##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 000-50962 ATLANTIC COAST FEDERAL CORPORATION  FEDERAL
    
    59-3764686(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)505 Haines AvenueWaycross, Georgia
    
    31501(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code (800)342-2824 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
YES o NO þ Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the last practicable date. Class
    
    Outstanding at March 31, 2005Common Stock, $.01 Par Value
    
    14,547,500




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ATLANTIC COAST FEDERAL CORPORATION Form 10-Q Quarterly Report Table of Contents Page NumberPART I.Item 1. 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
    
    
    23Item 4. Controls and Procedures
    
    
    25PART II.Item 1. Legal Proceedings
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3. Defaults Upon Senior Securities
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26Item 5. Other Information
    
    
    26Item 6. Exhibits
    
    
    26Form 10-Q Signature Page
    
    
    27Ex-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 CFOEX-31.1: SECTION 302 CERTIFICATION OF PRESIDENT AND CEOEX-31.2: SECTION 302 CERTIFICATION OF CFOEX-32.1: SECTION 906 CERTIFICATION OF PRESIDENT AND CEOEX-32.2: SECTION 906 CERTIFICATION OF CFO
  2




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##### Table of Contents



Part I 
 ITEM 1- FINANCIAL STATEMENTS ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31, 2005(unaudited) and December 31, 2004 March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCash and due from financial institutions
    
    $
    8,521,462
    
    
    $
    7,422,031Short-term interest-bearing deposits
    
    
    26,669,459
    
    
    
    18,285,854Total cash and cash equivalents
    
    
    35,190,921
    
    
    
    25,707,885Other interest bearing deposits in other financial institutions
    
    
    
    
    
    
    900,000Securities purchased under agreements to resell
    
    
    
    
    
    
    11,800,000Securities available for sale
    
    
    50,214,169
    
    
    
    53,363,310Real estate mortgages held for sale
    
    
    769,091
    
    
    
    80,545Loans, net of allowance for loan losses of $4,348,806 at March 31,
2005 and $3,956,230 at December 31, 2004
    
    
    547,454,814
    
    
    
    517,711,074Federal Home Loan Bank stock
    
    
    6,174,400
    
    
    
    5,511,400Accrued interest receivable
    
    
    2,485,559
    
    
    
    2,277,147Land, premises and equipment, net
    
    
    11,444,451
    
    
    
    10,515,101Bank owned life insurance
    
    
    14,974,506
    
    
    
    4,923,555Other real estate owned
    
    
    673,943
    
    
    
    306,679Goodwill
    
    
    2,661,190
    
    
    
    2,661,190Other assets
    
    
    2,197,318
    
    
    
    1,919,999Total assets
    
    $
    674,240,362
    
    
    $
    637,677,885LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Non-interest-bearing demand
    
    $
    39,440,067
    
    
    $
    34,798,817Interest bearing demand
    
    
    46,118,015
    
    
    
    30,581,713Savings and money market
    
    
    122,408,550
    
    
    
    124,259,438Time
    
    
    253,475,181
    
    
    
    246,042,229Total deposits
    
    
    461,441,813
    
    
    
    435,682,197Federal Home Loan Bank advances
    
    
    109,657,142
    
    
    
    100,314,286Accrued expenses and other liabilities
    
    
    3,622,761
    
    
    
    2,981,139Total liabilities
    
    
    574,721,716
    
    
    
    538,977,622Commitments and contingencies
    
    
    
    
    
    
    Preferred stock: $.01 par value; 2,000,000 shares authorized,
none issued
    
    
    
    
    
    
    Common stock: $.01 par value; 18,000,000 shares authorized; 14,547,500
issued and outstanding at March 31, 2005 and December 31, 2004
    
    
    145,475
    
    
    
    145,475Additional paid in capital
    
    
    56,369,307
    
    
    
    56,332,850Unearned employee stock ownership plan (ESOP) shares of 407,330 shares
at March 31, 2005 and 418,968 shares at December 31, 2004
    
    
    (4,073,300
    )
    
    
    (4,189,680
    )Retained earnings
    
    
    46,903,964
    
    
    
    46,412,522Accumulated other comprehensive income (loss)
    
    
    173,200
    
    
    
    (904
    )Total stockholders equity
    
    
    99,518,646
    
    
    
    98,700,263Total liabilities and stockholders equity
    
    $
    674,240,362
    
    
    $
    637,677,885
 The accompanying notes are an integral part of these unaudited consolidated financial
statements 3




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ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) Three monthsEnded March 31,2005
    
    
    2004Interest and dividend incomeLoans, including fees
    
    $
    7,842,180
    
    
    $
    7,353,061Securities and interest-bearing deposits
in other financial institutions
    
    
    528,141
    
    
    
    186,907Securities purchased under agreements to resell
    
    
    72,411
    
    
    
    Total interest and dividend income
    
    
    8,442,732
    
    
    
    7,539,968Interest expenseDeposits
    
    
    2,425,251
    
    
    
    1,986,021Federal Home Loan Bank advances
    
    
    1,052,350
    
    
    
    825,183Total interest expense
    
    
    3,477,601
    
    
    
    2,811,204Net interest income
    
    
    4,965,131
    
    
    
    4,728,764Provision for loan losses
    
    
    523,240
    
    
    
    1,544,050Net interest income after provision for loan losses
    
    
    4,441,891
    
    
    
    3,184,714Noninterest incomeService charges and fees
    
    
    941,867
    
    
    
    858,399Gain on sale of real estate mortgages held for sale
    
    
    11,399
    
    
    
    166,437Gain (loss) on sale of securities available for sale
    
    
    
    
    
    
    8,444Gain (loss) on sale of foreclosed assets
    
    
    852
    
    
    
    36,164Commission income
    
    
    99,244
    
    
    
    86,288Interchange fees
    
    
    180,442
    
    
    
    154,418Other
    
    
    52,832
    
    
    
    44,4271,286,636
    
    
    
    1,354,577Noninterest expenseCompensation and benefits
    
    
    2,229,380
    
    
    
    1,985,837Occupancy and equipment
    
    
    375,696
    
    
    
    345,792Data processing
    
    
    249,073
    
    
    
    289,345Advertising
    
    
    106,709
    
    
    
    86,590Outside professional services
    
    
    605,218
    
    
    
    296,834Interchange charges
    
    
    147,049
    
    
    
    256,104Collection expense and repossessed asset losses
    
    
    79,344
    
    
    
    49,713Telephone
    
    
    116,365
    
    
    
    134,074Other
    
    
    598,118
    
    
    
    590,8764,506,952
    
    
    
    4,035,165Income before income tax expense
    
    
    1,221,575
    
    
    
    504,126Income tax expense
    
    
    439,183
    
    
    
    163,542Net income
    
    $
    782,392
    
    
    $
    340,584Earnings per share:Basic and diluted
    
    $
    0.06
    
    
    $
    0.03Dividends declared per common share:
    
    $
    0.05
    
    
    $
    
 The accompanying notes are an integral part of these unaudited consolidated financial
statements 4




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ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AccumulatedAdditional
    
    
    Unearned
    
    
    
    
    
    
    OtherCommon
    
    
    Paid In
    
    
    ESOP
    
    
    Retained
    
    
    Comprehensive
    
    
    TotalFor
the three months ended March 31, 2005
    
    Stock
    
    
    Capital
    
    
    Shares
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance at January 1, 2005
    
    $
    145,475
    
    
    $
    56,332,850
    
    
    $
    (4,189,680)
    
    
    $
    46,412,522
    
    
    $
    (904)
    
    
    $
    98,700,263ESOP shares earned, 11,368 shares
    
    
    
    
    
    
    36,457
    
    
    
    116,380
    
    
    
    
    
    
    
    
    
    
    
    152,837Dividend declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (290,950
    )
    
    
    
    
    
    
    (290,950
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    782,392
    
    
    
    
    
    
    
    782,392Other comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    174,104
    
    
    
    174,104Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    956,496Balance at March 31, 2005 (unaudited)
    
    $
    145,475
    
    
    $
    56,369,307
    
    
    $
    (4,073,300
    )
    
    $
    46,903,964
    
    
    $
    173,200
    
    
    $
    99,518,646For the
three months ended March 31, 2004Balance at January 1, 2004
    
    $
    10
    
    
    $
    
    
    
    $
    
    
    
    $
    43,220,688
    
    
    $
    (2,323
    )
    
    $
    43,218,375Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    340,584
    
    
    
    
    
    
    
    340,584Other comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (276,962
    )
    
    
    (276,962
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,622Balance at March 31, 2004 (unaudited)
    
    $
    10
    
    
    $
    
    
    
    $
    
    
    
    $
    43,561,272
    
    
    $
    (279,285
    )
    
    $
    43,281,997
 The accompanying notes are an integral part of these unaudited consolidated financial
statements 5




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ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS Three
MonthsEnded March 31,2005
    
    
    2004(Unaudited)Cash flows from operating activitiesNet income
    
    $
    782,392
    
    
    $
    340,584Adjustments to reconcile net income
to net cash from operating activitiesProvision for loan losses
    
    
    523,240
    
    
    
    1,544,050Gain on sale of real estate mortgages held for sale
    
    
    (11,399
    )
    
    
    (166,437
    )Gain on the sale of other real estate owned
    
    
    (852
    )
    
    
    (36,164
    )Loans originated for sale
    
    
    (1,936,921
    )
    
    
    (10,187,502
    )Proceeds from loan sales
    
    
    1,259,774
    
    
    
    10,674,685Gain (loss) on the sale of securities
available for sale
    
    
    
    
    
    
    (8,444
    )ESOP compensation expense
    
    
    152,837
    
    
    
    Net depreciation and amortization
    
    
    434,232
    
    
    
    256,446Net change in accrued interest receivable
    
    
    (208,412
    )
    
    
    26,390Increase in bank owned life insurance
    
    
    (50,951
    )
    
    
    (42,546
    )Net change in other assets
    
    
    75,404
    
    
    
    (479,550
    )Net change in accrued expenses
and other liabilities
    
    
    350,672
    
    
    
    2,451,792Net cash from operating activities
    
    
    1,370,016
    
    
    
    4,373,304Cash flows from investing activitiesNet change in securities purchased under
agreements to resell
    
    
    11,800,000
    
    
    
    Proceeds from maturities and payments
of securities available for sale
    
    
    10,948,755
    
    
    
    4,075,000Purchase of securities available for sale
    
    
    (8,000,000
    )
    
    
    (15,866,289
    )Loans purchased
    
    
    (17,499,749
    )
    
    
    Net change in loans
    
    
    (13,465,317
    )
    
    
    (22,509,855
    )Expenditures on premises and equipment
    
    
    (1,167,688
    )
    
    
    (349,410
    )Proceeds from the sale of other real estate owned
    
    
    157,546
    
    
    
    928,188Purchase of FHLB stock
    
    
    (663,000
    )
    
    
    (967,100
    )Purchase of bank owned life insurance
    
    
    (10,000,000
    )
    
    
    Net change in other investments
    
    
    900,000
    
    
    
    500,000Net cash
used in investing activities
    
    
    (26,989,453
    )
    
    
    (34,189,466
    )
 The accompanying notes are an integral part of these unaudited consolidated financial
statements 6




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ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS Three
Months Ended March 31,2005
    
    
    2004(Unaudited)Cash flows from financing activitiesNet increase in deposits
    
    $
    25,759,617
    
    
    $
    99,815,354FHLB advances
    
    
    10,000,000
    
    
    
    20,000,000Repayment of FHLB advances
    
    
    (657,144
    )
    
    
    Net cash from financing activities
    
    
    35,102,473
    
    
    
    119,815,354Net change in cash and cash equivalents
    
    
    9,483,036
    
    
    
    89,999,192Cash and cash equivalents at beginning of period
    
    
    25,707,885
    
    
    
    8,995,824Cash and cash equivalents at end of period
    
    $
    35,190,921
    
    
    $
    98,995,016Supplemental information:Interest paid
    
    $
    3,407,687
    
    
    $
    2,673,867Income taxes paid
    
    
    
    
    
    
    575,747Supplemental non-cash disclosures:Loans transferred to other real estate
    
    $
    523,959
    
    
    $
    48,126Dividends declared
    
    
    290,950
    
    
    
    
 The accompanying notes are an integral part of these unaudited consolidated financial
statements 7




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ATLANTIC COAST FEDERAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(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 First Community Financial Services Inc. (FCFS), an inactive wholly owned subsidiary
of the Bank. 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 period ending March 31, 2005 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2005. The 2004 Atlantic Coast
Federal Corporation consolidated financial statements, as presented in the Companys Form 10-K,
should be read in conjunction with these statements. Some items in the prior year
Form 10-Q were reclassified to conform to the current
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 Statement of Financial Accounting Standard (SFAS) No. 123, Revised, requires all public companies
to record compensation cost for stock options provided to employees in return for employee service.
The cost is measured at the fair value of the options when granted, and this cost is expensed over
the employee service period, which is normally the vesting period of the options. This SFAS was to
apply to awards granted or modified after the first quarter or year beginning after June 15, 2005. However, the Securities and Exchange Commission (SEC) has
announced that they will allow public companies to delay adoption, such that the Companys 8




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ATLANTIC COAST FEDERAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited) implementation will not be until the first interim period of 2006. Compensation cost will also be
recorded for prior option grants that vest after the date of adoption. The scope of the standard
would not include the Companys ESOP. Presently, the Company does not have stock-based
compensation programs. However, such programs may be adopted in the future. 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, but does not expect a
material impact on the Companys financial condition or results of operations upon adoption. NOTE 4  FEDERAL HOME LOAN BANK ADVANCES At March 31, 2005 the sum of individual advances from the Federal Home Loan Bank of Atlanta totaled
$109,657,142 and had fixed and variable interest rates ranging from 2.57% to 6.93% with a weighted
average interest rate of 4.01%. As of March 31, 2005 the advances mature in each of the calendar years as follows: 2005
    
    $
    10,657,1422006
    
    
    5,000,0002007
    
    
    2,000,0002008
    
    
    8,000,0002009
    
    
    5,000,000Thereafter
    
    
    79,000,000$
    109,657,142
 The Company has a borrowing capacity of 30% of total assets with the Federal Home Loan Bank of
Atlanta. The Company had mortgage loans totaling approximately $377,180,000 at March 31, 2005
pledged as collateral for the advances. At March 31, 2005, Atlantic Coast Federal Corporation
owned $6,174,400 of FHLB stock, which also secures debts to the FHLB. NOTE 5-DIVIDENDS During the first quarter of
2005, the Companys board of directors declared our initial cash
dividend at a rate of $0.05 per share. The dividend is payable
on May 2, 2005 for stockholders of record on
April 15, 2005. Atlantic Coast Federal, MHC (MHC) which holds
8,725,500 shares, or 60% of the Companys total outstanding
stock has informed us that the Office of Thrift Supervision (OTS) has
approved MHCs request to waive receipt of the dividend on their
owned shares. Therefore, for the three months ending March 31,
2005, stockholders equity was only charged with a reduction of
$290,950 for the declared dividends related to the minority
stockholders. The amount of the cash dividend waived by MHC was
$436,425. 9




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ATLANTIC COAST FEDERAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited) NOTE 6-EARNINGS PER COMMON SHARE Earnings per common share is computed by dividing net income by the weighted average number of
common share outstanding. A reconciliation of the numerator and denominator of the earnings
per common share computation for the three months ended March 31, 2005 and 2004, is as follows: 2005
    
    
    2004BasicNet income
    
    $
    782,392
    
    
    $
    340,584Weighted average common shares
outstanding
    
    
    14,547,500
    
    
    
    8,728,500Less: Average unallocated ESOP shares
    
    
    418,968
    
    
    
    Average shares
    
    
    14,128,532
    
    
    
    8,728,500Basic earnings per common share
    
    $
    0.06
    
    
    $
    0. 03
 There were no potential dilutive common shares for the periods presented. NOTE 7-COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) components and related taxes for the three months ending March
31, 2005 and 2004 were as follows: 2005
    
    
    2004Unrealized holding gains and (losses)
on securities available for sale
    
    $
    (178,619
    )
    
    $
    77,860Less reclassification adjustments for (gains)
losses recognized in income
    
    
    
    
    
    
    8,444Net unrealized gains and (losses)
    
    
    (178,619
    )
    
    
    69,416Tax effect
    
    
    67,875
    
    
    
    (26,378
    )Net-of-tax amount
    
    
    (110,744
    )
    
    
    43,038Change in fair value of derivatives used
for cash flow hedges
    
    
    459,433
    
    
    
    (524,000
    )Tax effect
    
    
    (174,585
    )
    
    
    204,000Net-of-tax amount
    
    
    284,848
    
    
    
    (320,000
    )Other comprehensive income (loss)
    
    $
    174,104
    
    
    $
    (276,962
    )
 10




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Part 1 ATLANTIC COAST FEDERAL CORPORATION 
   Forward-Looking Statements ThisForm 10-Qcontains forward-looking statements that are statements that are not historical
or current facts. When used in this filing and in future filings by Atlantic Coast Federal
Corporation with the Securities and Exchange Commission, in Atlantic Coast Federal Corporations
press releases or other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases, anticipate, would be, will
allow, intends to, will likely result, are expected to, will continue, is anticipated,
estimated, projected, or similar expressions are intended to identify, forward looking
statements. Such statements are subject to risks and uncertainties, including but not limited to
changes in economic conditions in Atlantic Coast Federal Corporations market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for loans in Atlantic Coast
Federal Corporations market area, changes in the position of banking regulators on the adequacy of
our allowance for loan losses, and competition, all or some of which could cause actual results to
differ materially from historical earnings and those presently anticipated or projected. Atlantic Coast Federal Corporation wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and advise readers that
various factors, including regional and national economic conditions, substantial changes in levels
of market interest rates, credit and other risks of lending and investing activities, and
competitive and regulatory factors, could affect Atlantic Coast Federal Corporations financial
performance and could cause Atlantic Coast Federal Corporations actual results for future periods
to differ materially from those anticipated or projected. Atlantic Coast Federal Corporation does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or unanticipated events
or circumstances after the date of such statements. Critical Accounting Policies Certain 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 that 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 11




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##### Table of Contents



Part 1 Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K filed
with the Securities and Exchange Commission. The allowance for loan losses is a valuation allowance for probable incurred credit losses,
increased by the provision for loan losses and decreased by charge-offs less recoveries.
Management estimates the allowance balance required by considering the past loan loss experience,
the nature and volume of the portfolio, information about specific borrower situations and
estimated value of any underlying collateral, whether the loan was originated through the 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 evaluated and determined to be impaired. Loans individually evaluated
are generally large balance and/or complex loans, such as multi-family and commercial real estate
loans. This evaluation is often based on significant estimates and assumptions due to the level of
subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility
of such matters to change. The general component relates to large groups of small balance
homogeneous loans that are evaluated in the aggregate based on historical loss experience adjusted
for current factors. 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 balance loans. The provision for loan loss expense was $523,000
for the three months ending March 31, 2005, and $1.5 million for the same quarter in 2004. This
decrease was primarily due to a $4 million charge-off occurring in the first quarter of 2004 on one
impaired loan relationship. 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 $(111,000) and $43,000 for the three months ended March 31, 2005 and 2004,
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. 12




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##### Table of Contents



Part 1 Atlantic Coast Federal Corporation assesses the carrying value of intangible assets and
goodwill at least 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 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 March 31, 2005; 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. Comparison of Financial Condition at March 31, 2005 and December 31, 2004 General.Our total assets increased by $36.6 million, or 5.7%, to $674.2 million at March 31,
2005, from $637.7 million at December 31, 2004. The increase in total assets was driven primarily
by $29.7 million of net loan growth and an increase of $10.1 million in our bank owned life
insurance investment. This growth was primarily funded with deposit growth of $25.8 million, or
5.9%, to $461.4 million at March 31, 2005, from $435.7 million at December 31, 2004. Borrowings
from the Federal Home Loan Bank (FHLB) increased $9.3 million to supplement cash requirements to
fund loan growth. Cash and cash equivalents. Cash and cash equivalents increased $9.5 million to $35.2 million
at March 31, 2005, from $25.7 million at December 31, 2004. This increase represents a shift of
the majority of funds received from the sale, at par, of the $11.8 million securities purchased
under agreement to resell that were held at December 31, 2004. We expect the balances we maintain
in cash and cash equivalents will fluctuate as our other interest earning assets mature, or we
identify opportunities for longer-term investments that fit the Companys growth strategy. Securities available for sale.Securities available for sale (AFS) decreased $3.2 million to
$50.2 million as of March 31, 2005 from $53.4 million at December 31, 2004 as maturities of $10.0
million in commercial paper exceeded purchases of $8.0 million of FHLB debt securities. 13




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##### Table of Contents



Part 1 Securities available for sale are composed primarily of debt securities of government-sponsored
organizations that issue mortgages or mortgage-backed securities. The percentage of such securities
compared to the total portfolio was approximately 77% at March 31, 2005, and 60% at December 31,
2004. In the near term we expect the composition of our securities available for sale to continue
to be weighted in this manner. Loans.Our net loan portfolio increased $29.7 million or 5.8%, to $547.5 million at March 31,
2005, from $517.7 million at December 31, 2004. New loan originations totaled $51.0 million for
the three months ended March 31, 2005, of which $14.4 million, or 28.2%, was for one-to-four family
residential mortgages or residential construction loans, $17.3 million, or 34.0% was for home
equity and second mortgages, and $13.2 million, or 25.8% was for installment automobile and other
consumer loans. Also, for the first time in several quarters, we had meaningful growth in
commercial loans, as originations were $6.1 million or 12.0%. The pace of loan originations in the
first quarter of 2005 continued the moderate rate we began to experience in the fourth quarter of
2004 as a result of rising interest rates on our on primary variable rate products. Therefore, we
also purchased $17.0 million of loans, principally adjustable rate one-to- four family residential
mortgages, to supplement the growth from loans originated in our retail network. Going forward in
2005, we expect internally generated loan originations to be moderate. Depending on liquidity,
earning needs and the availability of high quality loan products, we may continue to purchase loans
originated outside of our retail network. Allowance for Loan Losses. Our allowance for loan losses at March 31, 2005 was $4.3 million,
or .79% of loans, compared to $4.0 million, or .76% of loans, at December 31, 2004. Net charge-offs
for the three months ended March 31, 2005 and 2004, were $130,000 and $4.2 million, respectively.
Total net charge-offs in the first quarter 2004, was almost entirely due to the charge-off of $4.0
million of a single problem loan relationship. The loans involved land acquisition and the
construction of a water treatment plant for commercial and industrial customers. Due to the loss
of municipal operating licenses, and the resultant impact to the business and collateral value, the
loan was charged down to its estimated fair value. At March 31, 2005 the remaining balance of the
loan relationship was $680,000, for which $302,000 of our allowance for loan losses was allocated.
The remaining balance represents managements estimated 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 ultimate uncertainty of the ultimate value that
will be obtained for 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 $6.1 million and $6.7 million at March 31, 2005,
and December 31, 2004, respectively and total impaired loans were approximately $8.0 million and
$8.5 million at March 31, 2005, and December 31, 2004, respectively. The decrease in impaired
loans was primarily the result of the improved financial condition and performance of a commercial
real estate loan with a balance of $916,000. However, the reserves allocated for impaired loans
increased $300,000 to $1.8 million at March 31, 2005, from $1.5 million at December 31, 2004,
primarily due to a change in managements estimate of collateral value for a commercial real estate
loan secured by a long-term care facility. As of March 31, 2005, and December 31, 2004, all
non-performing loans were classified as non- 14




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Part 1 accrual, and we did not have any restructured loans or loans 90 days past due and accruing interest
as of March 31, 2005, and December 31, 2004. All non-performing loans, excluding small balance
homogeneous loans, are also reported as impaired loans at March 31, 2005, and December 31, 2004. During the first quarter of 2005, we signed a settlement agreement with the bankruptcy trustee
for the seller of a pool of leases we purchased in 2001. This agreement will allow us to collect
approximately $170,000 in lease payments that are now being held by the bankruptcy trustee. The
payments will be applied to the carrying balance of the leases that, net of the reserve we have
allocated for this pool of leases, which was $850,000 at March 31, 2005. Collection of the total
amount owed on the leases from the surety who had provided payment performance bonds for the
leases, continues to be vigorously pursued under the terms of the bonds. Before applying any
payments due from the bankruptcy trustee, the balance due is approximately $1.9 million
(representing the balance outstanding prior to charge-offs taken). Total legal fees incurred on
this matter for the three months ended March 31, 2005 and 2004 was $103,500 and $50,285,
respectively. Collection of any amount, including the $850,000 net amount included in our
consolidated financial statements at March 31, 2005, or the gross amount of $1.9 million, cannot
be assured. We believe 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. Bank Owned Life Insurance. Bank owned life insurance was $15.0 million at March 31, 2005, an
increase of $10.1 million from the balance invested at December 31, 2004. The increase was
primarily due to the purchase of $10.0 million of additional life insurance policies on certain key
executives. Deposits. Total deposits increased by $25.8 million, or 5.9%, to $461.4 million at March 31,
2005, from $435.7 million at December 31, 2004. Interest bearing demand accounts increased $15.5
million, or nearly 51.0%, to $46.1 million at March 31, 2005, from $30.6 million at December 31,
2004. The growth in interest bearing demand accounts continues the rapid growth experienced in the
fourth quarter of 2004 following the introduction of a large balance, high interest rate, demand
deposit product aimed at large-account customers who have a need to access their deposits more
frequently than permitted by time deposits or money market accounts. A portion of the growth in
interest bearing demand accounts was from existing money market accounts, which led to a decrease
in savings and money market deposits of $1.9 million to $122.4 million at March 31, 2005, from
$124.3 million at December 31, 2004. Time deposits increased $7.5 million, to $253.5 million at
March 31, 2005, from $246.0 million at December 31, 2004. The majority of this increase was driven
by the purchase of $6.0 million of brokered deposits that were used to meet loan and investment
demands, or to replace other maturing time deposits. Total brokered deposits at March 31, 2005 and
December 31, 2004 were $29.8 million and $23.8 million, respectively. The weighted average maturity
of brokered deposits at March 31, 2005 was approximately 24 months and the weighted average
interest rate was 3.15%. We expect future deposit growth as we expand our products and services in
new and existing markets particularly in core deposits, and we also anticipate we will continue to
purchase brokered deposits to meet liquidity demands. 15




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##### Table of Contents



Part 1 Borrowings. FHLB advances increased $9.4 million, or 9.3%, to $109.7 million at March 31,
2005, from $100.3 million at December 31, 2004. The additional advances, which were acquired at
fixed rates, will be used to replace $10.7 million of advances that mature later in 2005. The
weighted average maturity of the new advances is approximately 46 months with a weighted average
rate of 4.5%. Management expects that FHLB advances will continue to provide Atlantic Coast
Federal Corporation with a significant additional funding source to meet the needs of its lending
activities. Stockholders Equity. Stockholders equity increased $818,000 to $99.5 million at March 31,
2005, from $98.7 million at December 31, 2004. Additions to stockholders equity resulted from the
recognition of net income of $782,000 for the three months ending March 31, 2005, the allocation of
shares to employees under the Companys Employee Stock Ownership Plan (ESOP) of $153,000 and other
net comprehensive income of $174,000. The increase in net other comprehensive results from an
increase in unrealized gains on interest rate swaps of $285,000, offset by additional unrealized
losses on AFS securities of $111,000, net of taxes. The interest rate swaps have been designated as
cash flow hedges of certain FHLB advances, and were determined to be fully effective during the
first quarter of 2005. The Company expects the hedges to remain fully effective during the
remaining terms of the swaps. The unrealized losses on AFS securities are due to changes in
interest rates, and we consider their decline in value below their cost to be temporary. Going
forward, we expect changes in interest rates to continue to cause swings in unrealized gains and
losses from our interest rate swaps and AFS securities. During the first quarter of 2005, the Companys board of directors declared our initial cash
dividend at a rate of $0.05 per share. The dividend is payable on May 2, 2005 for stockholders of
record on April 15, 2005. Atlantic Coast Federal, MHC (MHC) which holds 8,725,500 shares, or 60% of
the Companys total outstanding stock has informed us that the Office of Thrift Supervision (OTS)
has approved MHCs request to waive receipt of the dividend on their owned shares. Therefore, for
the three months ending March 31, 2005, stockholders equity was only charged with a reduction of
$290,950 for the declared dividends related to the minority stockholders. The amount of the cash dividend
waived by MHC was $436,425. The equity to assets ratio decreased to 14.76% at March 31, 2005, from 15.48% at December 31,
2004. The decrease was primarily due to the rate of asset growth in the first quarter. Despite this
decrease, we continued to be well in excess of all minimum regulatory capital requirements, and are
considered well capitalized under those formulas. Total risk-based capital to risk-weighted
assets was 15.2%, Tier 1 capital to risk-weighted assets was 14.6%, and Tier 1 capital to total
adjusted total assets was 10.3% at March 31, 2005. These ratios as of December 31, 2004 were 16.4%,
15.8% and 10.9%, respectively. Comparison of Results of Operation for the Three Months Ended March 31, 2005 and 2004 General.Our net income for the three months ended March 31, 2005 was $782,000, which was
$442,000 higher than for the same period in 2004. Net interest income increased 5.0%, or 16




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Part 1 $236,000 in the first quarter of 2005 compared to same quarter in 2004, due to the growth of net
interest-earning assets. The provision for loan loss expense in the first quarter of 2005,
decreased significantly due to a large charge-off in the same quarter in 2004. These combined
improvements in income for the first quarter of 2005 as compared to the same quarter in 2004, more
than offset a small decline in non-interest income, and a 11.7%, or $472,000, increase in
non-interest expense due to increased compensation and benefit costs and outside professional fees. Interest Income. Interest income increased $903,000 or 12.0%, to $8.4 million for the three
months ended March 31, 2005, from $7.5 million for the same period in 2004. More than one-half of
this increase is due to the increase in average outstanding loans of $85.5 million for the first
quarter of 2005, compared to 2004. While total average outstanding loans increased, the yield on
the loans for the first quarter of 2005 decreased by 69 basis points, to 5.90%, from 6.59% for the
three months ended March 31, 2004. The decline in yield on loans is generally due to a change in
the mix of loans and a continuingly low interest rate environment for longer-term loans. Interest
income on securities and other interest bearing assets increased $414,000 for the three months
ending March 31, 2005 to $601,000, from $187,000 for the same period in 2004. The majority of this
increase is due to an average increase in outstanding balances invested in securities and other
interest earning assets of $45.6 million. The amounts invested in the first quarter of 2005, have
increased as the pace of loan growth has slowed (See Comparison of Financial Condition at March
31, 2005 and December 31, 2004-Loans) and there was additional liquidity from the stock offering
in the fourth quarter of 2004, and strong deposit growth in the first quarter of 2005. As a strategy to reduce loan charge-offs and create a more stable loan portfolio, management
has, over the last two years, redirected the Companys loan originations so that the portfolio mix
is away from the historically 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.
As evidence of this change in mix, first and second mortgages on one-to-four- family loans were an
average of 72.9% of total average loans for the three months ended March 31, 2005 compared to an
average of 66.4% for the same period in 2004. On the other hand, average outstanding automobile
loans constituted 6.30% of total average loans for the quarter ending March 31, 2005, compared to
8.23% for the three months ended March 31, 2004. Management expects that automobile and other
consumer lending will remain at current levels while we also purse a growth strategy in commercial
loans. Our efforts in commercial lending have not, thus far, resulted in meaningful growth
primarily because of the competition for this type of lending in our markets. However, we continue
to believe that commercial lending represents an important part of developing a balanced loan
portfolio, and intend to focus resources in this area of our business. 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
utilization of the proceeds from the stock offering completed in the fourth quarter of 2004, as
well as general growth from existing markets and possibly new markets. Our interest income could
be adversely impacted by continued low interest rates and the type of interest earning-assets
available for investment by the Company. 17




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##### Table of Contents



Part 1 Interest Expense.Interest expense increased $666,000, or 23.7%, to $3.5 million for the
quarter ending March 31, 2005, from $2.8 million for the same quarter in 2004 as average interest
bearing liabilities increased $70.8, million, or 16.1% for the three months ended March 31, 2005,
compared to the same three months in 2004. The total cost of funds increased 17 basis points to
2.72% for the first quarter of 2005, compared to the same period in 2004, due to increased rates
paid on deposits. The yield on deposits was 2.37% for the first quarter of 2005, compared to 2.20%
in 2004. This increase was primarily due to general market rate increases following Federal
Reserve rate hikes occurring over the final three quarters of 2004 and the first quarter of 2005.
We expect interest rates on deposits will continue to increase over the near term as market rates
for deposits increase. Interest expense on FHLB advances increased $227,000, to $1.1 million, for the three months
ended March 31, 2005, compared to the same period in 2004, as average outstanding borrowings
increased $26.2 million, or 34.6%, in the first quarter of 2005, compared to the first quarter of
2004. This additional expense in 2005 is due to increased borrowings and was partially offset as
the weighted average yield on FHLB advances declined 23 basis points in the first quarter of 2005,
compared to the same quarter in 2004. Net Interest Income.Net interest income increased $236,000 to $5.0 million for the three
months ended March 31, 2005, from $4.7 million for the same period in 2004. Our net interest spread
was 2.73% for the first quarter of 2005, compared to 3.62% for the same quarter in 2004, while our
net interest margin was 3.21% and 3.87%, for the same two quarters. The decline in the both the net
interest spread and net interest margin is due to the decline in yield on our loan portfolio that
reflects the change in the loan mix discussed above. Our rapid loan growth during 2004, primarily
in one-to-four-family residential mortgages, as well as the near-complete refinancing of our
existing residential mortgage portfolio, occurred during a period of unprecedented low interest
rates, and, therefore, the overall yield of our loan portfolio has declined. Management expects
net interest income to continue to grow as the Company utilizes funds from the stock offering and
deposit growth to expand its business. Net interest margins, however, will continue to decline in
the near term, but this compression could level off or possibly ease in 2006 as the Companys
portfolio of short-term hybrid ARM residential mortgages begin to reset Provision for Loan Losses.We establish provisions for loan losses, which are charged to
operations, at a level required to reflect probable incurred credit losses in the loan portfolio.
In evaluating the level of the allowance for loan losses, management considers historical loss
experience, the types of loans and the amount of loans in the loan portfolio, the source of
origination of those loans, adverse situations that may affect borrowers ability to repay,
estimated value of any underlying collateral, and prevailing economic conditions. Large groups of
smaller balance homogeneous loans, such as residential real estate, small commercial real estate,
home equity and consumer loans, are evaluated in the aggregate using historical loss factors
adjusted for current economic conditions, source of loan origination, and other relevant data.
Larger non-homogeneous loans, such as commercial loans for which management has concerns about the
borrowers ability to repay, are evaluated individually, and specific allowance allocations are
provided for such loans when necessary. 18




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##### Table of Contents



Part 1 Based on managements evaluation of these factors, provisions of $523,000 and $1.5 million
were made during the three months ended March 31, 2005 and 2004, respectively. A significant
portion of the provision expense for 2004 was related to one problem loan relationship of which
$4.0 million was charged-off during the quarter ending March 31, 2004 and required an additional
provision expense of $1.4 million for that quarter. 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 March 31, 2005, 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 $68,000, to $1.3 million for the three
months ended March 31, 2005, from $1.4 million for the same period in 2004. Gains from the sale of
loans decreased $155,000 during the first quarter of 2005, compared to the same quarter in 2004,
due to the sale of approximately $10.0 million of one-to-four family residential mortgages in 2004
as a part our overall asset/liability management strategy. Sales of mortgages in the first quarter
of 2005 were $1.3 million for a gain of $11,000. The decrease in gains from loan sales was
partially offset with an increase in service charges and fees of $84,000 to $942,000 for the three
months ended March 31, 2005, compared to $858,000 for the same period in 2004. The growth in
service charges and fees reflects a greater emphasis by our retail branch network to enforce the
application and collection of fees under our existing fee structure. We expect service charges and
fees will continue to grow as we expand our products and services in existing and new markets. Non-interest Expense.Our non-interest expense increased $472,000, to $4.5 million for the
quarter ended March 31, 2005, from $4.0 million for the same quarter in 2004. The increase in
non-interest expense is primarily due to increases of $244,000 for compensation and benefits and
$308,000 in outside professional services. In 2005, compensation and benefits includes $153,000
for recognition of shares committed to be allocated to employees under the Companys ESOP, which
was established concurrent with the stock offering on October 4, 2004. The remaining increase in
compensation and benefits is related to general cost of business increases. The increase in outside
professional fees during the first quarter of 2005, compared to the same quarter in 2004, is
primarily due to higher legal and accounting fees, mostly from benefit plan changes required by
recent legislation, costs associated with Sarbanes-Oxley initiatives, and various tax planning
initiatives These two increases were partially offset by a decrease in interchange charges of
$109,000 primarily due to final interchange costs paid in the first quarter of 2004 for the
Companys credit card business in late 2003. We expect non-interest expense will increase in the
future periods as a result of continued growth and expansion. 19




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##### Table of Contents



Part 1 Income Tax Expense.Income tax expense increased to $439,000, for the three months
ended March 31, 2005, from $164,000 for the same period in 2004. The increase is primarily due to
an increase in income before income taxes when comparing the two quarters. We anticipate that
income tax expense will continue to vary as income before income taxes varies. 20




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##### Table of Contents



Part 1 Average Balances, Net Interest Income, Yields Earned and Rates Paid The following table sets forth certain information for the three months ended March 31, 2005,
2004, and 2003 , respectively. The average yields and costs are derived by dividing annualized
income or expense by the average balance of assets or liabilities, respectively, for the periods
presented. For the three months ended March 31,2005
    
    
    2004
    
    
    2003Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield
    
    
    Average
    
    
    
    
    
    
    Yield
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    /Cost
    
    
    Balance
    
    
    Interest
    
    
    /Cost
    
    
    Balance
    
    
    Interest
    
    
    Yield /CostINTEREST-EARNING ASSETSLoans receivable(1)
    

    $
    531,441
    
    
    
    7,842
    
    
    
    5.90
    %
    
    $
    445,978
    
    
    
    7,353
    
    
    
    6.59
    %
    
    $
    400,466
    
    
    
    7,784
    
    
    
    7.77
    %Securities(2)
    
    
    52,479
    
    
    
    350
    
    
    
    2.67
    
    
    
    26,853
    
    
    
    130
    
    
    
    1.93
    
    
    
    29,360
    
    
    
    172
    
    
    
    2.34Other interest-earning assets(3)
    
    
    35,752
    
    
    
    250
    
    
    
    2.80
    
    
    
    15,737
    
    
    
    57
    
    
    
    1.46
    
    
    
    12,832
    
    
    
    66
    
    
    
    2.06Total interest-earning assets
    
    
    619,672
    
    
    
    8,442
    
    
    
    5.45
    
    
    
    488,568
    
    
    
    7,540
    
    
    
    6.17
    
    
    
    442,658
    
    
    
    8,022
    
    
    
    7.25Non-interest earning assets
    
    
    33,993
    
    
    
    
    
    
    
    
    
    
    
    32,096
    
    
    
    
    
    
    
    
    
    
    
    18,057Total assets
    
    $
    653,665
    
    
    
    
    
    
    
    
    
    
    $
    520,664
    
    
    
    
    
    
    
    
    
    
    $
    460,715INTEREST-BEARING LIABILITIESSavings deposits
    
    $
    66,760
    
    
    
    74
    
    
    
    0.45
    %
    
    $
    76,050
    
    
    
    150
    
    
    
    0.79
    %
    
    $
    58,191
    
    
    
    157
    
    
    
    1.08
    %Interest bearing demand accounts
    
    
    34,979
    
    
    
    104
    
    
    
    1.19
    
    
    
    19,167
    
    
    
    53
    
    
    
    1.10
    
    
    
    14,077
    
    
    
    50
    
    
    
    1.42Money market accounts
    
    
    57,241
    
    
    
    338
    
    
    
    2.36
    
    
    
    58,938
    
    
    
    198
    
    
    
    1.34
    
    
    
    59,925
    
    
    
    292
    
    
    
    1.95Time deposits
    
    
    251,059
    
    
    
    1,910
    
    
    
    3.04
    
    
    
    211,252
    
    
    
    1,585
    
    
    
    3.00
    
    
    
    217,326
    
    
    
    2,053
    
    
    
    3.78Federal Home Loan Bank advances
    
    
    101,874
    
    
    
    1,052
    
    
    
    4.13
    
    
    
    75,691
    
    
    
    825
    
    
    
    4.36
    
    
    
    43,699
    
    
    
    534
    
    
    
    4.89Total interest-bearing liabilities
    
    
    511,913
    
    
    
    3,478
    
    
    
    2.72
    
    
    
    441,098
    
    
    
    2,811
    
    
    
    2.55
    
    
    
    393,218
    
    
    
    3,086
    
    
    
    3.14Non-interest bearing liabilities
    
    
    42,123
    
    
    
    
    
    
    
    
    
    
    
    35,176
    
    
    
    
    
    
    
    
    
    
    
    28,004Total liabilities
    
    
    554,036
    
    
    
    
    
    
    
    
    
    
    
    476,274
    
    
    
    
    
    
    
    
    
    
    
    421,222Stockholders equity
    
    
    99,629
    
    
    
    
    
    
    
    
    
    
    
    44,390
    
    
    
    
    
    
    
    
    
    
    
    39,493Total liabilities and stockholders equity
    
    $
    653,665
    
    
    
    
    
    
    
    
    
    
    $
    520,664
    
    
    
    
    
    
    
    
    
    
    $
    460,715Net interest income
    
    
    
    
    
    $
    4,965
    
    
    
    
    
    
    
    
    
    
    $
    4,729
    
    
    
    
    
    
    
    
    
    
    $
    4,936Net interest spread
    
    
    
    
    
    
    
    
    
    
    2.73
    %
    
    
    
    
    

    
    
    
    
    
    3.62
    %
    
    
    
    
    
    
    
    
    
    
    4.11
    %Net earning assets
    
    $
    107,759
    
    
    
    
    
    
    
    
    
    
    $
    47,470
    
    
    
    
    
    
    
    
    
    
    $
    49,440Net interest margin(4)
    
    
    
    
    
    
    
    
    
    
    3.21
    %
    
    
    
    
    
    
    
    
    
    
    3.87
    %
    
    
    
    
    
    
    
    
    
    
    4.46
    %Average interest-earning assets to average
interest-bearing liabilities
    
    
    
    
    
    
    121.05
    %
    
    
    
    
    
    
    
    
    
    
    110.76
    %
    
    
    
    
    
    
    
    
    
    
    112.57
    %
   (1)
    
    Calculated net of deferred fees and loss reserves. 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. 21




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##### Table of Contents



Part 1 Rate/Volume Analysis The following table presents the dollar amount of changes in interest income and interest
expense for major components of interest-earning assets and interest-bearing liabilities. For each
category of interest-earning assets and interest-bearing liabilities, information is provided on
changes attributable to (1) changes in volume, which are changes in volume multiplied by the old
rate; and (2) changes in rate, which are changes in rate multiplied by the old volume; and (3)
changes not solely attributable to rate or volume have been allocated proportionately to the change
due to volume and the change due to rate. Three Months Ended March 31,2005 vs. 2004
    
    
    2004 vs. 2003Increase/(Decrease)
    
    
    Total
    
    
    Increase/(Decrease)
    
    
    TotalDue to
    
    
    Increase
    
    
    Due to
    
    
    IncreaseVolume
    
    
    Rate
    
    
    (Decrease)
    
    
    Volume
    
    
    Rate
    
    
    (Decrease)Interest-Earning AssetsLoans receivable
    
    $
    1,313
    
    
    $
    (824
    )
    
    $
    489
    
    
    $
    827
    
    
    $
    (1,258
    )
    
    $
    (431
    )Securities
    
    
    158
    
    
    
    63
    
    
    
    221
    
    
    
    (14
    )
    
    
    (28
    )
    
    
    (42
    )Other interest-earning assets
    
    
    112
    
    
    
    81
    
    
    
    193
    
    
    
    13
    
    
    
    (22
    )
    
    
    (9
    )Total interest-earning assets
    
    
    1,583
    
    
    
    (680
    )
    
    
    903
    
    
    
    826
    
    
    
    (1,308
    )
    
    
    (482
    )Interest-bearing liabilities:Savings deposits
    
    
    (17
    )
    
    
    (59
    )
    
    
    (76
    )
    
    
    41
    
    
    
    (48
    )
    
    
    (7
    )Interest bearing demand accounts
    
    
    47
    
    
    
    4
    
    
    
    51
    
    
    
    15
    
    
    
    (12
    )
    
    
    3Money market accounts
    
    
    (6
    )
    
    
    146
    
    
    
    140
    
    
    
    (4
    )
    
    
    (90
    )
    
    
    (94
    )Time deposits
    
    
    303
    
    
    
    22
    
    
    
    325
    
    
    
    (56
    )
    
    
    (412
    )
    
    
    (468
    )FHLB advances
    
    
    272
    
    
    
    (45
    )
    
    
    227
    
    
    
    354
    
    
    
    (63
    )
    
    
    291Total interest-bearing liabilities
    
    
    599
    
    
    
    68
    
    
    
    667
    
    
    
    350
    
    
    
    (625
    )
    
    
    (275
    )Net interest income
    
    $
    984
    
    
    $
    (748
    )
    
    $
    236
    
    
    $
    476
    
    
    $
    (683
    )
    
    $
    (207
    )
 22




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##### Table of Contents



Part 1 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to interest rate risk to the extent that its interest-bearing
liabilities, primarily deposits and FHLB advances, re-price more rapidly or at different rates than
its interest-earning assets. 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 OTS 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. Annually, in the first quarter, management
reviews the assumptions used in the MPVE methodology to ensure the financial nature of our asset
and liability products are appropriately considered, and makes changes accordingly. Management and
the Board of Directors review measurements of MVPE 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 our interest rate risk policy. The tables presented below, as of March 31,
2005 and December 31, 2004, respectively, are analyses of Atlantic Coast Federal Corporations
interest rate risk as measured by changes in MVPE for instantaneous and sustained parallel shifts
in the yield curve, in 100 basis point increments, up and down 300 basis points. 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 of 100, 200 and 300 basis points, 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. As illustrated by the tables below, we are in compliance with this aspect of our
asset/liability management policy. 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. As illustrated by the tables below, we are in compliance with this aspect
of our asset/liability management policy as well. As illustrated in the tables below, at December 31, 2004, Atlantic Coast Federal Corporations
MVPE methodology indicated that we would have benefited slightly from an increase in interest
rates. At March 31, 2005, after Managements annual review and change in assumptions, the MPVE
methodology indicated that we would be negatively impacted by an increase in interest rates. This
difference is principally due to changes in the rate-reset assumptions used for adjustable rate
mortgages. As illustrated in the tables below, Atlantic Coast Federal Corporations MVPE would be
negatively impacted by decreases in interest rates of 100, 200 and 300 basis points as the current
interest rate environment limits Atlantic Coast Federal Corporations ability to significantly
reduce interest rates on many of Atlantic Coast Federal Corporations deposit products and
borrowings from the FHLB. 23.




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##### Table of Contents



Part 1 March 31, 2005 Change inInterest Rates
    
    
    
    
    
    
    
    
    
    
    
    
    
    MVPE as % of PortfolioIn Basis
    
    
    
    
    Value of AssetsPoints
    
    Market Value of Portfolio Equity
    
    
    MVPE(Rate Shock)
    (1)

$  Amount
    
    

$  Change
    
    
    % Change
    
    
    Ratio
    
    
    Change
    (1)(Dollars in Thousands)+300
    
    $
    108,924
    
    
    $
    (22,406
    )
    
    
    (17.06
    )%
    
    
    17.52
    %
    
    (174)bp+200
    
    
    120,553
    
    
    
    (10,777
    )
    
    
    (8.21
    )
    
    
    18.68
    
    
    (58)bp+100
    
    
    129,537
    
    
    
    (1,793
    )
    
    
    (1.37
    )
    
    
    19.42
    
    
    +17bp0
    
    
    131,330
    
    
    
    
    
    
    
    
    
    
    
    19.26
    
    
    
    (100)
    
    
    127,077
    
    
    
    (4,253
    )
    
    
    (3.24
    )
    
    
    18.37
    
    
    (89)bp(200)
    
    
    112,403
    
    
    
    (18,927
    )
    
    
    (14.41
    )
    
    
    16.25
    
    
    (301)bp(300)
    
    
    99,138
    
    
    
    (32,193
    )
    
    
    (24.51
    )
    
    
    14.28
    
    
    (498)bp
 December 31, 2004 Change inInterest Rates
    
    
    
    
    
    
    
    
    
    
    
    
    
    MVPE as % of PortfolioIn Basis
    
    
    
    
    Value of AssetsPoints
    
    Market Value of Portfolio Equity
    
    
    MVPE(Rate Shock)
    (1)

$ Amount
    
    

$ Change
    
    
    % Change
    
    
    Ratio
    
    
    Change
    (1)(Dollars in Thousands)+300
    
    $
    125,480
    
    
    $
    2,250
    
    
    
    1.83
    %
    
    
    20.55
    %
    
    +142bp+200
    
    
    125,130
    
    
    
    1,900
    
    
    
    1.54
    
    
    
    20.13
    
    
    +100bp+100
    
    
    124,720
    
    
    
    1,490
    
    
    
    1.21
    
    
    
    19.70
    
    
    +57bp0
    
    
    123,230
    
    
    
    
    
    
    
    
    
    
    
    19.13
    
    
    
    (100)
    
    
    118,400
    
    
    
    (4,830
    )
    
    
    (3.92
    )
    
    
    18.14
    
    
    (99)bp(200)
    
    
    108,030
    
    
    
    (15,200
    )
    
    
    (12.33
    )
    
    
    16.46
    
    
    (267)bp(300)
    
    
    95,870
    
    
    
    (27,360
    )
    
    
    (22.20
    )
    
    
    14.54
    
    
    (459)bp
   (1)
    
    Expressed in basis points(bp). 24.




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##### Table of Contents



In addition to monitoring selected measures of MVPE, management also monitors effects on
net interest income resulting from increases or decreases in rates. This process is used in
conjunction with MVPE measures to identify excessive interest rate risk. In managing its
asset/liability mix, the Company, depending on the relationship between long and short-term
interest rates, market conditions and consumer preference, may place somewhat greater emphasis on
maximizing its net interest margin than on strictly matching the interest rate sensitivity of its
assets and liabilities. Management believes that the increased net income which may result from an
acceptable mismatch in the actual maturity or re-pricing of its asset and liability portfolios can,
during periods of declining or stable interest rates, provide sufficient returns to justify the
increased exposure to sudden and unexpected increases in interest rates which may result from such
a mismatch. Management believes that Atlantic Coast Federal Corporations level of interest rate
risk is acceptable under this approach. In evaluating Atlantic Coast Federal Corporations exposure to interest rate movements,
certain shortcomings inherent in the method of analysis presented in the foregoing tables must be
considered. For example, although certain assets and liabilities may have similar maturities or
re-pricing periods, they may react in different degrees to changes in market interest rates. Also,
the interest rates on certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind changes in interest
rates. Additionally, certain assets, such as adjustable-rate mortgages (ARMs), have features that
restrict changes in interest rates on a short-term basis and over the life of the asset. Further,
in the event of a significant change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed above. Finally, the ability of many
borrowers to service their debt may decrease in the event of an interest rate increase. Atlantic
Coast Federal Corporation considers all of these factors in monitoring its exposure to interest
rate risk. The Board of Directors and management of Atlantic Coast Federal Corporation believe that
certain factors afford Atlantic Coast Federal Corporation the ability to operate successfully
despite its exposure to interest rate risk. Atlantic Coast Federal manages its interest rate risk
by originating and retaining adjustable-rate loans in its portfolio and by selling most of our
currently originated fixed-rate, one-to-four family real estate loans. Also, to a limited degree,
we have utilized interest rate swap agreements as a part of our asset/liability management strategy
to reduce interest rate risk for $20,000,000 of our FHLB advances. We have determined that the
fair value of these interest rate swaps was approximately $640,025 as of March 31, 2005. Finally,
Atlantic Coast Federal Corporations investment strategy is to maintain a diversified portfolio of
high quality investments that balances the goals of minimizing interest rate and credit risks while
striving to maximize investment return and provide the liquidity necessary to meet funding needs. 
 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
March 31, 2005. 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 25.




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##### Table of Contents



ATLANTIC COAST FEDERAL CORPORATION FORM 10-Q March 31, 2005 
 Part II - Other Information 
 Item 1. Legal
proceedings The bankruptcy litigation involving the seller of the pool of
leases the Company purchased in 2001, was discharged in March of
2005. The Trustee is currently holding certain funds, which
constitute collections to which Atlantic Coast Federal, and other
investors which purchased leases, have a claim. At this time,
those funds are scheduled to be released to the claimants upon
closure of the contention period in which other creditors may
contest the settlement. Atlantic Coast Federal expects to receive
approximately $170,000 from the bankruptcy trustee during the
second quarter of 2005. 
 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. 26.




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##### Table of Contents



ATLANTIC COAST FEDERAL CORPORATION 
 FORM 10-Q March 31, 2005 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: May 16, 2005
    
    /s/ Robert J. Larison, Jr.Robert J. Larison, Jr.  President and Chief
Executive OfficerDate: May 16, 2005
    
    /s/ Jon C. Parker, Sr.Jon C. Parker, Sr.  Vice President andChief Financial Officer
 27.