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 September 30, 2005

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-50962

ATLANTIC COAST FEDERAL CORPORATION

(Exact name of registrant as specified in its charter)

FEDERAL (State or other jurisdiction of incorporation or organization)		59-3764686 (I.R.S. Employer Identification Number)

505 Haines Avenue Waycross, Georgia (Address of principal executive offices)		31501 (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES 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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No o

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 October 31, 2005 14,520,838

 

 

ATLANTIC COAST FEDERAL CORPORATION

Form 10-Q Quarterly Report

Table of Contents

		Page Number
PART I.
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures about Market Risk			35
Item 4. Controls and Procedures			36
PART II.
Item 1. Legal Proceedings			37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 3. Defaults Upon Senior Securities			37
Item 4. Submission of Matters to a Vote of Security Holders			37
Item 5. Other Information			38
Item 6. Exhibits			38
Form 10-Q Signature Page			39
Ex-31.1 Section 302 Certification
Ex-31.2 Section 302 Certification
Ex-32.1 Section 906 Certification
Ex-32.2 Section 906 Certification

Ex-31.1 Section 302 Certification of CEO
Ex-31.2 Section 302 Certification of CFO
Ex-32.1 Section 906 Certification of CEO
Ex-32.2 Section 906 Certification of CFO

Part I

ITEM 1- FINANCIAL STATEMENTS

ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2005(unaudited) and December 31, 2004

		September 30,				December 31,
		2005				2004
ASSETS
Cash and due from financial institutions		$	14,115,266			$	7,422,031
Short-term interest-bearing deposits			38,014,198				18,285,854
Total cash and cash equivalents			52,129,464				25,707,885
Other interest bearing deposits in other financial institutions			1,800,000				900,000
Securities purchased under agreements to resell			—				11,800,000
Securities available for sale			71,568,718				53,363,310
Real estate mortgages held for sale			106,400				80,545
Loans, net of allowance for loan losses of $4,251,663 at September 30, 2005 and $3,956,230 at December 31, 2004			557,164,662				517,711,074
Federal Home Loan Bank stock			7,074,400				5,511,400
Accrued interest receivable			2,656,210				2,277,147
Land, premises and equipment, net			13,892,396				10,515,101
Bank owned life insurance			20,315,096				4,923,555
Other real estate owned			310,000				306,679
Goodwill			2,661,190				2,661,190
Other assets			3,492,577				1,919,999
Total assets		$	733,171,113			$	637,677,885
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest-bearing demand		$	41,292,776			$	34,798,817
Interest bearing demand			79,427,278				30,581,713
Savings and money market			108,221,460				124,259,438
Time			273,205,605				246,042,229
Total deposits			502,147,119				435,682,197
Federal Home Loan Bank advances			129,000,000				100,314,286
Accrued expenses and other liabilities			4,531,913				2,981,139
Total liabilities			635,679,032				538,977,622
Commitments and contingencies			—				—
Preferred stock: $.01 par value; 2,000,000 shares authorized, none issued			—				—
Common stock: $.01 par value; 18,000,000 shares authorized; issued and outstanding of 14,805,969 at September 30, 2005 and 14,547,500 at December 31, 2004			148,060				145,475
Additional paid in capital			59,636,723				56,332,850
Unearned employee stock ownership plan (ESOP) shares of 384,054 at September 30, 2005 and 418,968 shares at December 31, 2004			(3,840,540	)			(4,189,680	)
Unearned management restricted stock plan shares of 258,469 at September 30, 2005 and 0 shares at December 31, 2004			(3,035,550	)			—
Retained earnings			48,518,012				46,412,522
Accumulated other comprehensive income (loss)			113,401				(904	)
Treasury stock, at cost, 285,131 shares at September 31, 2005 and 0 shares at December 31, 2004			(4,048,025	)			—
Total stockholders’ equity			97,492,081				98,700,263
Total liabilities and stockholders’ equity		$	733,171,113			$	637,677,885

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

ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
INTEREST AND DIVIDEND INCOME
Loans		$	8,330,514			$	7,762,489			$	24,532,289			$	22,588,663
Securities and interest-bearing deposits in other financial institutions			1,076,299				333,291				2,464,245				716,937
Securities purchased under agreements to resell			—				—				72,412				—
Total interest and dividend income			9,406,813				8,095,780				27,068,946				23,305,600
INTEREST EXPENSE
Deposits			3,227,839				2,073,437				8,547,046				5,981,860
Federal Home Loan Bank advances			1,355,530				1,011,756				3,636,035				2,719,374
Total interest expense			4,583,369				3,085,193				12,183,081				8,701,234
NET INTEREST INCOME			4,823,444				5,010,587				14,885,865				14,604,366
Provision for loan losses			442,095				674,415				1,542,384				2,327,245
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			4,381,349				4,336,172				13,343,481				12,277,121
NONINTEREST INCOME
Service charges and fees			1,640,849				1,051,564				3,769,943				2,924,315
Gain on the sale of loans held for sale			49,161				6,027				113,795				174,540
Gain(loss) on the sale of securities available for sale			(211	)			(46,978	)			(211	)			(38,535	)
Gain(loss) on sale of foreclosed assets			(1,221	)			27,285				40,505				82,334
Commission income			126,176				63,988				328,416				232,245
Interchange fees			187,950				163,322				561,186				483,809
Other			256,110				42,808				526,781				135,568
Total noninterest income			2,258,814				1,308,016				5,340,415				3,994,276
NONINTEREST EXPENSE
Compensation and benefits			2,402,174				1,880,779				6,985,955				5,700,328
Occupancy and equipment			459,640				360,515				1,267,672				1,055,060
Data processing			436,648				276,810				978,133				831,383
Advertising			166,162				127,228				445,723				305,096
Outside professional services			526,903				424,254				1,775,286				1,162,444
Interchange charges			161,313				54,455				462,709				487,331
Collection expense and repossessed asset losses			83,925				61,528				246,733				149,523
Telephone			162,541				131,817				411,762				401,870
Other			714,055				741,399				2,023,432				1,969,540
Total noninterest expense			5,113,361				4,058,785				14,597,405				12,062,575
INCOME BEFORE INCOME TAX EXPENSE			1,526,802				1,585,403				4,086,491				4,208,822
Income tax expense(benefit)			(387,683	)			581,455				487,151				1,510,377
NET INCOME		$	1,914,485			$	1,003,948			$	3,599,340			$	2,698,445
Earnings per common share:
Basic		$	0.14			$	0.12			$	0.25			$	0.31
Diluted		$	0.14			$	0.12			$	0.25			$	0.31
Dividends declared per common share:		$	0.07			$	—			$	0.18			$	—

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

ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

						ADDITIONAL				UNEARNED				UNEARNED								OTHER
		COMMON				PAID IN				ESOP				RESTRICTED				RETAINED				COMPREHENSIVE				TREASURY				TOTAL
		STOCK				CAPITAL				STOCK				STOCK AWARDS				EARNINGS				INCOME(LOSS)				STOCK				EQUITY
For the nine months ended September 30, 2005
Balance at January 1, 2005		$	145,475			$	56,332,850			($	4,189,680	)		$	—			$	46,412,522			($	904	)		$	—			$	98,700,263
ESOP shares earned, 34,914 shares							98,323				349,140																				447,463
Management restricted stock granted			2,585				3,176,584								(3,179,169	)															—
Management restricted stock expense															143,619																143,619
Stock options expense							28,966																								28,966
Dividends declared/paid( $.18 per share)																			(1,493,850	)											(1,493,850	)
Treasury stock purchased at cost																											(4,048,025	)			(4,048,025	)
Comprehensive income:
Net income																			3,599,340												3,599,340
Other comprehensive income(loss)																							114,305								114,305
Total comprehensive income																															3,713,645
Balance at September 30, 2005(unaudited)		$	148,060			$	59,636,723			($	3,840,540	)		($	3,035,550	)		$	48,518,012			$	113,401			($	4,048,025	)		$	97,492,081
For the nine months ended September 30, 2004
Balance at January 1, 2004		$	10			$	—			$	—			$	—			$	43,220,688			($	2,323	)		$	—			$	43,218,375
Comprehensive income:
Net income																			2,698,445												2,698,445
Other comprehensive income(loss)																							(37,104	)							(37,104	)
Total comprehensive income																															2,661,341
Balance at September 30, 2004(unaudited)		$	10			$	—			$	—			$	—			$	45,919,133			($	39,427	)		$	—			$	45,879,716

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

ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

		Nine Months
		Ended September 30,
		2005				2004
Cash flows from operating activities
Net income		$	3,599,340			$	2,698,445
Adjustments to reconcile net income to net cash from operating activities
Provision for loan losses			1,542,384				2,327,246
Gain on sale of real estate mortgages held for sale			(113,795	)			(174,540	)
Gain on the sale of other real estate owned			(40,505	)			(82,334	)
Loans originated for sale			(9,164,089	)			(10,636,272	)
Proceeds from loan sales			9,252,029				11,120,665
(Gain) loss on the sale of securities available for sale			211				38,535
ESOP compensation expense			447,463				—
Share-based compensation expense			172,585				—
Net depreciation and amortization			1,391,664				915,765
Net change in accrued interest receivable			(379,063	)			(53,994	)
Increase in bank owned life insurance			(391,541	)			(129,900	)
Net change in other assets			(1,217,170	)			(1,922,971	)
Net change in accrued expenses and other liabilities			1,174,638				2,054,232
Net cash from operating activities			6,274,151				6,154,877
Cash flows from investing activities
Net change in securities purchased under agreements to resell			11,800,000				(10,300,000	)
Proceeds from maturities and payments of securities available for sale			23,915,634				5,354,351
Proceeds from sales of securities available for sale			1,210,000				1,976,964
Purchase of securities available for sale			(43,678,308	)			(2,103,310	)
Loans purchased			(27,279,491	)			(6,437,739	)
Proceeds from sales of loans from portfolio			—				9,565,463
Net change in loans			(14,771,453	)			(77,836,329	)
Expenditures on premises and equipment			(4,152,035	)			(769,933	)
Proceeds from the sale of other real estate owned			581,184				1,020,477
Purchase of FHLB stock			(1,563,000	)			(1,467,100	)
Purchase of bank-owned life insurance			(15,000,000	)			—
Net change in other investments			(900,000	)			500,000
Net cash from investing activities			(69,837,469	)			(80,497,156	)

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

ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

		Nine Months
		Ended September 30,
		2005				2004
Cash flows from financing activities
Net increase in deposits		$	66,464,922			$	52,271,249
FHLB advances			30,000,000				55,000,000
Repayment of FHLB advances			(1,314,286	)			(25,657,144	)
Stock subscriptions received			—				38,326,522
Treasury stock purchased			(4,048,025	)			—
Dividends paid			(1,117,714	)			—
Net cash from financing activities			89,984,897				119,940,627
Net change in cash and cash equivalents			26,421,579				45,598,348
Cash and cash equivalents at beginning of period			25,707,885				8,995,824
Cash and cash equivalents at end of period		$	52,129,464			$	54,594,172
Supplemental information:
Interest paid		$	11,910,639			$	8,594,524
Income taxes paid			942,700				1,498,000
Supplemental non-cash disclosures:
Loans transferred to other real estate		$	544,000			$	133,126

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

ATLANTIC COAST FEDERAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 and nine-month periods ending September 30, 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 accepted 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 or stock options awarded to employees in return for employee service. The cost is measured at the grant-date fair value of the award and recognized as compensation expense over the employee service period, which is normally the vesting period. 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 until the first interim period of 2006. The Company has elected to early adopt SFAS No. 123 Revised as of July 1, 2005, to account for awards made during the quarter then ended. The Company’s stockholders approved a stock option plan and a stock award plan for recognition and retention of key employees and directors at the stockholders’ annual meeting on May 27, 2005. Initial awards under the 2005 Recognition and Retention Plan (the “Recognition Plan”) were made on July 1, 2005 and initial awards under our 2005 Stock Option Plan (the “Stock Option Plan”) were made on July 28, 2005. See Note 7 for additional discussion.

The Financial Accounting Standards Board (FASB) has issued FASB Staff Position (FSP) 115-1 and 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. The guidance in this FSP addresses the determination of when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP

ATLANTIC COAST FEDERAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)

amends SFAS No. 115,”Accounting for Certain Investments in Debt and Equity Securities”, and SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations”. The guidance in this FSP also nullifies certain requirements of EITF No. 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”. The guidance in FSP 115-1 and 124-1 is required to be applied to reporting periods beginning after December 15, 2005. Considering the latest guidance in FSP 115-1 and 124-1, management believes the Company’s current accounting for investment securities is appropriate for evaluating and accounting for any impairment of it’s investment security portfolio.

NOTE 4 – FEDERAL HOME LOAN BANK ADVANCES

At September 30, 2005 the sum of individual advances from the Federal Home Loan Bank of Atlanta totaled $129,000,000 and had fixed and variable interest rates ranging from 2.57% to 6.93% with a weighted average interest rate of 4.02%.

As of September 30, 2005 the advances mature in each of the calendar years as follows:

2005		$	10,000,000
2006			5,000,000
2007			2,000,000
2008			8,000,000
2009			5,000,000
Thereafter			99,000,000
		$	129,000,000

The Company has a borrowing capacity of 30% of total Bank assets with the Federal Home Loan Bank of Atlanta. The borrowing capacity at September 30, 2005 was $214,111,000. The Company had mortgage loans totaling approximately $404,773,000 at September 30, 2005 pledged as collateral for the advances. At September 30, 2005, Atlantic Coast Federal Corporation owned $7,074,400 of FHLB stock, which also secures debts to the FHLB.

NOTE 5-DIVIDENDS

During the third quarter of 2005, the Company’s board of directors declared a regular quarterly cash dividend at a rate of $0.07 per share. The dividend is payable on October 31, 2005 for stockholders’ of record on October 14, 2005. Atlantic Coast Federal, MHC (MHC) which holds 8,728,500 shares, or 60% of the Company’s total outstanding stock has informed the Company that it will waive receipt of the third quarter dividend on their owned shares. MHC had also waived receipt of the first quarter dividend on its owned shares, while accepting payment on the second quarter dividend.

Total dividends for the nine months ended September 30, 2005 charged to retained earnings was $1,493,850.

NOTE 6-EARNINGS PER COMMON SHARE

Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unearned restricted stock awards. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock, or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unvested stock options and stock awards. The dilutive effect of the unvested stock options and

ATLANTIC COAST FEDERAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)

stock awards is calculated under the treasury stock method utilizing the average market value of the Company’s stock for the period. A reconciliation of the numerator and denominator of the basic and diluted earnings per common share computation for the three and nine months ended September 30, 2005 and 2004, is as follows:

		For the three-months								For the nine-months
		ended September 30,								ended September 30,
		2005				2004				2005				2004
Basic
Net income		$	1,914,485			$	1,003,948			$	3,599,340			$	2,698,445
Weighted average common shares outstanding			14,732,808				8,728,500				14,609,948				8,728,500
Less: Average unallocated ESOP shares			418,968				—				418,968				—
Average unvested restricted stock awards			258,469				—				87,103				—
Average shares			14,055,371				8,728,500				14,103,877				8,728,500
Basic earnings per common share		$	0.14			$	0.12			$	0.25			$	0.31
Diluted
Net income		$	1,914,485			$	1,003,948			$	3,599,340			$	2,698,445
Weighted average common shares outstanding for basic earnings per common share			14,055,371				8,728,500				14,103,877				8,728,500
Add: Dilutive effects of assumed exercises of stock options			—				—				—				—
Add: Dilutive effects of full vesting of stock awards			37,532				—				12,511				—
Average shares and dilutive potential common shares			14,092,903				8,728,500				14,116,388				8,728,500
Diluted earnings per common share		$	0.14			$	0.12			$	0.25			$	0.31

NOTE 7- STOCK-BASED COMPENSATION

At the annual meeting held on May 27, 2005, the Company’s stockholders approved the establishment of both the Atlantic Coast Federal Corporation 2005 Recognition and Retention Plan (the Recognition Plan), and the Atlantic Coast Federal Corporation 2005 Stock Option Plan (the Stock Option Plan). The compensation cost that has been charged against income for Recognition Plan was $159,127 for the three and nine months ended September 30, 2005. The compensation cost that has been charged to income for the Stock Option Plan was $28,976.The total income tax benefit recognized in the income statement for stock-based compensation was $48,000 and $69,000 for the three and nine months ended September 30, 2005, respectively.

The Recognition Plan

The Recognition Plan permits the Company’s board of directors to award up to 285,131 shares of its common stock to outside directors and key employees designated by the board. Under the terms of the Recognition Plan, awarded shares are restricted as to transferability and may not be sold, assigned, or transferred prior to vesting. Awarded shares vest at a rate of 20% of the initially awarded amount per year, beginning on the first anniversary date of the award, and are contingent upon continuous service by the recipient through the vesting date. Accelerated vesting occurs if there is a change in control. Any awarded shares which are forfeited, are returned to

ATLANTIC COAST FEDERAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)

the Company to be re-awarded to another recipient. The Recognition Plan became effective on July 1, 2005 and remains in effect for the earlier of 10 years from the effective date, or the date on which all shares of common stock available for award have vested.

On July 1, 2005, the Company’s board of directors awarded 258,469 of the 285,131 shares of common stock available under the Recognition Plan, to outside directors and key employees. The restricted shares were issued out of previously authorized, but unissued common stock and had a grant date fair value of $3,179,169. A summary of the status of the non-vested shares of the Recognition Plan at September 30, 2005, is presented below:

						Weighted -
						Average
						Grant-date
		Shares				Fair-value
Outstanding at January 1, 2005			0			$	0.00
Granted July 1, 2005			258,469				12.30
Vested			0				0
Forfeited			0				0
Non-vested at September 30, 2005			258,469			$	12.30

The weighted average grant-date fair value is the end of day closing price of the Company’s common stock on July 1, 2005, adjusted for declared dividends. As of September 30, 2005, there was $3,020,210 of total unrecognized compensation expense related to non-vested shares awarded under the Recognition Plan. That expense is expected to be recognized over a weighted-average period of 4.8 years.

The Stock Option Plan

The Stock Option Plan permits the Company’s board of directors to grant options to purchase up to 712,827 shares of its common stock to the company’s outside directors and key employees. Under the terms of the Stock Option Plan, granted stock options have a contractual term of 10 years from the date of grant, with an exercise price equal to the market price of the Company’s common stock on the date of grant. Key employees are eligible to receive incentive stock options or non-qualified stock options, while outside directors are eligible for non-statutory stock options only. The Stock Plan also permits the Company’s board of directors to issue key employees, simultaneous with the issuance of stock options, an equal number of Limited Stock Appreciation Rights (The Limited SAR). The Limited SAR are exercisable only upon a change of control and, if exercised, reduce one-for-one the recipient’s related stock option grants. Under the terms of the Stock Option Plan, granted stock options vest at a rate of 20% of the initially granted amount per year, beginning on the first anniversary date of the grant, and are contingent upon continuous service by the recipient through the vesting date. Accelerated vesting occurs if there is a change in control. The Stock Option Plan became effective on July 28, 2005 and

ATLANTIC COAST FEDERAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)

terminates upon the earlier of 10 years after the effective date, or the date on which the exercise of Options or related rights equaling the maximum number of shares occurs.

On July 28, 2005 the Company’s board of directors awarded 260,000 incentive stock options to key employees and 100,100 non-statutory stock options to outside directors with an exercise price of $13.73. The fair value of each stock option awarded is estimated to be $3.15 on the date of grant, and is derived by using the Black-Scholes option- pricing model with the following assumptions:

Risk-free interest rate			4.07	%
Expected term of stock options (years)			6.0
Expected stock price volatility			23.79	%
Expected dividends			2.65	%

The risk-free interest rate is the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the stock option. Although the contractual term of the stock options granted is 10 years, the expected term of the stock is less because option restrictions do not permit recipients to sell or hedge their options, and therefore, we believe, encourage exercise of the option before the end of the contractual term. The Company does not have sufficient historical information about its own employees or directors vesting behavior, therefore the expected term of stock options is estimated considering the results of similar companies. Also, since the Company did not begin trading its common stock publicly until October 5, 2004, there was limited history about the volatility of its own shares. Therefore the expected stock price volatility is estimated by considering its own stock volatility for the period since October 5, 2004, as well as that of a sample of similar companies over the expected term of the stock options. Expected dividends is the estimated dividend rate over the expected term of the stock options.

A summary of the option activity under the Stock Option Plan as of September 30, 2005 and changes for the nine months then ended is presented below:

										Weighted-
						Weighted-				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
Options		Shares				Price				Term				Value
Outstanding at January 1, 2005			0			$	0.00				—				—
Granted			360,100				13.73				—				—
Vested			0				0				—				—
Forfeited			0				0				—				—
Non-vested at September 30, 2005			360,100			$	13.73				9.8			$	61,217
Exercisable at September 30, 2005			0			$	0.00				0			$	0.00

ATLANTIC COAST FEDERAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)

The Company has a policy of satisfying share option exercises by issuing shares from Treasury Stock obtained from its stock repurchase programs.

On October 11, 2005 the Company’s board of directors awarded an additional 2,851 shares of restricted stock to key employees under the Recognition Plan at a cost of $38,289 based on the grant date fair value. The cost of the award will be recognized over the vesting period. Also on October 11, 2005 the Company’s board of directors awarded an additional 174,300 stock options to outside directors and employees under the Stock Option Plan with an exercise price of $13.70 per share.

NOTE 8-COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) components and related taxes for the three and nine months ended September 30, 2005 and 2004 were as follows:

		For the three-months								For the nine-months
		ended September 30,								ended September 30,
		2005				2004				2005				2004
Net income		$	1,914,485			$	1,003,948			$	3,599,340			$	2,698,445
Other comprehensive income
Unrealized holding gains and (losses) on securities available for sale			(94,176	)			74,049				(241,313	)			(88,913	)
Less reclassification adjustments for (gains) losses recognized in income			211				46,978				211				38,535
Net unrealized gains and (losses)			(93,965	)			121,027				(241,102	)			(50,378	)
Tax effect			35,707				(45,989	)			91,619				19,146
Net-of-tax amount			(58,258	)			75,038				(149,483	)			(31,232	)
Change in fair value of derivatives used for cash flow hedges			306,411				(352,256	)			425,466				(9,469	)
Tax effect			(116,437	)			133,856				(161,678	)			3,597
Net-of-tax amount			189,974				(218,400	)			263,788				(5,872	)
Other comprehensive income (loss)			131,716				(143,362	)			114,305				(37,104	)
Total comprehensive income(loss)		$	2,046,201			$	860,586			$	3,713,645			$	2,661,341

ATLANTIC COAST FEDERAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)

NOTE 9- INCOME TAXES

Net income for the three and nine months ended September 30, 2005, includes an income tax benefit of $895,000 for the elimination of a tax-related contingent liability for the same amount. The tax-related contingent liability had been established by the Company in 2000 upon becoming a taxable entity and reflected the tax effect of the bad debt deduction taken by the Company in 2000 and 2001 calendar tax years. The Company believed the filing position was supportable based upon a reasonable interpretation of federal income tax laws and the underlying regulations. However, due to the lack of prior rulings on similar fact patterns, it was unknown whether the accounting method would be sustained upon audit by either federal or state tax authorities. The applicable statue of limitations expired with respect to the 2001 tax year on September 15, 2005, making the contingent liability unnecessary.

NOTE 10- SUBSEQUENT EVENTS

On October 21, 2005 the Company entered into a commitment agreement giving it the right to purchase residential construction loans from a mortgage lending company located in Orlando, Florida. Under the terms of the agreement all purchased loans will meet specific credit guidelines established by the Company, the seller will have the right to provide permanent financing upon the completion of construction, and the aggregate principal amount purchased will not exceed $50 million. Under a separate agreement, but as a condition to the commitment agreement, the seller will service the loans during the construction period. The amount of the servicing fee will vary according to each loan’s interest rate. The initial funding under the commitment was approximately $4 million.

Part 1

ATLANTIC COAST FEDERAL CORPORATION

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

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

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

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

Critical Accounting Policies

     Certain 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 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

Part 1

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 $1.5 million for the nine months ended September 30, 2005, and $2.3 million for the same period in 2004. This decrease was primarily due to a large 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 $(150,000) and $(31,000) for the nine months ended September 30, 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.

     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 September 30, 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.

     Statement of Financial Accounting Standard (SFAS) No. 123, Revised, requires all public companies to record compensation cost for stock or stock options awarded to employees in return for employee service. The cost is measured at the grant-date fair value of the award and recognized as compensation expense over the employee service period, which is normally the vesting period. 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 until the first interim period of 2006. The Company has elected to early adopt SFAS No. 123 Revised as of July 1, 2005, to account for awards made during the quarter ended September 30, 2005. The Company’s stockholders approved a stock option plan and a stock award plan for recognition and retention of key employees and directors at the stockholders’ annual meeting on May 27, 2005. Initial awards under the 2005 Recognition and Retention Plan (the “Recognition Plan”) were made on July 1, 2005 and initial awards under our 2005 Stock

Part 1

Option Plan (the “Stock Option Plan”) were made on July 28, 2005. See Note 7 contained in the Consolidated Financial Statements of Part I, Item 1 of this Form 10-Q for additional discussion.

     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 September 30, 2005 and December 31, 2004

     General. Our balance sheet growth for the period ended September 30, 2005 as compared to December 31, 2004 reflects double-digit growth. Deposit growth has outpaced loan demand, thereby enabling the Company to increase its investment in more liquid assets, such as securities available for sale, and other assets including bank owned life insurance.

     Following is a summarized comparative balance sheet as of September 30, 2005 and December 31, 2004:

		September 30,				December 31,				Increase(decrease)
		2005				2004				Dollars				Percentage
		(Dollars in thousands)
Assets
Cash and cash equivalents		$	52,130			$	25,708			$	26,422				102.8	%
Other interest bearing investments			1,800				12,700				(10,900	)			-85.8	%
Securitites available for sale			71,569				53,363				18,206				34.1	%
Loans			561,417				521,667				39,750				7.6	%
Allowance for loan loss			(4,252	)			(3,956	)			(296	)			7.5	%
Loans, net			557,165				517,711				39,454				7.6	%
Loans held for sale			106				81				25				30.9	%
Other assets			50,401				28,115				22,286				79.3	%
Total assets		$	733,171			$	637,678			$	95,493				15.0	%
Liabilities and stockholders’ equity
Deposits
Non-interest bearing		$	41,293			$	34,799			$	6,494				18.7	%
Interest bearing transaction accounts			79,427				30,582				48,845				159.7	%
Savings and money-market			108,221				124,259				(16,038	)			-12.9	%
Time			273,206				246,042				27,164				11.0	%
Total deposits			502,147				435,682				66,465				15.3	%
Federal Home Loan Bank advances			129,000				100,314				28,686				28.6	%
Accrued expenses and other liabilities			4,532				2,982				1,550				52.0	%
Total liabilities			635,679				538,978				96,701				17.9	%
Stockholders’ equity			97,492				98,700				(1,208	)			-1.2	%
Total liabilities and stockholders’ equity		$	733,171			$	637,678			$	95,493				15.0	%

Part 1

     Cash and cash equivalents. Cash and cash equivalents is comprised principally of interest-earning balances held in other depository institutions. We expect the balances we maintain in cash and cash equivalents will fluctuate as our other interest earning assets mature, or we identify opportunities for longer-term investments that fit the Company’s growth strategy. Approximately one-half of the increased balance at September 30, 2005 as compared to December 31, 2004 is due to the sale, at par, of the $11.8 million securities under agreement to resell, which were held as other interest-bearing investments at December 31, 2004.

     Securities available for sale. Securities available for sale is comprised 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 has grown from approximately 60% at December 31, 2004 to approximately 90% at September 30, 2005. In the near-term we expect the composition of our investment in securities available for sale to be continue to be heavily weighted in mortgage-backed securities or the debt of government- sponsored organizations that issue mortgages. The increase in securities available for sale from December 31, 2004 to September 30, 2005 was funded from deposit growth that outpaced loan growth.

     Loans. Following is a comparative composition of net loans as of September 30, 2005 and December 31, 2004:

																		Increase(decrease)
		As of								As of
		September				% of total				December				% of total
		30,2005				loans				31, 2004				loans				Dollars				Percentage
		(Dollars In Thousands)
Commercial non-mortgage		$	6,179				1.1	%		$	3,711				0.7	%		$	2,468				66.5	%
Commercial real estate and multifamily			68,482				12.3	%			65,220				12.6	%			3,262				5.0	%
Construction loans			12,538				2.2	%			16,853				3.2	%			(4,315	)			-25.6	%
One to four family residential mortgages			318,636				57.1	%			303,544				58.4	%			15,092				5.0	%
Consumer and other loans
Automobile			32,967				5.9	%			31,385				6.0	%			1,582				5.0	%
Unsecured			18,635				3.3	%			18,871				3.6	%			(236	)			-1.3	%
Home equity			75,403				13.5	%			60,076				11.6	%			15,327				25.5	%
Land			11,690				2.1	%			12,078				2.3	%			(388	)			-3.2	%
Other			13,065				2.3	%			7,638				1.5	%			5,427				71.1	%
Total loans			557,595								519,376								38,219				7.4	%
Allowance for loan losses			(4,252	)			-0.8	%			(3,956	)			-0.8	%			(296	)			7.5	%
Net deferred loan (fees) costs			3,042				0.5	%			1,473				0.3	%			1,569				106.5	%
Premiums on purchased loans			780				0.1	%			818				0.2	%			(38	)			-4.6	%
Loans, net		$	557,165							$	517,711							$	39,454				7.6	%

     The composition of our net loan portfolio is heavily weighted toward loans secured by first mortgages, home equity loans, or second mortgages, all secured by one-to four-family residences, with approximately 70% of our loans invested in those types of loans at September 30, 2005, and December 31, 2004. The current interest rate environment has resulted in a flattening interest rate yield curve, whereby interest rates for longer-term, fixed rated mortgages are nearly equal to short-term rates. Under such circumstances, our asset-liability strategy has been to emphasize shorter term or adjustable rate lending. However, due to significant competition in our market for adjustable-rate first mortgage loans on one-to four-family residences, loan originations generated from our internal retail network has been a modest $31.1 million for first nine months

Part 1

of 2005. To supplement our investment in one-to-four family mortgages we purchased $27.3 million of adjustable rate one-to four-family loans. Depending on liquidity, earning needs, and the availability of high quality loans, we expect to continue to purchase adjustable rate one-to four-family residential mortgage loans to supplement our internal loan originations and maintain at least our current level of growth. The largest dollar growth in loans during the nine months ended September 30, 2005, occurred in home equity loans, with a growth rate over December 31, 2004 of 25.5% or $15.3 million.

     Although our lending activity will remain focused on loans secured by one-to-four-family residences, we also intend to continue to pursue commercial and commercial real estate lending opportunities that fit our loan quality guidelines and give us an opportunity to diversify our loan portfolio.

     Allowance for Loan Losses. Our allowance for loan losses was .76% of total loans outstanding at September 30, 2005 and December 31, 2004. Allowance for loan losses activity for the nine months ended September 30, 2005 and 2004 was as follows:

		2005				2004
		(In Thousands)
Beginning balance		$	3,956			$	6,593
Loans charged-off			(1,832	)			(5,437	)
Recoveries			586				634
Net charge-offs			(1,246	)			(4,803	)
Provision for loan losses			1,542				2,327
Ending balance		$	4,252			$	4,117

     Gross charge-offs in the first three quarters of 2004, were primarily 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. During 2005 an additional $605,000 of the loan relationship was charged-off, leaving a balance of $55,000 that is fully collateralized by real estate.

     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 $2.7 million and $6.7 million at September 30, 2005, and December 31, 2004, respectively, and total impaired loans were approximately $3.8 million and $8.5 million at September 30, 2005, and December 31, 2004, respectively. The decrease in impaired loans was primarily the result of a payoff received for a commercial real estate loan secured by a long-term care facility with a balance of $2.2 million, improved financial performance of a commercial loan secured by an apartment building, and the $605,000 charge-off discussed above. Accordingly, the allowances allocated for impaired loans decreased $400,000 to $1.1 million at September 30, 2005, from $1.5 million at December 31, 2004. As of September 30, 2005, and December 31, 2004, all non-performing loans were classified as non-accrual, and we did not have any restructured loans or loans 90 days past due and accruing interest as of September 30, 2005, and December 31, 2004. Non-performing loans, excluding small balance homogeneous loans, were $1.6 million and $4.4 million at September 30, 2005 and December 31, 2004, respectively. At December 31, 2004, all such

Part 1

non-performing loans were also reported as impaired loans. At September 30, 2005 all such non-performing loans, except one loan for $381,000 that was paid off subsequent to September 30, 2005, were also reported as impaired loans.

     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. In the second quarter of 2005 we collected approximately $207,000 in lease payments that were being held by the bankruptcy Trustee. These payments, along with approximately $6,000 in payments received in the third quarter, have been applied to the carrying balance of the leases. At September 30, 2005 the balance of the loan, net of the allowance we have allocated for this pool of leases, is $637,000. 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. After applying the payments received from the bankruptcy trustee, the balance due is approximately $1.7 million (representing the balance outstanding prior to charge-offs taken). Total legal fees incurred on this matter for the nine months ended September 30, 2005 and 2004 were $235,918 and $404,966, respectively. Collection of any amount, including the $637,000 net amount included in our consolidated financial statements at September 30, 2005, or the gross amount of $1.7 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 $637,000 net amount remaining as an asset. Additionally, we anticipate we will incur additional legal costs as we pursue collection on the surety bonds.

     Other assets. The increase in other assets from December 31, 2004 was primarily due to the Company’s purchase of $10.0 million of additional bank owned life insurance policies on certain key executives in the first quarter of 2005 and $5.0 million in the third quarter. As of September 30, 2005 and December 31, 2004 the balance of bank owned life insurance policies was $20.3 million and $4.9 million, respectively.

     Deposits. Interest bearing demand accounts have grown nearly 160%, or $48.9 million, since the end of 2004. The growth, which began in the fourth quarter of 2004, has been generated from our interest on checking 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. Although the product is priced higher than our money market products, and has resulted in some erosion of our savings and money market products, we believe we have been successful in cross-selling other products and created numerous new customer relationships. As a consequence of this success, we have extended the interest on checking marketing program beyond the original program end date of September 30, 2005, until June of 2006. The increase in time deposits was driven in part by the purchase of $14.0 million of brokered deposits that were used to meet loan and investment demands, or to replace other maturing time deposits. Total brokered deposits at September 30, 2005 and December 31, 2004 were $32.8 million and $23.8 million, respectively. The weighted average maturity of brokered deposits at September 30, 2005, was approximately 22 months and the weighted average interest rate was 3.53%. Time deposits also increased as of September 30, 2005, as compared to the end of 2004, following our general deposit rate increases occurring during 2005 that have tracked rates in our market following the Federal Reserve Bank interest changes. 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.

     Borrowings. The Company borrows funds from the Federal Home Loan Bank of Atlanta (FHLB) to support our lending and investment activities. The increase in FHLB borrowings as of September 30, 2005, as compared to December 31, 2004, is due to additional advances of $20 million made to take advantage of the unique current interest rate environment that has led to a flattening yield curve. The additional advances, which were acquired at fixed rates, will be used to replace $10.7 million of advances that mature later in 2005

Part 1

and fund lending growth in 2005. The weighted average maturity of the new advances is approximately 50 months with a weighted average rate of 4.44%. 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. Activity in the Company’s stockholders’ equity for the nine months ended September 30, 2005 was as follows:

Balance at December 31, 2004		$	98,700,263
Increases to stockholders’ equity:
Net income for the nine months ended September 30, 2005			3,599,340
Net other comprehensive income			114,305
ESOP shares allocated to employees			447,463
Management restricted stock earned under Recognition Plan			143,619
Stock options earned under Stock Option Plan			28,966
Total increases to stockholders’ equity			4,333,693
Decreases to stockholders’ equity:
Dividends			(1,493,850	)
Treasury stock purchased at cost			(4,048,025	)
Total decreases to stockholders’ equity			(5,541,875	)
Balance at September 30, 2005		$	97,492,081

     Net other comprehensive income for the nine months ending September 30, 2005 resulted from an increase in unrealized gains on interest rate swaps of $264,000, offset by additional unrealized losses on AFS securities of $150,000, 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 nine months 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.

     Management restricted stock earned under the Recognition Plan and stock options earned under the Stock Option Plan reflects the recognition of compensation expense under SFAS No.123 Revised. The Company early adopted SFAS No. 123 Revised during the third quarter 2005, to account for its share based compensation plans. Under this new accounting standard, the cost of awards granted under the Recognition Plan and the Stock Option Plan, are amortized over the vesting period of five years, beginning on the grant dates of July 1, 2005 and July 28, 2005, respectively.

     During the third quarter of 2005, the Company’s board of directors declared a regular quarterly cash dividend at a rate of $0.07 per share. The dividend is payable on October 31, 2005 for stockholders’ of record on October 14, 2005. Atlantic Coast Federal, MHC (MHC) which holds 8,728,500 shares, or 60% of the Company’s total outstanding stock has informed the Company that it will waive receipt of the third quarter dividend on their owned shares. Accordingly, stockholders’ equity for the nine months ending September 30,

Part 1

2005, was reduced $376,136 for the declared dividend. Stockholders’ equity was also reduced for payments of dividends in the first and second quarter of 2005 that totaled $1,117,714. We expect the MHC to waive receipt of payment on future dividends for its owned shares.

     Under a stock repurchase program initiated on August 5, 2005, and completed prior to the end of the third quarter, the Company purchased 285,131 shares of its common stock at an average cost of $14.20 per share. The common stock was repurchased to offset the impact of 258,469 shares of common stock issued on July 1, 2005 under the Company’s Recognition Plan. The Company has announced it will begin a new stock repurchase program in early November 2005, to purchase up to 10%, or 579,520 shares of its currently outstanding common stock, over the proceeding 12 months. While the initial stock repurchase program was completed as planned, no assurances can be made about the number of shares that will be purchased, or the price of such shares under the new stock repurchase program.

     The equity to assets ratio decreased to 13.30% at September 30, 2005, from 15.48% at December 31, 2004. The decrease was primarily due to the rate of asset growth through September 30, 2005 and the aforementioned Treasury stock purchased. 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 15.59%, Tier 1 capital to risk-weighted assets was 14.76%, and Tier 1 capital to total adjusted total assets was 10.03% at September 30, 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 September 30, 2005 and 2004.

     General. Our net income for the three months ended September 30, 2005, was $1,915,000 which was $911,000 more than for the same period in 2004, primarily due to the recognition of a tax benefit from the elimination of a tax-related contingent liability of $895,000. Net interest income decreased 3.7%, or $187,000 in the third quarter of 2005 compared to the same quarter in 2004, generally due to the rising cost of deposits. The provision for loan losses expense for the three months ended September 30, 2005, decreased $233,000 from $675,000 for the same period in 2004, on the basis of improved credit quality. Non-interest income for the third quarter of 2005 grew by 72.6% to $2.3 million as compared to $1.3 million for the same quarter in 2004, due to the implementation of several service charges and fees initiatives. The increase in non-interest income was offset by increased non-interest expense as it grew $1.0 million, or 26.0%, to $5.1 million for the three months ended September 30, 2005, from $4.1 million for the same period in 2004 due to increased compensation and benefit costs and outside professional services costs.

     Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following table sets forth certain information for the three months ended September 30, 2005, 2004 and 2003, respectively. The average yields and costs are derived by dividing income or expense by the average balance or liabilities, respectively, for the periods presented.

Part 1

		For the three months ended September 30,
		2005												2004												2003
		Average Balance				Interest				Average Yield /Cost				Average Balance				Interest				Average Yield /Cost				Average Balance				Interest				Average Yield /Cost
INTEREST-EARNING ASSETS
Loans receivable(1)		$	548,855				8,331				6.07	%		$	507,738				7,762				6.12	%		$	407,578				7,383				7.25	%
Securities(2)			69,487				596				3.43	%			20,512				104				2.04	%			36,853				165				1.79	%
Other interest-earning assets(3)			55,355				480				3.47	%			45,159				229				2.03	%			2,723				56				8.16	%
Total interest-earning assets			673,696				9,407				5.59	%			573,409				8,096				5.65	%			447,154				7,604				6.80	%
Non-interest earning assets			50,998												37,965												45,786
Total assets		$	724,694											$	611,374											$	492,940
INTEREST-BEARING LIABILITIES
Savings deposits		$	59,367				61				0.41	%		$	78,577				72				0.37	%		$	75,337				187				0.99	%
Interest bearing demand accounts			71,734				431				2.40	%			28,170				72				1.02	%			14,579				32				0.88	%
Money market accounts			53,079				358				2.70	%			58,073				248				1.71	%			59,931				182				1.21	%
Time deposits			267,901				2,377				3.55	%			231,088				1,682				2.91	%			221,956				1,875				3.38	%
Federal Home Loan Bank advances			129,008				1,356				4.20	%			91,958				1,012				4.40	%			43,643				539				4.94	%
Total interest-bearing liabilities			581,089				4,583				3.16	%			487,867				3,085				2.53	%			415,446				2,816				2.71	%
Non-interest bearing liabilities			43,527												77,205												35,565
Total liabilities			624,616												565,072												451,011
Stockholders’ equity			100,078												46,302												41,929
Total liabilities and stockholders’ equity		$	724,694											$	611,374											$	492,940
Net interest income						$	4,824											$	5,011											$	4,789
Net interest spread											2.42	%											3.12	%											4.09	%
Net earning assets		$	92,607											$	85,542											$	31,708
Net interest margin(4)											2.86	%											3.50	%											4.28	%
Average interest-earning assets to average interest-bearing liabilities							115.94	%											117.53	%											107.63	%