    
    
    
    10,597,421Bank owned life insurance
    
    
    4,880,200
    
    
    
    4,750,300Other real estate owned
    
    
    270,484
    
    
    
    1,078,986Goodwill
    
    
    2,661,190
    
    
    
    2,661,190Other assets
    
    
    4,505,533
    
    
    
    3,149,661Total assets
    
    $
    623,078,872
    
    
    $
    499,003,324LIABILITIES AND EQUITYDeposits:Non-interest-bearing demand
    
    $
    36,320,929
    
    
    $
    28,865,407Interest bearing demand
    
    
    27,206,552
    
    
    
    13,907,287Savings and money market
    
    
    149,421,277
    
    
    
    136,995,621Time
    
    
    231,578,317
    
    
    
    212,487,510Total deposits
    
    
    444,527,075
    
    
    
    392,255,825Federal Home Loan Bank advances
    
    
    90,314,286
    
    
    
    60,971,429Accrued expenses and other liabilities
    
    
    4,031,273
    
    
    
    2,557,695Stock
subscriptions received
    
    
    38,326,522
    
    
    
    Total liabilities
    
    
    577,199,156
    
    
    
    455,784,949Commitments and contingenciesPreferred stock: $.01 par value; 1,000,000 shares authorized,
none issued
    
    
    
    
    
    
    Common stock: $.01 par value; 9,000,000 shares authorized;
1,000 shares issued and outstanding as of September 30, 2004(unaudited)
and December 31, 2003
    
    
    10
    
    
    
    10Retained earnings
    
    
    45,919,133
    
    
    
    43,220,688Accumulated other comprehensive income(loss)
    
    
    (39,427
    )
    
    
    (2,323
    )Total equity
    
    
    45,879,716
    
    
    
    43,218,375Total liabilities and equity
    
    $
    623,078,872
    
    
    $
    499,003,324
 The accompanying notes are an integral part of these unaudited consolidated financial statements. oPAGE o3o




---



##### Table of Contents



ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Nine Months Ended September 30, 2004 and 2003
(Unaudited) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003INTEREST AND DIVIDEND INCOMELoans, including fees
    
    $
    7,762,489
    
    
    $
    7,383,787
    
    
    $
    22,588,663
    
    
    $
    22,975,679Securities and interest-bearing deposits
in other financial institutions
    
    
    333,291
    
    
    
    220,888
    
    
    
    716,937
    
    
    
    699,409Total interest and dividend income
    
    
    8,095,780
    
    
    
    7,604,675
    
    
    
    23,305,600
    
    
    
    23,675,088INTEREST EXPENSEDeposits
    
    
    2,073,437
    
    
    
    2,276,990
    
    
    
    5,981,860
    
    
    
    7,397,975Federal Home Loan Bank advances
    
    
    1,011,756
    
    
    
    538,744
    
    
    
    2,719,374
    
    
    
    1,593,645Total interest expense
    
    
    3,085,193
    
    
    
    2,815,734
    
    
    
    8,701,234
    
    
    
    8,991,620NET INTEREST INCOME
    
    
    5,010,587
    
    
    
    4,788,941
    
    
    
    14,604,366
    
    
    
    14,683,468Provision for loan losses
    
    
    674,415
    
    
    
    188,266
    
    
    
    2,327,245
    
    
    
    4,100,064NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
    
    
    4,336,172
    
    
    
    4,600,675
    
    
    
    12,277,121
    
    
    
    10,583,404NONINTEREST INCOMEService charges and fees
    
    
    1,051,564
    
    
    
    915,406
    
    
    
    2,924,315
    
    
    
    2,628,101Gain(loss) on the sale of loans held for sale
    
    
    6,027
    
    
    
    (6,466
    )
    
    
    174,540
    
    
    
    99,311Gain on sale of credit card portfolio
    
    
    
    
    
    
    3,085,062
    
    
    
    
    
    
    
    3,085,062Gain(loss)on the sale of securities available
for sale
    
    
    (46,978
    )
    
    
    56,607
    
    
    
    (38,535
    )
    
    
    59,017Gain(loss) on sale of foreclosed assets
    
    
    27,285
    
    
    
    (19,122
    )
    
    
    82,334
    
    
    
    (56,265
    )Commission income
    
    
    63,988
    
    
    
    82,427
    
    
    
    232,245
    
    
    
    328,143Interchange fees
    
    
    163,322
    
    
    
    166,461
    
    
    
    483,809
    
    
    
    563,344Other
    
    
    42,808
    
    
    
    60,037
    
    
    
    135,568
    
    
    
    180,793Total noninterest income
    
    
    1,308,016
    
    
    
    4,340,412
    
    
    
    3,994,276
    
    
    
    6,887,506NONINTEREST EXPENSECompensation and benefits
    
    
    1,880,779
    
    
    
    1,681,915
    
    
    
    5,700,328
    
    
    
    5,111,989Occupancy and equipment
    
    
    360,515
    
    
    
    338,764
    
    
    
    1,055,060
    
    
    
    923,643Data processing
    
    
    276,810
    
    
    
    296,017
    
    
    
    831,383
    
    
    
    990,334Advertising
    
    
    127,228
    
    
    
    170,978
    
    
    
    305,096
    
    
    
    397,479Outside professional services
    
    
    424,254
    
    
    
    563,170
    
    
    
    1,162,444
    
    
    
    1,165,430Interchange charges
    
    
    54,455
    
    
    
    164,370
    
    
    
    487,331
    
    
    
    563,208Collection expense and repossessed asset losses
    
    
    61,528
    
    
    
    65,456
    
    
    
    149,523
    
    
    
    201,012Telephone
    
    
    131,817
    
    
    
    125,841
    
    
    
    401,870
    
    
    
    410,160Other
    
    
    741,399
    
    
    
    739,395
    
    
    
    1,969,540
    
    
    
    2,002,456Total noninterest expense
    
    
    4,058,785
    
    
    
    4,145,906
    
    
    
    12,062,575
    
    
    
    11,765,711INCOME BEFORE INCOME TAX EXPENSE
    
    
    1,585,403
    
    
    
    4,795,181
    
    
    
    4,208,822
    
    
    
    5,705,199Income tax expense
    
    
    581,455
    
    
    
    1,781,286
    
    
    
    1,510,377
    
    
    
    2,038,100NET INCOME
    
    $
    1,003,948
    
    
    $
    3,013,895
    
    
    $
    2,698,445
    
    
    $
    3,667,099BASIC AND DILUTED EARNINGS PER
COMMON SHARE
    
    $
    1,003.95
    
    
    $
    3,013.90
    
    
    $
    2,698.45
    
    
    $
    3,667.10
 The accompanying notes are an integral part of these unaudited consolidated financial statements. oPAGE o4o




---



##### Table of Contents



ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Nine Months Ended September 30, 2004 and 2003
(Unaudited) AccumulatedOtherComprehensiveCommon
    
    Retained
    
    Income(Loss)
    
    TotalStock
    
    Earnings
    
    Net of Tax
    
    EquityBalance at December 31, 2003
    
    $
    10
    
    
    $
    43,220,688
    
    
    $
    (2,323
    )
    
    $
    43,218,375Comprehensive income:Net income for the nine months
ended September 30, 2004
    
    
    
    
    
    
    2,698,445
    
    
    
    
    
    
    
    2,698,445Other comprehensive income(loss),
    
    
    
    
    
    
    
    
    
    
    (37,104
    )
    
    
    (37,104
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,661,341Balance at September 30, 2004
    
    $
    10
    
    
    $
    45,919,133
    
    
    $
    (39,427
    )
    
    $
    45,879,716Balance at December 31, 2002
    
    $
    
    
    
    $
    38,853,464
    
    
    $
    71,014
    
    
    $
    38,924,478Common stock issuance 1,000 shares
    
    
    10
    
    
    
    (10
    )
    
    
    
    
    
    
    Dividends declared and paid to MHC
    
    
    
    
    
    
    (50,000
    )
    
    
    
    
    
    
    (50,000
    )Comprehensive income:Net income for the nine months
ended September 30, 2003
    
    
    
    
    
    
    3,667,099
    
    
    
    
    
    
    
    3,667,099Other comprehensive income(loss)
    
    
    
    
    
    
    
    
    
    
    (12,444
    )
    
    
    (12,444
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    3,654,655Balance at September 30, 2003
    
    $
    10
    
    
    $
    42,470,553
    
    
    $
    58,570
    
    
    $
    42,529,133
 The accompanying notes are an integral part of these unaudited consolidated financial statements. oPAGE o5o




---



##### Table of Contents



ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2004 and 2003
(Unaudited) 2004
    
    2003Cash flows from operating activitiesNet income
    
    $
    2,698,445
    
    
    $
    3,667,099Adjustments to reconcile net income to net cash
from operating activities:Provision for loan losses
    
    
    2,327,246
    
    
    
    4,100,064Gain on the sale of loans held for sale
    
    
    (174,540
    )
    
    
    (99,373
    )Gain on the sale of credit card portfolio
    
    
    
    
    
    
    (3,085,062
    )Loans originated for sale
    
    
    (10,636,272
    )
    
    
    (6,660,683
    )Proceeds from loan sales
    
    
    11,120,165
    
    
    
    9,077,003(Gain)loss on sale of other real estate owned
    
    
    (82,334
    )
    
    
    (56,265
    )(Gain)loss) on the sale of securities available for sale
    
    
    38,535
    
    
    
    (59,017
    )Net depreciation and amortization
    
    
    915,765
    
    
    
    996,369Net change in accrued interest receivable
    
    
    (53,994
    )
    
    
    (49,317
    )Increase in bank owned life insurance
    
    
    (129,900
    )
    
    
    (164,150
    )Net change in other assets
    
    
    (1,329,463
    )
    
    
    1,785,660Increase in accrued expenses and other liabilities
    
    
    1,467,711
    
    
    
    1,320,538Net cash from operating activities
    
    
    6,161,364
    
    
    
    10,772,866Cash flows from investing activitiesSecurities purchased under agreement to resell
    
    
    (10,300,000
    )
    
    
    Proceeds from calls, maturities and payments
of securities available for sale
    
    
    5,349,963
    
    
    
    13,033,082Proceeds from sales of securities available for sale
    
    
    36,063,129
    
    
    
    20,869,894Purchases of securities available for sale
    
    
    (47,156,562
    )
    
    
    (38,864,637
    )Loans purchased
    
    
    (6,437,739
    )
    
    
    (23,327,179
    )Proceeds
from sale of credit card portfolio
    
    
    
    
    
    
    15,939,487Proceeds
from sale of loans from portfolio
    
    
    9,565,463
    
    
    
    Net change in loans
    
    
    (77,836,329
    )
    
    
    (27,816,082
    )Expenditures on land, premises and equipment
    
    
    (779,932
    )
    
    
    (1,130,375
    )Proceeds from the sale of other real estate owned
    
    
    1,023,962
    
    
    
    747,445Cash received for net liabilities assumed in acquisition of branches
    
    
    
    
    
    
    9,143,226(Purchase) of Federal Home Loan Bank stock
    
    
    (1,467,100
    )
    
    
    (294,300
    )Purchase of Bank owned life insurance
    
    
    
    
    
    
    (2,947,198
    )Net change in other investments
    
    
    500,000
    
    
    
    339,939Net cash from investing activities
    
    
    (91,475,145
    )
    
    
    (34,306,698
    )Cash flows from financing activitiesNet increase in deposits
    
    
    52,271,249
    
    
    
    20,357,141Federal Home Loan Bank advances
    
    
    55,000,000
    
    
    
    20,000,000Stock subscriptions received
    
    
    38,326,522
    
    
    
    Repayment of Federal Home Loan Bank advances
    
    
    (25,657,144
    )
    
    
    (13,814,286
    )Dividends paid
    
    
    
    
    
    
    (50,000
    )Net cash from financing activities
    
    
    119,940,627
    
    
    
    26,492,855Net increase in cash and cash equivalents
    
    
    34,626,846
    
    
    
    2,959,023Cash and cash equivalents at beginning of the period
    
    
    8,995,824
    
    
    
    13,978,958Cash and cash equivalents at end of the period
    
    $
    43,622,670
    
    
    $
    16,937,981Cash paid during the period for:Interest
    
    $
    8,611,618
    
    
    $
    8,965,555Income taxes
    
    $
    1,498,500
    
    
    $
    950,000Loans
transferred to other real estate owned
    
    $
    133,126
    
    
    $
    233,140
 The accompanying notes are an integral part of these unaudited consolidated financial statements. oPAGE o6o




---



##### Table of Contents



ATLANTIC COAST FEDERAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the
accounts of Atlantic Coast Federal Corporation (or the Company) and its
wholly owned subsidiary, Atlantic Coast Federal (the Bank) and the Banks
wholly owned subsidiary First Community Financial Services (First Community).
All significant inter-company balances and transactions have been eliminated in
consolidation. 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-month and nine-month periods ending September 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. The 2003 Atlantic Coast Federal Corporation consolidated
financial statements, as presented in the Companys Registration Statement on Form S-1, as amended,
filed with the Securities and Exchange Commission (SEC), should be read in conjunction with
these statements. Certain accounts in the December 31, 2003 balance sheet have been reclassified
to conform to current period presentation. NOTE 2-USE OF ESTIMATES The preparation of consolidated financial statements, in conformity with
accounting principles generally acceptable in the United States of America,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the
reported amounts of income and expenses during the reported periods. Actual
results could differ from current 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 The Emerging Issues Task Force (EITF) has issued EITF Abstracts Issue No.
03-01(EITF No. 03-01) to provide application guidance for assessing when an
investment is impaired, whether the impairment is other than temporary, and the
measurement of an impairment loss. Implementation of the provisions of EITF No. 03-01
have been delayed pending the issuance of implementation guidelines.
Management is presently evaluating the impact of implementing EITF No. 03-01
without considering the oPAGE o7o




---



##### Table of Contents



NOTE 3- IMPACT OF CERTAIN ACCOUNTING PRONOUNCEMENTS (Continued) implication of guidelines but does not expect a material impact on the
Companys financial condition or results of operations upon adoption. NOTE 4- SECURITIES PURCHASED UNDER AGREEMENT TO RESELL Securities purchased under agreements to resell are treated as collateralized
financing transactions and are recorded at the amounts at which the securities
were acquired plus accrued interest. NOTE 5  FEDERAL HOME LOAN BANK ADVANCES At September 30, 2004 the sum of individual advances from the Federal Home Loan
Bank of Atlanta totaled $90,314,286 and had both variable and fixed interest
rates. At September 30, 2004 these rates ranged from 1.23% to 6.93% with an
average interest rate of 3.70%. As of September 30, 2004 the advances mature as follows: 2005
    
    $
    2006
    
    
    11,314,3002007
    
    
    2008
    
    
    2009
    
    
    5,000,000Thereafter
    
    
    73,999,986$
    90,314,286
 The Company has a borrowing capacity of 30% of total assets with the Federal
Home Loan Bank of Atlanta. The Company had mortgage loans pledged as collateral
for FHLB advances of approximately $321,019,000 at September 30, 2004. At
September 30, 2004, Atlantic Coast Federal Corporation owned $4,548,600 of FHLB
stock, which also secures debts to the FHLB. NOTE 6 INTEREST RATE SWAPS Since November 17, 2003 the Company has entered into interest rate swap
agreements to make fixed payments in exchange for variable interest payments.
The interest rate swaps are used to mitigate overall risk to changes in
interest rates during the life of the swaps and are a component of the
Companys asset liability management strategy to reduce the risk that changes
in interest rates will change net interest margin. The notional amount of the
interest rate swap does not represent amounts exchanged by the parties. The
amount exchanged is determined by reference to the notional amount and the
other terms of the individual interest rate swap agreements. oPAGE o8o




---



##### Table of Contents



NOTE 6  INTEREST RATE SWAPS (Continued) This interest rate swaps have been designated as cash flow hedges of certain
Federal Home Loan Bank advances and were determined to be fully effective
during 2003 and 2004. As such, no amount of ineffectiveness has been included in net income.
Therefore, the aggregate fair value of the swaps are recorded in other
liabilities with changes in fair value recorded in other comprehensive income
(loss). The amount included in accumulated other comprehensive income (loss)
would be reclassified to current earnings should the hedges no longer be
considered effective. The Company expects the hedges to remain fully effective
during the remaining terms of the swaps. Summary information about all interest rate swaps as of September 30, 2004
follows: Notional amounts
    
    $
    20,000,000Weighted average pay rates
    
    
    3.16
    %Weighted average receive rates
    
    
    1.20
    %Maturity
    
    7.5 years
 The amount of unrealized loss related to interest rate swaps at September 30,
2004 was $9,468. NOTE 7-EARNINGS PER COMMON SHARE Basic earnings per common share is computed by dividing net income by the
weighted average number of common stock outstanding. For the three and nine
month periods ended September 30, 2004 and 2003 the weighted average number of
common shares , outstanding used in the computation of basic earnings per share
was 1,000. There were no potential dilutive common shares. As described in Note 9, on October 4, 2004 the Company completed a minority
stock offering in which a total of 14,547,500 common shares were issued, which
would have changed materially the number of common shares outstanding if this
had occurred before the end of the period. NOTE 8-COMPREHENSIVE INCOME (LOSS) Atlantic Coast Federal Corporations comprehensive income includes all items
which comprise net income, plus other comprehensive income(loss). For the
three and nine months ended September 30, 2004 and 2003 Atlantic Coast Federal
Corporations other comprehensive income (loss) was as follows: For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Net Income
    
    $
    1,003,948
    
    
    $
    3,013,895
    
    
    $
    2,698,445
    
    
    $
    3,667,099Other comprehensive(loss)income, net of tax:Unrealized(loss)gain on securities
available for sale, net of income
tax expense(benefit) of $28,765 and $(39,243) for the
three months ended September 30,
2004 and 2003, respectively, and $(33,717)
and $13,456 for the nine months ended
September 30, 2004 and 2003, respectively.
    
    
    45,286
    
    
    
    (43,892
    )
    
    
    (55,012
    )
    
    
    25,492Unrealized(loss) gain on cash flow hedges,
net of income tax expense(benefit) of $(129,856) and $0
for the three months ended September 30, 2004
and 2003, respectively, and $(3,597) and $0
for the nine months ended September 30,
2004 and 2003, respectively.
    
    
    (218,400
    )
    
    
    0
    
    
    
    (5,871
    )
    
    
    0Less reclassification adjustment for:Realized gains(losses) on securities sold included
in net income, net of tax expense( benefit) of $(17,226) and
$21,024 for the three months ended September
30, 2004 and 2003, respectively, and $(14,574)
and $21,081 for the nine months ended
September 30, 2004 and 2003, respectively.
    
    
    29,751
    
    
    
    (35,583
    )
    
    
    23,779
    
    
    
    (37,936
    )Total other comprehensive (loss)income, net of tax
    
    
    (143,363
    )
    
    
    (79,475
    )
    
    
    (37,104

    )
    
    
    (12,444
    )Comprehensive income
    
    $
    860,585
    
    
    $
    2,934,420
    
    
    $
    2,661,341
    
    
    $
    3,654,655
 NOTE 9-SUBSEQUENT EVENT On February 25, 2003, the Board of Directors of Atlantic Coast Federal
Corporation adopted a resolution to sell common stock in an amount equal to
40% (the Minority Stock Offering) of the consolidated pro forma market value of
the Company and the Bank after giving effect to the offering. oPAGE o9o




---



##### Table of Contents



NOTE 9- SUBSEQUENT EVENT (Continued) On October 4, 2004 the Company completed the Minority Stock Offering by selling
5,819,000 shares of common stock at $10 per share, and received proceeds of
$51,734,800 net of conversion expenses of approximately $1,800,000
and net of unfunded ESOP proceeds of $4,655,200. The Company also
issued 8,728,500 shares of common stock to its parent company Atlantic Coast
Federal, MHC (the MHC). Accordingly the MHC holds 60%, or
8,728,500 shares,
of the outstanding stock of the Company, with the remaining 40% held by the
public. The Company holds 100% of the Bank and First Community. The
Bank is generally prohibited by the Office of Thrift Supervision from paying
dividends to the Company if the dividends would cause the Bank to fall
below the well capitalized capital threshold. With the proceeds the Company loaned its employee stock ownership plan
$4,655,200 to enable it to buy 8% of the shares issued in the offering to
persons other than the MHC. The Company also contributed $28,195,000, which
is 50% of the proceeds net of stock offering costs of approximately $1,800,000,
to the Bank as a capital contribution. The balance will be retained as the
Companys initial capitalization and may be used for general business purposes
including investment in securities, repurchasing shares of its common stock,
paying dividends, or pursuing acquisitions. The funds received by the Bank will
be used for general business purposes including originating loans and
purchasing securities and may also be used for growth through expansion of the
branch office network or acquisitions. Offering costs were deferred and deducted from the proceeds of the shares sold
in the stock offering. At September 30, 2004, and December 31,
2003, $1,100,000 and $191,000 were deferred and
included in other assets on the balance sheet. oPAGE o10o




---



##### Table of Contents



Part 1 ATLANTIC COAST FEDERAL CORPORATION 
 
 Forward-Looking Statements 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. General On November 1, 2000, Atlantic Coast Federal converted its charter from a
federally-chartered credit union to a federally-chartered thrift. On that date
the name was changed from Atlantic Coast Federal Credit Union to Atlantic Coast
Federal, and we became a taxable organization. oPAGE o11o




---



##### Table of Contents



On May 30, 2002, Atlantic Coast Federal adopted a plan of mutual holding
company reorganization to reorganize into a three-tier mutual holding company.
The reorganization became effective on January 1, 2003. Following the
reorganization, Atlantic Coast Federal became a wholly-owned subsidiary of
Atlantic Coast Federal Corporation, which became a wholly-owned subsidiary of
Atlantic Coast Federal, MHC. The transaction was accounted for at historical
cost. Our principal business has historically consisted of attracting deposits
from the general public and the business community and making loans secured by
various types of collateral, including real estate and general business assets.
Atlantic Coast Federal Corporation is significantly affected by prevailing
economic conditions as well as government policies and regulations concerning,
among other things, monetary and fiscal affairs, housing and financial
institutions. Deposit flows are influenced by a number of factors, including
interest rates paid on competing investments, account maturities, fee
structures, and level of personal income and savings. Lending activities are
influenced by the demand for funds, the number and quality of lenders, and
regional economic cycles. Sources of funds for lending activities of Atlantic
Coast Federal Corporation include deposits, borrowings, payments on loans,
maturities of securities and income provided from operations. Atlantic Coast
Federal Corporations earnings are primarily dependent upon Atlantic Coast
Federal Corporations net interest income, the difference between interest
income and interest expense. Interest income is a function of the balances of loans and investments
outstanding during a given period and the yield earned on such loans and
investments. Interest expense is a function of the amount of deposits and
borrowings outstanding during the same period and interest rates paid on such
deposits and borrowings. Atlantic Coast Federal Corporations earnings are
also affected by Atlantic Coast Federal Corporations provisions for loan
losses, service charges, gains from sales of loans, commission income,
interchange fees, other income, operating expenses and income taxes. Critical Accounting Policies Certain of our accounting policies are important to the portrayal of our
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. Facts
and circumstances which could affect these judgments include, but without
limitation, changes in interest rates, in the performance of the economy or in
the financial condition of borrowers. 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 intangible assets including goodwill. Atlantic Coast
Federal Corporations accounting policies are discussed in detail in Note 1 of
the Notes to the Consolidated Financial Statements included in the Companys
Registration Statement on Form S-1, as amended, filed with the SEC. 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 collateral values, whether the loan was oPAGE o12o




---



##### Table of Contents



originated through the Company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. The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or
loans otherwise classified as special mention, substandard, or doubtful. The
general component covers non-classified loans and is based on historical loss
experience adjusted for current factors. We believe 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
dollar loans. The allowance for loan losses was $4.1 million at September 30,
2004 and $6.6 million at December 31, 2003. The decrease in the allowance for
loan losses from December 31, 2003 to September 30, 2004 was primarily due to a
$4 million charge-off occurring in the first quarter of 2004 on one impaired
loan relationship. The allowance for loan losses as a percentage of total loans
was 0.80% at September 30, 2004 and 1.49% as of December 31, 2003. Provision
for loan losses totaled $674,000 and $188,000 for the three months ended
September 30, 2004 and 2003. Provision for loan losses totaled $2.3 million
and $4.1 million for the nine months ending September 30, 2004 and 2003,
respectively. This data demonstrates the manner in which the allowance for
loan losses and related provision expense can change over long term and
short-term periods. Changes in economic conditions, the nature and size of the
loan portfolio and individual borrower conditions can dramatically impact our
required level of allowance for loan losses in relatively short periods of
time. The amount of allowance for loan losses allocated to individually
evaluated loan relationships decreased $2.1 million to $2.0 million at
September 30, 2004 from $4.1 million at December 31, 2003, primarily due to the
charge-off of the impaired loan noted above. Management anticipates that large
individual specific loss allocations may continue to be required in future
periods as changes in borrower conditions can change in relatively short time
periods. 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. Atlantic Coast Federal Corporation obtains market
values from a third party on a monthly basis in order to adjust the securities
to fair value. Other comprehensive income (loss) resulting from changes in the
fair market value of Atlantic Coast Federal Corporations available for sale
securities portfolio totaled $(31,000) and $(12,000) for the nine months ended
September 30, 2004 and 2003 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. Atlantic Coast Federal Corporation assesses the carrying value of
intangible assets including goodwill annually in order to determine if such
intangible assets are impaired. In reviewing the carrying value of intangible
assets, Atlantic Coast Federal Corporation assesses the recoverability of such
assets by evaluating the fair value of oPAGE o13o




---



##### Table of Contents



Atlantic Coast Federal Corporations community banking segment which is
the Companys only business segment. Any impairment would be required to be
recorded during the period identified. Atlantic Coast Federal Corporations
goodwill totaled $2.7 million as of September 30, 2004; therefore, if Atlantic
Coast Federal Corporations goodwill was determined to be impaired, Atlantic
Coast Federal Corporations financial results could be materially impacted. After converting to a federally-chartered savings association, Atlantic
Coast Federal 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 bases 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 Federal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 Atlantic Coast Federal Corporation in
preparing our federal and state tax returns are subject to the review of taxing
authorities, and the review of the positions we have taken by taxing
authorities could result in a material adjustment to our financial statements. Business Strategy We have concentrated our lending efforts on the origination of one-to-four
family mortgage loans along with various consumer loans and other secured
commercial loans (including commercial real estate and construction lending)
for portfolio retention. Our business strategy emphasizes retail deposits
along with Federal Home Loan Bank (FHLB) advances as its principal sources of
funds. Our primary objective is to remain an independent, community oriented
financial institution serving customers in our primary market area. The board
of directors has sought to accomplish this objective through the adoption of a
strategy designed to maintain profitability, a strong capital position and high
asset quality. This strategy primarily involves (i) emphasizing the
origination of one-to-four family residential mortgage loans, multi-family
loans, commercial real estate loans and commercial construction loans, (ii)
maintaining a portfolio of securities with various types of investments, (iii)
controlling operating expenses while providing high quality customer service,
(iv) purchasing residential mortgage loans for the purpose of interest rate
risk management, and (v) increasing non-interest income through revisions to
our service fee structure. In connection with the stock offering, we anticipate receiving $56.4
million in net proceeds. We anticipate utilizing the net proceeds as described
in How We Intend to Use the Proceeds on page 9 of the prospectus contained
in the Companys Registration Statement onForm S-1, as amended, filed with the SEC.
We anticipate the proceeds will result in an immediate
increase in assets, and we anticipate future growth through normal expansion of
products and services into new and existing markets, although no specific plans
exist at this time. Our results of operations may be significantly impacted by
our ability to effectively utilize the proceeds from the oPAGE o14o




---



##### Table of Contents



stock offering.
Should we not be able to invest a significant portion of the proceeds in assets
with favorable yields our financial performance could be negatively impacted. Comparison of Financial Condition at September 30, 2004 and December 31, 2003. General.
Total assets increased $124.1 million, or 24.9%, to $623.1
million at September 30, 2004 from $499.0 million at December 31, 2003. Asset
growth was primarily comprised of $72.4 million in net loans, $34.6 million of
cash and cash equivalents, $10.3 million of securities purchased under
agreement to resell, and $5.6 million of securities available for sale. The
asset growth was funded by increased deposits of $52.3 million, additional
Federal Home Loan Bank (FHLB) borrowings of $29.3 million and $38.3 million in
stock subscriptions received in connection with Atlantic Coast Federals stock
offering. Assets.Cash and cash equivalents increased $34.6 million or nearly 500%
to $43.6 million at September 30, 2004 from $9.0 million at December 31, 2003.
The increase is primarily due to a $34.3 increase in overnight investment
account held with the bank used by Atlantic Coast Federal for check clearing.
We purchased securities under agreement to resell for $10.3 million from
another financial institution and under the terms of the agreement have the
right to sell them back at our discretion. The source of these funds for
these increases was stock subscriptions received held by Atlantic Coast Federal
Corporation in connection with its stock offering. Our net loan portfolio increased $72.4 million, or 16.6%, to $508.0
million at September 30, 2004 from $435.6 million at December 31, 2003. New
loan originations totaled $188.0 million in the nine months of 2004 of which
$125.6 million or 66.8% was for one-to-four family mortgages or residential
construction loans, $30.6 million or 16.2% for home equity and second mortgage
loans and $27.1 or 14.4% for installment auto and other consumer loans. We also
sold approximately $18.4 million of residential mortgage loans, and we expect
that we will continue to sell certain long term fixed rate mortgages in future
periods as a part of our overall asset/liability management and liquidity
strategies. We believe our lending strategy will continue to focus on the
origination of residential mortgage loans and decreasing originations of
consumer loans such as automobile loans. In addition, we anticipate increasing
our commercial lending focus, particularly related to commercial real estate
lending. Securities available for sale increased $5.6 million, or 21.3%, to $31.6
million at September 30, 2004 from $26.0 million at December 31, 2003. The
increase is primarily due to an $8.3 million increase in money market funds
offset by the redemption of $3.0 million of FHLB bonds that were called prior
to maturity and $1.7 million of state and county municipal bonds that either
matured or were sold for liquidity purposes. The source of funds for the growth
of available for sale securities was primarily from the stock subscriptions
received by Atlantic Coast Federal as of September 30, 2004. Decisions about
future investments in securities available for sale will continue to be made on
the basis of liquidity and funding requirements. The Company currently
anticipates that short-term investments may be utilized in the future as
liquidity levels increase as a result of the proceeds from the stock offering
until such funds can be redeployed into loans or other long-term investments. The investment in FHLB stock increased approximately $1.5 million in order
to maintain required investment levels following the Companys additional
borrowings (see Borrowings below). oPAGE o15o




---



##### Table of Contents



Our allowance for loan losses at September 30, 2004 was $4.1 million or.80% of loans, compared to the $6.6 million or 1.49% of loans at December 31,
2003. Net chargeoffs for the nine months ended September 30, 2004 and September 30,
2003 were $4.8 million and $1.4 million. Net charge-offs for the nine months
ended September 30, 2004 consisted of gross charge-offs of $5.4 million and
recoveries of $633,000. The remaining change in the balance of the allowance
for loan losses from December 31, 2003 to September 30, 2004 is related to
provision for loan losses of $2.3 million for the nine months ending September
30, 2004. The increase in net charge-offs, the decline in the allowance for
loan losses and the decline in the percentage of the allowance for loan losses
to total loans were all primarily due to a charge-off totaling $4.0 million on
an individual problem loan situation discussed below. Individual borrower
conditions may change in a relatively short time period and thereby require
changes in our loan loss allocations for such loans. In addition, as a loan is
identified as a loss, it is then charged off. Identification of such changes
necessary for loss allocations as well as charge-offs of loans may cause our
allowance for loan losses to total loans ratio to fluctuate such as the change
discussed above. During 2003 management identified significant concerns relative to the
collectibility of a $4.8 million loan made to finance the acquisition of land
and the construction of a water treatment plant for commercial and industrial
customers. Based on estimates of expected cash flows and estimates of
collateral value management allocated approximately $2.8 million of the
allowance for loan losses to this loan relationship. During 2003, no portion
of the loan relationship was charged-off as the borrower continued to perform
under the terms of its agreement. In May 2004, management learned that key
business permits had been revoked by the municipality where the borrower
operated during the quarter ended March 31, 2004 and thus its operations
ceased during the first quarter of 2004. Accordingly, management determined
that it was appropriate to record additional provisions for loan losses
totaling approximately $1.4 million for this loan relationship in the first
quarter of 2004 and charge-off approximately $4.0 million of the relationship
as of March 31, 2004. The additional provision for loan losses is primarily a
result of there no longer being any expected future operating cash flows as the
borrower is in the process of declaring bankruptcy. As of September 30, 2004,
the remaining balance of this loan relationship is approximately $710,000, and
management has allocated approximately $209,000 of the allowance for loan
losses to this remaining balance. The remaining balance represents
managements current estimate of the fair value of the underlying collateral;
however, management determined that it was appropriate to provide an allowance
for loan losses allocation to this balance in recognition of the uncertainty of
the ultimate value that will be obtained from the collateral. 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.
Non-performing loans totaled approximately $3.7 million and $7.6 million at
September 30, 2004 and December 31, 2003, and total impaired loans were
approximately $3.6 million and $11.4 million at September 30, 2004 and December
31, 2003. The decrease in impaired loans is primarily the result of the loan
charge-off discussed above and improved financial condition and performance of
other loans totaling $3.8 million. As of September 30, 2004 and December 31,
2003, 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 as of
September 30, 2004 and December 31, 2003. The decrease in non-performing loans
is primarily oPAGE o16o




---



##### Table of Contents



related to the $4.0 million charge-off discussed above. All
non-performing loans, excluding small balance homogeneous loans, are also reported as impaired loans at September 30,
2004 and December 31, 2003. In August 2001, we entered into a sale and servicing agreement whereby a
pool of leases totaling $2,011,000 was purchased. The leases are
collateralized by small equipment and automobiles. In addition, each lease was
backed by a surety bond obtained by the seller and provided as part of the
purchase agreement for the pool of leases. The surety bonds obligated the
insurance company to pay even in the event there was fraud. At December 31,
2001, the remaining balance on the pool of leases was $1,924,000. Scheduled
payments have not been received since December 2001. We have filed claims with
the surety on the surety bonds for past due payments. At December 31, 2001,
management had not made any provision for loan losses with respect to these
leases. During 2002, the surety did not perform on the claims made on it.
Therefore, in early 2002, we placed the leases on non-accrual status. The
surety has alleged that most, if not all, of the leases sold by the seller were
fraudulent or fictitious. The surety has filed a suit against the seller of
the leases. Subsequent to the suit against the seller, the surety later named
Atlantic Coast Federal Corporation as a defendant. The seller of the leases
has since filed bankruptcy and we do not expect recovery from the seller. We
have filed a suit against the surety, asserting, among other things, breach of
contract and bad faith in issuing their bond surety and then failing to
perform. In 2002, we were informed by the bankruptcy
trustee that certain leases included in the lease pool purchased by Atlantic
Coast Federal Corporation were fictitious. As a result, we charged-off
approximately $260,000 during 2002. As of December 31, 2002, the remaining
balance on these leases was approximately $1,664,000 and was classified as
impaired. At December 31, 2002, management had allocated approximately
$667,000 of the allowance for loan losses with respect to these leases. During 2003, management continued to pursue collection on the surety
bonds under the terms of those bonds. During December 2003, we charged-off an
additional $664,000 of the leases. At September 30, 2004 and December 31,
2003, the remaining balance on these leases is approximately $1,000,000, and
management has allocated approximately $150,000 of the allowance for loan
losses with respect to these leases. Legal costs incurred on this matter for
the nine months ended September 30, 2004 and September 30, 2003 were $405,000
and $269,000. Management continues to vigorously pursue collection on the
surety bonds under the terms of those bonds. There can be no assurance,
however, that we will recover the balance of the lease payments of $1.9 million
due as of December 2001. The previous charge-offs on these leases and the
current level of allowance for loan loss allocation for the remaining balance
of these leases are indicative of our best estimate of the probable losses
incurred, based on consultation with legal counsel. Collection of any amount,
including the $850,000 net amount included in our financial statements as of
September 30, 2004, or the gross amount of $1.9 million, cannot be assured. We
believe that there is a possibility that no amount will be collected in the
future; therefore, we may incur additional losses up to the $850,000 net amount
remaining as an asset. Additionally, we anticipate we will incur additional
legal costs as we pursue collection on the surety bonds. oPAGE o17o




---



##### Table of Contents



Deposits. Total deposits increased by $52.2 million, or 13.3%, to $444.5
million at September 30, 2004 from $392.3 million at December 31, 2003. A
portion of this growth was from new and existing depositors who were establishing or expanding
subscription rights for the stock offering. Such deposits totaled approximately
$26 million as of September 30, 2004. Normal deposit growth included
certificate of deposit growth of $19.1 million. We expect future deposit
growth as we expand our products and services in new and existing markets. Borrowings. Federal Home Loan Bank advances increased $29.3 million, or
48.1% to $90.3 million at September 30, 2004 from $61.0 million at December 31,
2003. The additional borrowings are 10-year notes. Two of the notes total $15
million and are at an average fixed rate of 3.69%. These notes convert to a
LIBOR based variable rate if the three-month LIBOR reaches 7.0% for one note
and 7.5% for the other, or are redeemable at our option. The remaining new
borrowings total $15 million at a rate of LIBOR plus 22 basis points. These
additional $15.0 million of borrowings have scheduled maturities occurring
between January 21, 2014 and June 18, 2014. Approximately $10 million were
used for liquidity purposes to replace a large block of maturing certificates
of deposits that had been originated at premium rates during a deposit
promotion program in 2003. The remaining funds were used to fund loan growth
during the first six months of 2004. Management expects that Federal Home Loan
Bank advances will continue to provide the Company with a significant
additional funding source to meet the needs of its lending activities. Equity.Total equity increased $2.7 million, or 6.2%, to $45.9 million at
September 30, 2004 from $43.2 million at December 31, 2003. The increase in
equity is primarily due to the Companys net income of $2.7 million. Equity was
also impacted by other comprehensive losses of $37,000 resulting from an
decrease in market value of interest rate swaps being used to hedge the cash
flows of certain FHLB advances of $6,000, net of tax, combined with a decrease
in the market value of securities available for sale of $31,000, net of tax. The
equity to assets ratio was 7.36% at September 30, 2004 compared to 8.66% at
December 31, 2003. The decrease was a result of strong loan growth as well as
the noted deposit activity related to our stock offering that increased
deposits and concurrently cash and short-term investments. As a result, our
regulatory capital ratios declined, however, we remained in excess of all
minimum capital requirements to be well capitalized as of September 30, 2004.
Total risk based capital to risk weighted assets was 10.5%, tier 1 capital to
risk weighted assets was 9.9% and Tier 1 capital to total adjusted total assets
was 6.9% as of September 30, 2004. These ratios as of December 31, 2003 were
12.4%, 11.7% and 8.1%. Comparison of Results of Operation for the Nine Months Ended September 30, 2004
and 2003 General.Net income for the nine months ended September 30, 2004 was $2.7
million, which was $969,000 less in net income for the same period in 2003.
Net interest income slightly decreased compared to the prior year primarily due
to a lower interest rate environment. The provision for loan loss expense is
significantly lower in 2004, however this decline was more than offset by a
decrease in non-interest income that included a gain on the sale of the credit
card portfolio of approximately $3.1 million in the 3rd quarter of 2003.
Non-interest expense increased during the first nine months of 2004 as compared
to the same period in 2003 primarily due to higher compensation and benefit
costs arising from branch additions in late 2003. oPAGE o18o




---



##### Table of Contents



Net Interest Income.Net interest income decreased $79,000 for the nine
months ended September 30, 2004 compared to the same period in 2003. For the
nine months ended September 30, 2004, average interest-earning assets increased to
$528.7 million from $453.0 million for the same period a year ago primarily as
a result of loan growth. Offsetting this increase in average interest-earning
assets was a 109 basis point decline in the yield on interest earning assets to
5.88% for the nine months ending September 30, 2004 from 6.97% for the
comparable period in 2003. This decline reflects Atlantic Coast Federals
continuing change in mix of interest earning assets, away from installment and
credit card loans which have higher yields, but also have higher risk of loss,
to first and second mortgages loans for one-to-four family dwellings which have lower
yields but lower risk of loss. First and second mortgage loans on one-to-four family
loans were 67.98%of total loans as of September 30, 2004 as compared to 61.46%
as of September 30, 2003. The decline in yield on interest earning assets was
partially offset by a decrease of 44 basis points in the cost of funds on
interest bearing liabilities to 2.48% for the nine months ending September 30,
2004 from 2.92% for the same period in 2003. Net interest margin, which is net
interest income compared to average interest earning assets, decreased 64 basis
points to 3.68% for the nine months ended September 30, 2004 from 4.32% for the
same period in 2003. Atlantic Coast Federal Corporation continues to utilize
its asset/liability management strategy to reduce the impact of changes in
interest rates on Atlantic Coast Federal Corporations net interest income.
Atlantic Coast Federal Corporation expects that its net interest margin may
decline in the near future as a result of the continued low interest rate
environment during recent periods and a strategy to emphasis first and second
mortgage lending on one-to-four family dwellings. Increases in net interest income
resulting from increases in average interest earnings assets are anticipated to
partially offset the decline in net interest income resulting from decreases in
our net interest margin; however, growth in average interest earning assets is
not assured and the degree to which such growth will result in growth in net
interest income cannot be assured. The following table details the relative interest rates and average
balances of Atlantic Coast Federal Corporations interest-earning assets and
interest-bearing liabilities for the nine months ended September 30, 2004 and
2003: oPAGE o19o




---



##### Table of Contents



DISTRIBUTION OF INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES;
INTEREST RATES AND INTEREST DIFFERENTIALS
( dollars in thousands ) Average Yield/Average Balance
    
    
    
    
    
    Rate
    
    
    
    Interest
    
    
    
    
    
    Variance attributable to2004
    
    2003
    
    2004
    
    2003
    
    
    
    2004
    
    2003
    
    Variance
    
    Volume(5)
    
    RateInterest-earning assets$
    476,332
    
    
    $
    400,491
    
    
    
    6.32
    %
    
    
    7.65
    %
    
    Loans Receivable(1)
    
    $
    22,589
    
    
    $
    22,976
    
    
    $
    (387
    )
    
    $
    3,957
    
    
    
    (4,344
    )28,457
    
    
    
    36,901
    
    
    
    1.52
    %
    
    
    1.72
    %
    
    Securities(2)
    
    
    325
    
    
    
    477
    
    
    
    (152
    )
    
    
    (101
    )
    
    
    (51
    )23,910
    
    
    
    15,638
    
    
    
    2.19
    %
    
    
    1.90
    %
    
    Other earning assets(3)
    
    
    392
    
    
    
    222
    
    
    
    170
    
    
    
    131
    
    
    
    39528,699
    
    
    
    453,030
    
    
    
    5.88
    %
    
    
    6.97
    %
    
    Total Interest earning assets
    
    
    23,306
    
    
    
    23,675
    
    
    
    (369
    )
    
    
    3,987
    
    
    
    (4,356
    )Interest bearing liabilities$
    94,315
    
    
    $
    74,402
    
    
    
    .63
    %
    
    
    1.09
    %
    
    Savings deposits
    
    $
    444
    
    
    $
    602
    
    
    $
    (158
    )
    
    $
    145
    
    
    
    (303
    )68,516

    
    
    
    68,615
    
    
    
    1.33
    %
    
    
    1.57
    %
    
    Money market accounts
    
    
    685
    
    
    
    807
    
    
    
    (122
    )
    
    
    (1
    )
    
    
    (121
    )220,875

    
    
    
    223,552
    
    
    
    2.93
    %
    
    
    3.57
    %
    
    Time deposits
    
    
    4,853
    
    
    
    5,990
    
    
    
    (1,137
    )
    
    
    (71
    )
    
    
    (1066
    )FHLB advances and other83,606
    
    
    
    43,222
    
    
    
    4.34
    %
    
    
    4.92
    %
    
    borrowings
    
    
    2,719
    
    
    
    1,593
    
    
    
    1,126
    
    
    
    1,328
    
    
    
    (202
    )$
    467,312
    
    
    $
    409,791
    
    
    
    2.48
    %
    
    
    2.92
    %
    
    Total interest bearing liabilities
    
    $
    8,701
    
    
    $
    8,992
    
    
    $
    (291
    )
    
    $
    1,401
    
    
    
    (1,692
    )3.40
    %
    
    
    4.05
    %
    
    Net Interest Spread
    
    
    14,605
    
    
    
    14,683
    
    
    
    (78
    )
    
    
    2,586
    
    
    
    (2,664
    )3.68
    %
    
    
    4.32
    %
    
    Net  Interest Margin(4)Average interest earning assets to113.14
    %
    
    
    111.27
    %
    
    
    
    
    
    
    
    
    
    average interest bearing liabilities
 (1) Calculated net of deferred fees and allowance for loan losses. 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 (5) Variances not solely attributable to rate or volume have been allocated proportionately to the change due to volume and the change due to rate. oPAGE o20o




---



##### Table of Contents



Interest Income.Interest income decreased $370,000, or 1.6%, to $23.3
million for the nine months ended September 30, 2004 from $23.7 million for the
nine months ended September 30, 2003 primarily due to a decline in interest
income from loans. Although average loans outstanding were $75.8 million higher
for the nine months ended September 30, 2004 as compared to the same nine
months in 2003, interest income was $387,000 less as overall yields were lower.
The weighted average yield on loans decreased from 7.65% for the nine months
ended September 30, 2003 to 6.32% for the nine months ended September 30, 2004.
This decline is primarily due to a historically low interest rate environment
that caused the majority of our first mortgage customers to refinance mortgages
to lower rates. Also contributing to the decrease in yields is the change in
loan portfolio mix away from higher yielding, but higher risk of loss consumer
loans, to lower yielding but also lower risk of loss, first and second
mortgages on one-to-four family dwellings. The loan volume from the credit card
portfolio sold in July of 2003 and reductions in indirect automobile lending in
2004, both of which had higher rates due to their risk have been replaced with
first and second mortgages on one-to-four family dwellings. In addition the majority of
total loan growth has occurred in this type of loan. Interest income on other
interest-earning assets, including securities available for sale increased
$18,000 for the nine months ended September 30, 2004 as compared to the same
period for 2003. The weighted average yield on other interest-earning assets
was 1.8% for the first nine months of 2004 and 2003. We expect our interest
income will increase as average interest earning assets and interest rates on
such assets increase. Growth in interest earnings assets is anticipated due to
the proceeds from the stock offering as well as general growth from existing
markets and possibly new markets. Our interest income could be adversely
impacted by continued low interest rates or decreases in average interest
earning assets. Interest Expense.Interest expense decreased $291,000 to $8.7 million for
the first nine months of 2004 from $9.0 million for the same period in 2003.
The decrease in interest expense was due to a decrease in the Companys cost of
funds for the nine months ending September 30, 2004 resulting from the
continued low interest rate environment partially offset by increased
borrowings. The cost of funds was 2.48% for the nine months ended September
30, 2004 compared to 2.92% for the same period in 2003. Although average
interest bearing deposits outstanding increased $17.2 million for the nine
months ended September 30, 2004 as compared to the same nine months in 2003,
interest expense on deposits was $1.4 million less due to the re-pricing of
deposit accounts to lower interest rates consistent with the continued low
interest rate environment. Interest expense on Federal Home Loan Bank advances increased $1.1 million
to $2.7 million for the nine months ended September 30, 2004 from $1.6 million
for the nine months ended September 30, 2003. The increase resulted from an
increase in average Federal Home Loan Bank advances of $40.6 million to $83.6
million for the nine months ended September 30, 2004 from $43.0 million for the
same period in 2003. This increase in interest expense due to increased levels
of borrowings was partially offset by a 58 basis point decrease in the cost of
Federal Home Loan Bank advances, from 4.92% for the first nine months of 2003
to 4.34% for the same period in 2004. We expect interest expense to increase
as interest rates and average interest bearing liabilities increase. 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 oPAGE o21o




---



##### Table of Contents



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 homogenous 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 $2.3
million and $4.1 million were made during the nine months ended September 30,
2004 and the nine months ended September 30, 2003. The majority of the
provision expense for both nine-month periods is related to one problem loan
relationship of which $4.0 million was charged-off during the quarter ending
March 31, 2004. For the nine months ended September 30, 2004, the provision
expense for this one problem loan was $1.4 million. The provision expense for
the nine months ending September 30, 2003 included allowance for loan losses of
$2.3 million for this problem loan situation, and management classified several
other loan relationships totaling $12.2 million and provided specific allowance
allocations totaling $1.6 million on these loan relationships. Provisions for
loan losses on loans collateralized by first and second mortgages have
increased $248,000 during the nine months ended September 30, 2004 as compared
to the same period in 2003. In part, this is due to the rising interest rate
environment that causes monthly payments on variable rate loans to increase and
could negatively impact the ability of some borrowers to repay their loans.
Also in the first nine months of 2004 there has been an increasingly larger
share of new first mortgage loan originations occurring through brokers.
Management believes these loans have inherently more risk than loans originated
through its retail branch network because the Company relies on the broker to
perform certain underwriting procedures. Finally, management believes that the
2004 hurricane season and questions about future insurance coverage have
destabilized the Florida and Georgia real estate markets, thus impacting the
first and second mortgage collateral values. Consumer loan losses declined in
the first nine months of 2004 as a result of the sale of our credit card
portfolio and the continued decline of our automobile loan portfolio 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 September 30, 2004 is maintained at a level
that represents managements best estimate of probable incurred losses in the
loan portfolio. Non-interest Income.Non-interest income decreased $2.9 million to $4.0
million for the nine months ended September 30, 2004 from $6.9 million for the
same period in 2003. Non-interest income in 2003 includes a gain on the sale of
the credit card portfolio. oPAGE o22o




---



##### Table of Contents



On July 31, 2003, the Company sold its credit card
portfolio with balances totaling $13.0 million to a third party for a gain of
$3.1 million, net of estimated costs for closing and other settlement issues. Exclusive of this gain, non-interest income
increased $207,000 for the nine months ended September 30, 2004 as compared to
the same period in 2003. This increase results from additional deposit service
charges and fees of $296,000 and gains on sales of foreclosed assets of
$82,000 for the nine months ended September 30, 2004 as compared to a loss of
$56,000 for the same period in 2003. Atlantic Coast Federal Corporation sold
approximately $18.3 million of mortgage loans during the nine months ended
September 30, 2004 for gains of $175,000. Although, management anticipates
sales of certain mortgage loans to continue as part of the asset/liability
strategy, there can be no assurance that gains will continue to be realized on
such sales. These increases were offset by declines of $96,000 in commissions
earned from the sale of investment and insurance products to customers and
$80,000 in interchange fees resulting from the sale of the credit card
portfolio. For the nine months ended September 30, 2004 net losses on sales of
AFS securities was $39,000 compared to a gain of $59,000 for the same
nine-month period in 2003. We anticipate our non-interest income will be positively impacted by the
future growth of the Company into new and existing markets. However,
non-interest income for the year ending December 31, 2003 was positively
impacted by the sale of our credit card loan portfolio, and we currently do not
anticipate significant gains from the sale of assets in 2004. oPAGE o23o




---



##### Table of Contents



Non-interest Expense.Non-interest expense increased $297,000 to $12.1
million for the nine months ended September 30, 2004 compared to $11.8 million
for the nine months ended September 30, 2003. The increase in non-interest
expense is primarily due to increases of $588,000 in compensation and benefits
related to our overall growth and expansion including the acquisition of new
branches and expenses associated with additional personnel needed to operate
the new branches. We anticipate non-interest expense will increase in future
periods as a result of additional growth and expansion. Income Tax Expense.Income tax expense decreased to $1.5 million for the
nine months ended September 30, 2004 from $2.0 million for the nine months
ended September 30, 2003. The decrease is primarily due to a decrease in
income before income taxes when comparing the two periods. We anticipate that
income tax expense will continue to vary as income before income taxes varies. Comparison of Results of Operation for the Three Months Ended September 30,
2004 and 2003 General.Net income for the three months ended September 30, 2004 was $1.0
million, which was $2.0 million less than the net income of $3.0 million for
the same period in 2003. The third quarter of 2003 includes a $3.1 million
gain on the sale of Atlantic Coast Federal Corporations credit card portfolio.
Aside from this gain an increase in net interest income was offset by an
increase in the provision for loan losses for the third quarter of 2004 as
compared to the same period in 2003. Net Interest Income.Net interest income increased $222,000 for the
three months ended September 30, 2004 compared to the same period in 2003. For
the three months ended September 30, 2004, average interest-earning assets
increased to $573.4 million from $462.4 million for the same period a year ago
primarily as a result of loan growth. Offsetting this increase in average
interest-earning assets was a 92 basis point decline in the yield on interest
earning assets to 5.64% for the three months ending September 30, 2004 from
6.56% for the comparable period in 2003. This decline reflects Atlantic Coast
Federals continuing change in mix of interest earning assets, away from
installment and credit card loans which have higher yields, but also have
higher risk of loss, to first and second mortgages loans for one-to-four family
dwellings which have lower yields but lower risk of loss. First and second
mortgages on one-to-four family loans were 67.98% of total loans as of September 30,
2004 as compared to 61.46% as of September 30, 2003. The decline in the yield
on interest earning assets was partially offset by a decrease of 20 basis
points in the cost of funds on interest bearing liabilities to 2.52% for the
three months ending September 30, 2004 from 2.72% for the same period in 2003.
The degree of change in the cost of funds as compared to the yield on interest
earning assets is less due to Atlantic Coast Federal Corporations use of
longer term borrowings from the Federal Home Loan Bank which are a better
funding match than non-core deposits for the growth in first mortgages on one-to-four
family dwellings. Atlantic Coast Federal Corporation continues to utilize its
asset/liability management strategy to reduce the impact of changes in interest
rates on Atlantic Coast Federal Corporations net interest income. Atlantic
Coast Federal Corporation expects that its net interest margin may decline in
the near future as a result of the continued low interest rate environment
during recent periods and its strategy to emphasize first and second mortgage
lending on one-to-four family dwellings. Increases in net interest income resulting
from increases in average interest earnings assets are anticipated to partially
offset the decline in net interest income resulting from decreases in our net
interest margin; oPAGE o24o




---



##### Table of Contents



however, growth in average interest earning assets is not assured and the
degree to which such growth will result in growth in net interest income cannot
be assured. The following table details the relative interest rates and average
balances of Atlantic Coast Federal Corporations interest-earning assets and
interest-bearing liabilities for the three months ended September 30, 2004 and
2003: oPAGE o25o




---



##### Table of Contents



DISTRIBUTION OF INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES;
INTEREST RATES AND INTEREST DIFFERENTIALS
(dollars in thousands ) Average Yield/Average Balance
      
      
      
      
      Rate
      
      
      
      
      Interest
      
      
      
      
      
      
      Variance attributable to2004
      
      2003
      
      
      2004
      
      2003
      
      
      

      2004
      
      2003
      
      
      Variance
      
      Volume(5)
      
      
      RateInterest-earning assets$
      507,712
      
      $
      407,605
      
      
      
      6.12
      %
      
      
      7.25
      %
      
      Loans receivable(1)
      
      
      $
      7,763
      
      
      $
      7,384
      
      
      
      $
      379
      
      
      $
      1,640
      
      
      
      $
      (1,261
      )22,606
      
      
      38,065
      
      
      
      1.52
      %
      
      
      1.40
      %
      
      Securities(2)
      
      
      
      85
      
      
      
      133
      
      
      
      
      (48
      )
      
      
      (58
      )
      
      
      
      1043,065
      
      
      16,703
      
      
      
      2.30
      %
      
      
      2.09
      %
      
      Other earning assets(3)
      
      
      
      247
      
      
      
      87
      
      
      
      
      160
      
      
      
      151
      
      
      
      
      9$
      573,383
      
      $
      462,372
      
      
      
      5.64
      %
      
      
      6.56
      %
      
      Total interest earning assets
      
      
      
      8,095
      
      
      
      7,604
      
      
      
      
      491
      
      
      
      1,733
      
      
      
      
      (1,242
      )Interest bearing liabilities$
      97,272
      
      $
      75,747
      
      
      
      0.52
      %
      
      
      1.00
      %
      
      Savings deposits
      
      
      $
      125
      
      
      $
      190
      
      
      
      $
      (65
      )
      
      $
      51
      
      
      
      
      (116
      )67,549
      
      
      74,100
      
      
      
      1.57
      %
      
      
      1.14
      %
      
      Money market accounts
      
      
      
      266
      
      
      
      212
      
      
      
      
      54
      
      
      
      (20
      )
      
      
      
      74231,088
      
      
      221,956
      
      
      
      2.91
      %
      
      
      3.38
      %
      
      Time deposits
      
      
      
      1,682
      
      
      
      1,875
      
      
      
      
      (193
      )
      
      
      75
      
      
      
      
      (268
      )FHLB advances and other91,958
      
      
      43,643
      
      
      
      4.40
      %
      
      
      4.94
      %
      
      borrowings
      
      
      
      1,012
      
      
      
      539
      
      
      
      
      473
      
      
      
      546
      
      
      
      
      (73
      )$
      487,867
      
      $
      415,446
      
      
      
      2.52
      %
      
      
      2.72
      %
      
      Total interest bearing liabilities
      
      
      
      3,085
      
      
      
      2,816
      
      
      
      
      269
      
      
      
      652
      
      
      
      
      (383
      )3.12
      %
      
      
      3.84
      %
      
      Net Interest Spread
      
      
      
      5,010
      
      
      
      4,788
      
      
      
      
      222
      
      
      
      1081
      
      
      
      
      (859
      )3.50
      %
      
      
      4.29
      %
      
      Net Interest Margin(4)Average interest earning assets117.53
      %
      
      111.30
      %
      
      
      
      
      
      
      
      
      
      to average interest bearing liabilities
 (1) Calculated net of deferred fees and allowance for loan losses. 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 (5) Variances not solely attributable to rate or volume have been allocated proportionately to the change due to volume and the change due to rate. oPAGE o26o




---



##### Table of Contents



Interest Income.Interest income increased $491,000, or 6.5%, to $8.1 million
for the three months ended September 30, 2004 from $7.6 million for the three
months ended September 30, 2003 primarily due to an increase in interest income
from loans. Average loans outstanding were $100.1 million higher for the three
months ended September 30, 2004 as compared to the same three months in 2003,
resulting in increased interest income of $379,000. As noted above, the change
in the mix of loans impacted the yield on interest earning assets as the
weighted average yield on loans decreased from 7.25% for the three months ended
September 30, 2003 to 6.12% for the three months ended September 30, 2004.
Interest income on other interest-earning assets, including securities
available for sale increased $112,000 for the three months ended September 30,
2004 as compared to the same period for 2003 primarily due to the growth in
average other interest earning assets of $26.4 million. This growth resulted
from the receipt of cash in connection with the Companys stock offering which
was conducted during the third quarter of 2004. The cash was invested in
short term liquid assets and the majority of it was returned in October 2004 to
interested investors, as submitted orders far exceeded the planned stock
issuance. We expect our interest income will increase as average interest
earning assets and interest rates on such assets increase. Growth in interest
earnings assets is anticipated due to the proceeds from the stock offering as
well as general growth from existing markets and possibly new markets. Our
interest income could be adversely impacted by continued low interest rates or
decreases in average interest earning assets. Interest Expense.Interest expense increased $269,000 to $3.1 million for
the three months ending September 30, 2004 from $2.8 million for the same
period in 2003. The increase in interest expense was due to increases in
average outstanding interest bearing liabilities during the quarter. The cost
of funds was 2.52% for the three months ending September 30, 2004 compared to
2.72% for the three months ended September 30, 2003. Although average interest
bearing deposits increased $24.1 million for the three months ended September
30, 2004 as compared to the same period in 2003, interest expense on deposits
was $204,000 less due to the re-pricing of certificate of deposit accounts to
lower interest rates consistent with the continued low interest rate
environment. Interest expense on Federal Home Loan Bank advances increased $473,000 to
$1.0 million for the three months ended September 30, 2004 from $539,000 for
the three months ended September 30, 2003. The increase resulted from an
increase in average Federal Home Loan Bank advances of $48.4 million to $92.0
million for the three months ended September 30, 2004 from $43.6 million for
the same period in 2003. This increase in interest expense due to increased
levels of borrowings was partially offset by a 54 basis point decrease in the
cost of Federal Home Loan Bank advances, from 4.94% for the third quarter of
2003 to 4.40% for the same quarter in 2004. We expect interest expense to
increase as interest rates and average interest bearing liabilities increase. 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, adverse situations that
may affect borrowers ability to repay, estimated value of any underlying
collateral, and prevailing economic conditions. Large groups of smaller
balance homogenous 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 oPAGE o27o




---



##### Table of Contents



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 $674,000
and $188,000 were made during the three months ended September 30, 2004 and for
the same period in 2003. As explained in Comparison of Results of Operations
for the Nine Months Ended September 30, 2004 and 2003 approximately $248,000 of the
increase in the provision for the three months ended September 30, 2004 as
compared to the same period in 2003 is due to managements determination that
the risk of loss for loans collateralized by first and second mortgages has
increased. The lower provision for loan losses in the third quarter of 2003 is
also a result of the sale of the credit card portfolio in the third quarter of
2003. 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 September 30, 2004 is maintained at a level
that represents managements best estimate of probable incurred losses in the
loan portfolio. Non-interest Income.Non-interest income decreased $2.9 million to $1.3
million for the three months ended September 30, 2004 from $4.3 million for the
same period in 2003. Non-interest income in 2003 includes a gain on the sale of
the credit card portfolio. On July 31, 2003, the Company sold its credit card
portfolio with balances totaling $13.0 million to a third party for a gain of
$3.1 million, net of estimated costs for closing and other settlement issues.
Exclusive of this gain, non-interest income increased $52,000 for the three
months ended September 30, 2004 as compared to the same period in 2003. Service
charges and fees increased $136,000 for the three months ended September 30, 2004 as compared to the same period in 2003, primarily due to increases in
transaction charges and the growth of service charges for commercial checking
accounts as that deposit type continues to grow. This increase was largely
offset by losses on the sale of available for sale securities of $47,000 for
the third quarter of 2004 compared to a gain of $57,000 for the same quarter in
2003. Non-interest Expense.Non-interest expense decreased $87,000 to $4.1
million for the three months ended September 30, 2004 compared to $4.2 million
for the three months ended September 30, 2003. Compensation and benefits
expense increased $199,000 to $1.9 million for the three months ended September
30, 2004 from $1.7 million for the same period in 2003 due to our overall
growth and expansion including the acquisition of new branches and expenses
associated with additional personnel and occupancy needed to operate the new
branches. This increase was offset by decreased outside professional service
expenses of $139,000 for the third quarter of 2004 as compared to the same
period in 2003 primarily due to reduced legal costs. In addition, interchange
charges decreased $110,000 in the third quarter of 2004 as compared to 2003
due to the sale of the credit card business in 2003. We anticipate non-interest
expense will increase in future periods as a result of additional growth and
expansion. oPAGE o28o




---



##### Table of Contents



Income Tax Expense.Income tax expense decreased $1.2 million to $581,000
for the three months ended September 30, 2004 compared to $1.8 million for the
same period in 2003. The decrease is due to a decrease in income before income
taxes when comparing the two periods. We anticipate that income tax expense
will continue to vary as income before income taxes varies. Liquidity Management maintains a liquidity position that it believes will adequately
provide funding for loan demand and deposit run-off that may occur in the
normal course of business. Atlantic Coast Federal Corporation relies on a
number of different sources in order to meet its potential liquidity demands.
The primary sources are increases in deposit accounts and cash flows from loan
payments and the securities portfolio. In addition to these primary sources of funds, management has several
secondary sources available to meet potential funding requirements. As of
September 30, 2004 and December 31, 2003, Atlantic Coast Federal Corporation
had additional borrowing capacity of $100 million and $88 million with the
Federal Home Loan Bank of Atlanta. Also, Atlantic Coast Federal Corporation
has existing lines of credit available in excess of $20 million with other
financial institutions. Atlantic Coast Federal Corporation has classified its
entire securities portfolio as available for sale, providing an additional
source of liquidity. Management believes that Atlantic Coast Federal
Corporations security portfolio is of high quality and the securities would
therefore be marketable. The Company also can utilize brokers to obtain
certificates of deposits at costs and terms that are comparable to certificate
of deposits originated in its branch network. As of September 30, 2004,
Atlantic Coast Federal Corporation had $13.3 million certificates of deposits
obtained through brokers that were purchased to replace maturing branch
originated certificates of deposits. These certificates of deposits have a
weighted average maturity of 14.7 months and a weighted average rate of 2.56%.
As of December 31, 2003 Atlantic Coast Federal Corporation had no brokered
deposits. In addition, Atlantic Coast Federal Corporation has historically
sold mortgage loans in the secondary market to reduce interest rate risk and to
create an additional source of liquidity. The stock offering will increase our
liquidity until such time that we deploy the net proceeds from cash and other
short-term investments to loans consistent with our business plan as well as
increase our regulatory capital. In the first nine months of 2004, cash and cash equivalents have increased
$34.6 million from $9.0 million as of December 31, 2003 to $43.6 million as of
September 30, 2004. Cash from operating activities of $6.2 million combined
with cash from financing activities of $119.9 million exceeded cash used for
investing activities of $91.5 million. Primary sources of cash were increases
in deposits of $52.3 million, additional FHLB borrowings of $55.0 million,
$38.4 million of funds held for investors who subscribed for shares offered in
Atlantic Coast Federal Corporations stock offering and sales of securities
available for sale of $36.0 million. Deposit growth occurred in March 2004
principally from new or existing depositors who were establishing or expanding
subscription rights for the stock offering. While the majority of these
deposits were withdrawn in April 2004, approximately $26 million were retained.
The remaining deposit growth occurred through normal operations. The funds
retained from investors who subscribed for shares in the stock offering
represent only a part of total funds received during the offering that ended on
September 12, 2004. Total funds received were approximately $188.4 million of
which $150 million was held for the potential investors by a third party escrow
agent as of September 30, 2004. Upon the closing in oPAGE o29o




---



##### Table of Contents



October 2004, Atlantic Coast Federal expects net proceeds to be
approximately $56.4 million. Primary uses of cash included originations of
portfolio loans of $77.8 million, purchases of securities available for sale of
$47.2 million and principal as payments on FHLB debt of $25.7 million. Due to the
short-term nature of the acquired deposits other investing activities were
limited to purchase and sale of short-term investments. During first nine months of 2003, cash and cash equivalents increased $3.0
million from $14.0 million as of December 31, 2002 to $16.9 million as of
September 30, 2003. Cash from operating activities of $10.8 million and cash
from financing activities of $26.5 million were nearly offset by cash used for
investing activities of $34.3 million for the nine months ending September 30,
2003. Primary sources of cash through September 30, 2003 included proceeds
from sales of loans, including the sale of the credit card portfolio,
of $25.0
million, proceeds from sales and maturities of available for sale securities
totaling $33.9 million, increases in deposits of $20.4 million, additional FHLB
borrowings of $20.0 million and cash received for net liabilities assumed in
branch acquisitions of $9.1 million. Primary uses of cash included net
originations and purchases of portfolio loans and originations of loans held
for sale totaling $57.8 million, purchases of securities available for sale of
$38.9 million, repayment of FHLB advances of $13.8 million and purchases of
bank owned life insurance of $2.9 million. Our stock offering will provide significant additional liquidity and
capital resources. As our liquidity positions have historically been
maintained to provide for loan demand and deposit run-off, the stock offering
proceeds may provide excess liquidity in the near term. The additional
liquidity and capital resources from the stock offering will help provide for
the future growth of Atlantic Coast Federal Corporation. As of September 30, 2004, management is not aware of any current
recommendations by regulatory authorities, which, if they were implemented,
would have or reasonably likely to have a material adverse affect on the
Atlantic Coast Federal Corporations liquidity, capital resources or
operations. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The asset/liability management discussion contained in Atlantic Coast
Federal Corporations prospectus contained in its Registration Statement on Form S-1, as amended,
under Managements Discussion and Analysis of Financial Condition and
Results of Operations provides detailed quantitative and qualitative
disclosures about Atlantic Coast Federal Corporations market risk and should
be referenced for information thereon. The Companys primary market risk exposure is interest rate risk. We are
subject to interest rate risk to the extent that our interest-bearing
liabilities, primarily deposits and FHLB advances, re-price more rapidly or at
different rates than our 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. The Committee 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. The Committee is responsible for reviewing and reporting the
effects of the policy implementations and strategies to the Board of Directors
at least quarterly. A key element of Atlantic Coast Federal Corporations asset/liability plan
is to protect net earnings by managing the maturity or re-pricing mismatch
between its interest-earning assets and rate-sensitive liabilities.
Historically, the Company has sought to reduce exposure to its earnings through
the use of adjustable rate loans and through the sale of certain fixed rate
loans in the secondary market, and by extending funding maturities through the
use of FHLB advances. As part of its efforts to monitor and manage interest
rate risk, the Company uses a Market Value of Portfolio Equity (MVPE)
methodology that is similar to the Net Portfolio Value (NPV) methodology
adopted by the Office of Thrift Supervision as part of its capital regulations.
In essence, this approach calculates the difference between the present value
of expected cash flows from assets and the present value of expected cash flows
from liabilities. Management and the Board of Directors review MVPE
measurements on a quarterly basis to determine whether Atlantic Coast Federal
Corporations interest rate exposure is within the limits established by the
Board of Directors in the Atlantic Coast Federal Corporations interest rate
risk policy. Atlantic Coast Federal Corporations asset/liability management strategy
dictates acceptable limits on the amounts of change in given certain changes in
interest rates. For decreases in interest rates, in 100 basis point
increments, Atlantic Coast Federal Corporations policy requires the MVPE ratio
to be at least 8.0%. For interest rate increases of 100, 200 and 300 basis
points, our policy dictates that our MVPE ratio should not fall below 7.0%,
6.0% and 5.0%, respectively. Our policy also dictates that for interest rate
increases or decreases of 100, 200 or 300 basis points the percentage change in
our MVPE ratio should not decrease by more than 7.5%, 15.0% and 25.0%,
respectively. Based on the review of MVPE in the quarter ended September 30,
2004, Atlantic Coast Federal was in compliance with established limits of
interest rate exposure. 
 ITEM 4  CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the participation of
the Companys management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in Rule 13a-15(e) or
15d-15(e) promulgated under the Securities and Exchange Act of 1934, as
amended) as of September 30, 2004. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer, have concluded that our
disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Securities Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in the SECs rules and regulations and are operating
in an effective manner. No change in our internal controls over financial reporting (as defined in
Rules 13a-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934)
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting. oPAGE o30o




---



##### Table of Contents



ATLANTIC COAST FEDERAL CORPORATION FORM 10-Q September 30, 2004 
 Part II  Other Information 
 Item 1. Legal proceedings There are no material pending legal proceedings to which the
Company or its subsidiaries is a party other than ordinary routine
litigation incidental to their respective businesses. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information None 
 Item 6. Exhibits a. Exhibits  31.1
    
    Certification of Chief Executive Officer Pursuant
to Rule 13a-14(a)/15d-14(a)31.2
    
    Certification of Chief Financial Officer Pursuant
to Rule 13a-14(a)/15d-14(a)32.1
    
    Certification of Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.




---



##### Table of Contents



ATLANTIC COAST FEDERAL CORPORATION FORM 10-Q September 30, 2004 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: November 15, 2004
    
    /s/  Robert J. Larison
Jr
Robert J. Larison Jr  President and ChiefExecutive OfficerDate: November 15, 2004
    
    /s/  Jon C. ParkerJon C. Parker  Chief Financial Officer
 oPAGE o32o