EXHIBIT (c)(ii)
October 2003
COMMON STOCK FAIR VALUE APPRAISAL
HFB Financial Corporation
Middlesboro, Kentucky
================================================================================
COMMON STOCK FAIR VALUE APPRAISAL
================================================================================
HFB FINANCIAL CORPORATION
MIDDLESBORO, KENTUCKY
OCTOBER 2003
COMMON STOCK FAIR VALUE APPRAISAL
HFB FINANCIAL CORPORATION
MIDDELSBORO, KENTUCKY
<Table>
<Caption>
TABLE OF CONTENTS
================================================================================
TAB PAGE
1 APPRAISAL LETTER .................................................. 1
2 COMPANY BACKGROUND ................................................ 3
3 ECONOMIC OUTLOOK
National Economy .................................................. 5
Current State of the Industry ..................................... 8
Demographic and Economic Analysis ................................. 9
4 COMPETITIVE MARKET OVERVIEW ....................................... 14
5 FINANCIAL REVIEW .................................................. 19
6 DELAWARE BLOCK METHODOLOGY ........................................ 31
Transaction Value Method .......................................... 32
Asset Value Method ................................................ 33
Earnings Value Method ............................................. 34
7 DELAWARE BLOCK METHOD CONCLUSION .................................. 36
8 CONSIDERATION OF RECENT FAIR VALUE CASE LAW ....................... 38
Adjusted Book Value Method ........................................ 40
Investment Value Method ........................................... 42
Discounted Cash Flow Method ....................................... 44
Acquisition Comparable Method ..................................... 47
9 CONCLUSION ........................................................ 49
10 FIRM QUALIFICATIONS
Professional Bank Services, Inc. .................................. 52
Resumes ........................................................... 53
Code of Conduct ................................................... 56
11 EXHIBITS
1 - Projected Financial Data for HFB Financial Corporation ........ 57
2 - HFB Recent Trading History .................................... 58
</Table>
(PROFESSIONAL BANK SERVICES LETTERHEAD)
October 14, 2003
Board of Directors
HFB Financial Corporation
1602 Cumberland Avenue
Middlesboro, Kentucky 40965
To The Directorate:
You have requested a fair value appraisal of the common stock of HFB Financial
Corporation, Middlesboro, Kentucky (the "Company"). The purpose and intended use
of this appraisal is to determine the fair value of the Company's common shares
relative to a proposed merger transaction whereby a new Tennessee corporation
will be merged with and into the Company with the Company being the survivor of
the merger (the "Merger"). Under the terms of the proposed Merger, Company
common shareholders owning less than 250 Company common shares will receive fair
value in cash in exchange for their shares of Company common stock. This fair
value appraisal is based on a review of the financial condition and history of
the Company and its wholly owned subsidiary, Home Federal Bank Corporation,
Middlesboro, Kentucky (the "Bank"), regulatory and audit reports, and other such
summary information available and deemed appropriate. The date of this appraisal
is September 26, 2003.
Professional Bank Services, Inc. ("PBS") has performed stock appraisals for
numerous financial institutions in Kentucky and throughout the United States.
Our knowledge of the financial industry evolves from an experienced staff and a
history as consultants and financial advisors to the banking industry. PBS'
wholly owned subsidiary, Investment Bank Services, Inc., is a registered
Broker/Dealer with the Securities and Exchange Commission ("SEC").
For purposes of this fair value appraisal, we have reviewed and analyzed the
historical performance of the Company and the Bank, including: (i) June 30,
1999, 2000, 2001, 2002 and December 31, 2002 audited financial statements and
Forms 10-KSB of the Company; (ii) December 31, 2002, March 31, 2003 and June 30,
2003 Consolidated Reports of Condition and Income filed by the Bank; (iii) March
31, 2003 and June 30, 2003 forms 10-QSB filed by the Company with the SEC; (iv)
April 9, 2003 Form DEF 14C Proxy Statement filed by the Company; (v) June 30,
2003 Uniform Bank
-1-
Board of Directors
HFB Financial Corporation
October 14, 2003
Page Two
Performance Report of the Company; (v) December 31, 2002, March 31, 2003 and
June 30, 2003 FR Y-9 C filed by the Company with the Federal Reserve, and (vi)
the historical common stock trading activity of the Company.
We have reviewed statistical data regarding the loan portfolio, securities
portfolio and other performance ratios and statistics. Financial projections
have been prepared and analyzed as well as other financial studies, analyses and
investigations as deemed relevant for the purposes of this appraisal. In review
of the aforementioned information, we have taken into account our assessment of
general market and financial conditions, our experience in other transactions,
and our knowledge of the banking industry generally.
We have not compiled, reviewed or audited the financial statements of the
Company or the Bank, nor have we independently verified any of the information
reviewed; we have relied upon such information as being complete and accurate in
all material respects. We have not made an independent evaluation of the assets
of the Company or the Bank.
PBS, its officers, and its staff have no present business interest in the
Company. No benefits will accrue to PBS as a result of this review, other than
the professional fees previously agreed to by the Company. Fees paid to PBS for
the preparation of this review are neither dependent or contingent upon any
transaction or upon the results of the review.
Based on the foregoing, and all other factors deemed relevant and assuming
accuracy and completeness of information provided by the Company, it is our
opinion, as an independent appraiser, that the fair value of the common stock of
the Company, under current Tennessee statues utilizing the Delaware Block
Method, is $21.00 per share. The consideration of control premiums as well as
the utilization of a comparable company approach and discounted cash flow
methodology results in a fair value of $22.75 per common share.
Very truly yours,
/s/ PROFESSIONAL BANK SERVICES, INC.
CHRISTOPHER L. HARGROVE
PROFESSIONAL BANK SERVICES, INC.
-2-
COMPANY BACKGROUND
HFB Financial Corporation (the "Company") is the sole stockholder of, and acts
as the holding company for, Home Federal Bank Corporation ("Home Federal" or the
"Bank"). The Company was organized at the direction of the Bank in September
1992 to acquire all of the capital stock issued by the Bank in its conversion
from a mutual to stock form. The Company has no significant assets other than
capital stock of the Bank. The Company qualifies as a bank holding company and
is subject to regulation by the Federal Reserve Board ("FRB"). The Company's
principal business is the business of the Bank and its subsidiary. The Bank
operates through three full-service offices in the southeastern Kentucky
communities of Middlesboro and Harlan and two full-service offices in the
eastern Tennessee communities of New Tazewell and Jacksboro.
The Company is engaged principally in the business of accepting deposits from
the general public and originating permanent loans that are secured by one-
to-four-family residential properties located in its market area. The Company
also originates consumer loans and commercial real estate loans and maintains a
substantial investment portfolio of mortgage-backed and other investment
securities.
During the quarter ended December 31, 2001, the Bank converted from a federally
chartered thrift to a state chartered commercial bank in order to allow Bank
management to focus more on commercial lending and other commercial bank
activities. On February 19, 2002, the board of directors of the Company made a
determination to change the registrant's fiscal year-end from June 30 to
December 31, effective July 1, 2002. The Company filed an Annual Report on Form
10-KSB with the Securities and Exchange Commission for its fiscal year ended
June 30, 2002. Pursuant to the change in fiscal year, the Company also filed a
Form 10-KSB transition report with the Securities and Exchange Commission for
the six-month period ending December 31, 2002. This filing also included audited
financial statements covering the six-month period ending December 31, 2002.
The Company changed its fiscal year in order to facilitate the comparability of
the Company to other bank holding companies, which have historically utilized a
December 31 year-end. Moving to a December 31 year-end has aligned the Company's
financial
-3-
reporting with its peer group and with publicly held bank holding companies in
the United States.
On July 8, 2002, the Bank received regulatory approval to establish a branch
office in the City of Jacksboro, Tennessee. Jacksboro is the county seat for
Campbell County and is located in the northeastern portion of Tennessee. The new
branch was opened during January 2003 in a temporary location. The new permanent
branch office building is expected to be ready for occupancy in approximately 18
months.
The Company's common shares are traded on the National Association of Securities
Dealer's Automated Quotation System (NASDAQ) under the symbol HFBA.
-4-
NATIONAL ECONOMY
According to estimates released by the Bureau of Economic Analysis, the U.S.
economy experienced an increase in growth during the second quarter of 2003
compared to the first quarter of 2003. Second quarter 2003 real Gross Domestic
Product ("GDP") increased at a 2.4% annual rate compared to first quarter 2003
real GDP annualized growth of 1.4%. Overall, for the year ending December 31,
2002, real GDP increased a modest 2.4% compared to 0.3% for 2001.
The increase in real GDP during the second quarter reflects an increase in
personal consumption expenditures, a significant increase in nonresidential
fixed investment as well as residential fixed investment and an increase in
federal defense spending. These positive trends were partially offset by a
decrease in private inventory investment and exports. Imports, which are
subtracted from GDP, increased in the second quarter of 2003.
Personal consumption expenditures increased 3.3% for the second quarter of 2003,
compared with an increase of 2.0% in the first quarter. Nonresidential fixed
investment increased 6.9% for the second quarter of 2003 compared to a first
quarter decrease of 4.4%. Residential investment increased 6.0% for the second
quarter of 2003 compared to a 10.1% increase in the first quarter of 2003.
Exports of goods and services decreased 3.1% for the second quarter of 2003
compared to a decline of 1.3% for the first quarter of 2003. Imports of goods
and services increased 9.2% for the second quarter of 2003 compared to a
decrease of 6.2% for the first quarter. Government consumption expenditures and
gross investment increased 7.5% for the second quarter of 2003 compared to 0.4%
for the first quarter of 2003.
Overall for the year ending December 31, 2002, Personal consumption expenditures
increased 3.1% compared to 2.5% during 2001. During 2002, real gross private
domestic investment increased 1.0% compared to a significant decline of 10.7%
during 2001. This is primarily a result of an increase in residential fixed
investment. Residential investment increased 3.1% for the year compared to an
increase of only 0.3% during 2001. This trend was partially offset by continued
weakness in nonresidential fixed investment. Nonresidential fixed investment
declined 5.7% during 2002 compared to a decline of 5.2% during 2001.
-5-
In light of the continued stagnation in the economy, lingering fears of slipping
into another recession, the events of September 11, 2001, and the decline in the
equity markets, the FOMC has reduced the Federal Funds rate by 550 basis points
since year-end 2000. As of September 26, 2003, the targeted Fed Funds rate is
now 1.00% compared to a high of 6.50% at year-end 2000.
On September 26, 2003 the S&P 500 Index closed at 996.85 compared to 879.82 at
December 31, 2002, 1,148.08 at December 31, 2001, 1,320.28 at December 31, 2000
and 330.22 at December 31, 1990. In terms of fundamental valuation levels, the
market capitalization weighted absolute price to earnings ratio at December 31,
2002 equaled 19.42X compared to 24.71X at December 31, 2001, 24.20X at December
31, 2000 and 14.98 at December 31, 1990.
Given the available economic and market data, it appears that the US economy has
begun to enter a new expansion phase. However, continued turmoil in the Middle
East coupled with continued corporate scandals has cast a shadow over consumer
and business sentiment. The equity markets, while rebounding significantly from
2002 year-end index values, remain characterized by a significant degree of
uncertainty and volatility. On September 26, 2003, the NASDAQ Index closed at
1,792.07 which is an increase of 34.19% from the December 31, 2002 NASDAQ Index
closing value of 1,335.51 and a decrease of 8.12% from the December 31, 2001
closing value of 1,950.40. In addition, the September 26, 2003 NASDAQ closing
value of 1,792.07 represents a decline of 3,256.55 or 65% from its all-time high
close of 5,048.62 reached on March 10, 2000. On September 26, 2003, the SNL
Securities Bank Index closed at 490.81 representing an increase of 16.92% from
the December 31, 2002 closing value of 419.80.
-6-
BUREAU OF ECONOMIC ANALYSIS
OVERVIEW OF THE ECONOMY
PERCENT CHANGE AT SEASONALLY ADJUSTED ANNUAL RATE (UNLESS OTHERWISE NOTED)
<Table>
<Caption>
2001 2002 2002 2003
Q1 Q2 Q3 Q4 Q1 Q2
PRODUCTION:
Gross domestic product* 0.3 2.4 5.0 1.3 4.0 1.4 1.4 2.4
PURCHASES, BY TYPE:
Gross domestic purchases* 0.4 3.0 5.6 2.6 3.9 2.9 0.6 3.8
Personal consumption expenditures* 2.5 3.1 3.1 1.8 4.2 1.7 2.0 3.3
Nonresidential fixed investment* -5.2 -5.7 -5.8 -2.4 -0.8 2.3 -4.4 6.9
Residential investment* 0.3 3.9 14.2 2.7 1.1 9.4 10.1 6.0
Exports of goods and services* -5.4 -1.6 3.5 14.3 4.6 -5.8 -1.3 -3.1
Imports of goods and services* -2.9 3.7 8.5 22.2 3.3 7.4 -6.2 9.2
Government consumption
expenditures and gross investment* 3.7 4.4 5.6 1.4 2.9 4.6 0.4 7.5
PRICES OF:
Gross domestic purchases 1.9 1.2 1.2 2.3 1.2 1.8 3.4 0.3
Personal consumption expenditures 2.0 1.4 1.1 2.7 1.7 1.8 2.7 0.9
Gross domestic product 2.4 1.1 1.3 1.2 1.0 1.8 2.4 1.0
PERSONAL INCOME:
New England# (quarterly rate) 3.2 1.7 0.9 1.4 0.1 0.2 0.8 --
Mideast# (quarterly rate) 3.3 2.0 0.8 1.1 0.3 0.4 0.8 --
Great Lakes# (quarterly rate) 2.4 2.4 0.6 1.7 0.5 0.5 0.9 --
Plains# (quarterly rate) 3.4 2.9 1.2 0.8 0.9 0.7 1.3 --
Southeast# (quarterly rate) 4.0 3.2 1.2 1.2 0.5 0.8 1.1 --
Southwest# (quarterly rate) 4.1 2.2 0.5 1.2 0.4 0.7 0.9 --
Rocky Mountain# (quarterly rate) 4.0 1.9 0.8 0.7 0.6 0.7 1.0 --
Far West# (quarterly rate) 2.8 2.6 1.1 1.3 0.7 0.8 0.8 --
Real disposable personal income in
the U.S.* 1.8 4.3 14.5 3.9 1.8 1.4 2.1 2.4
Personal saving rate (level, not
change) 2.3 3.9 3.5 4.0 3.5 3.6 3.6 3.3
Billions of dollars, seasonally adjusted
annual rate (unless otherwise noted)
FEDERAL GOVERNMENT FINANCES:
Receipts# 2,008.4 1,875.6 1,884.7 1,883.7 1,864.1 1,860.8 1,869.8 --
Current expenditures# 1,936.4 2,075.5 2,030.5 2,079.3 2,074.6 2,117.4 2,145.1 2,240.8
NIPA Surplus or Deficit(-)# 72.0 -199.9 -145.8 -195.6 -210.5 -256.6 -275.3 --
STATE AND LOCAL GOVERNMENT FINANCES:
Receipts# 1,261.3 1,304.9 1,273.3 1,302.5 1,310.3 1,331.6 1,344.0 --
Current expenditures# 1,292.6 1,356.4 1,329.1 1,347.6 1,365.0 1,384.0 1,410.9 1,411.1
NIPA surplus or deficit(-)# -31.3 -51.5 -55.8 -45.1 -54.7 -52.4 -66.9 --
INVENTORIES:
Change in private inventories* -61.4 5.2 -28.9 4.9 18.8 25.8 4.8 -17.9
Ratio, Inventories to final sales* 2.18 2.19 2.17 2.18 2.17 2.14
Millions of dollars, seasonally adjusted
BALANCE OF PAYMENTS:
Goods and services# -357,819 -418,038 -90,057 -104,888 -106,980 -116,116 -121,567 --
Current account# -393,745 -480,861 -106,728 -122,827 -122,724 -128,586 -136,112 --
</Table>
-7-
CURRENT STATE OF THE INDUSTRY (JUNE 30, 2003)
FDIC - insured institutions experienced a second consecutive quarter of record
profits with over half (57%) reporting earnings increases in the second quarter.
Low interest rates have allowed financial institutions to record gains on sales
of securities and other assets that provided a significant increase to industry
earnings. Net income in the second quarter totaled $30.2 billion for all insured
financial institutions and set a new earnings record. The average return on
assets for the industry rose to 1.38% in the second quarter, up from 1.37% a
year ago.
The largest revenue increase occurred in gains on sales of securities, which
were $4.9 billion up from $3.7 billion in the first quarter. Non-interest income
increased 3.8% from the first quarter, and net interest income increased by only
0.9%. The minimal growth in net interest income is the result of narrower net
interest margins. The average net interest margin declined to 3.74% in the
second quarter representing the lowest average since the first quarter of 2001.
For the first six months of 2003, a strengthening economy was evidenced by
improving asset quality. Financial institutions charged-off $10.2 billion in the
second quarter representing a decrease of 1.1% from the first quarter. The
average net charge-off rate was 0.79% representing the lowest level in two
years. Noncurrent loans declined 3.5% in the second quarter marking the largest
quarterly decline since the fourth quarter of 1994.
For the second quarter of 2003, the industry's total assets increased $317.0
billion or 3.7% representing the largest quarterly increase ever. Both
residential mortgage loans and home equity loans increased $139 billion in the
second quarter and accounted for 71.9% of the increase in total loans. Equity
capital increased by 2.5% in the second quarter, but capital ratios declined as
this growth failed to keep pace with the stronger asset growth. Nevertheless,
regulatory capital ratios remain near historic highs. The core capital ratio
fell by only one basis point from 7.88% to 7.87%.
During the second quarter of 2003, the total number of insured financial
institutions declined from 9,314 to 9,267 institutions. One institution failed,
while 66 were absorbed in mergers. There were 24 new charters reporting
financial results. The overall number of financial institutions on the FDIC's
"Problem List" declined for the second consecutive quarter, decreasing from 129
to 125. (Source: The FDIC Quarterly Banking Profile, Second Quarter 2003)
-8-
BANKING MARKET PROFILE
DEMOGRAPHIC AND ECONOMIC REVIEW
HFB Financial Corporation, Middlesboro, Kentucky (the "Company") operates from
its main office located in Bell County, Kentucky, two branch offices located in
Harlan County, Kentucky, one branch office located in Claiborne County,
Tennessee and one branch office located in Campbell County, Tennessee. The
following data is a review of the demographics and economics of the market area
in which the Company operates.
The table below lists the population of Bell County, Harlan County, Claiborne
County, Campbell County, the State of Kentucky and the State of Tennessee.
POPULATION TRENDS
<Table>
<Caption>
ESTIMATE
1990 2002 2007
--------- ---------- ---------
Bell County, KY 31,506 29,736 28,937
Percent Change -5.62% -2.69%
Harlan County, KY 36,574 32,436 30,613
Percent Change -11.31% -5.32%
Claiborne County, TN 26,137 30,213 31,140
Percent Change 15.59% 3.07%
Campbell County, TN 35,079 40,168 41,112
Percent Change 14.51% 2.35%
State of Kentucky 3,685,296 4,077,458 4,184,010
Percent Change 10.64% 2.61%
State of Tennessee 4,877,185 5,776,014 5,994,702
Percent Change 18.43% 3.79%
</Table>
Source: SNL Securities, L.P. Claritas
The 2002 population base of Bell County at 29,736 reflects a decline of 5.62% in
population since 1990. Population estimates for the year 2007 for Bell County
indicate a continued decrease in population of 2.69% from the 2002 population.
The 2002 population base of Harlan County at 32,436 reflects a decline of 11.31%
in population
-9-
since 1990. Population estimates for the year 2007 for Harlan County indicate a
continued decrease in population of 5.32% from the 2002 population. The 2002
population base of Claiborne County at 30,213 reflects an increase of 15.59% in
population since 1990. Population estimates for the year 2007 for Claiborne
County indicate a minimal increase in population of 3.07% from the 2002
population. The 2002 population base of Campbell County at 40,168 reflects an
increase of 14.51% in population since 1990. Population estimates for the year
2007 for Campbell County indicate a minimal increase in population of 2.35% from
the 2002 population.
2002 AGE DISTRIBUTION
<Table>
<Caption>
BELL HARLAN CLAIBORNE CAMPBELL STATE OF STATE OF
COUNTY COUNTY COUNTY COUNTY KENTUCKY TENNESSEE
------ ------ --------- -------- -------- ---------
Population 29,736 32,436 30,213 40,168 4,077,458 5,776,014
0 - 14 20.00% 20.00% 19.00% 19.00% 20.00% 20.00%
15 - 34 27.00% 25.00% 26.00% 26.00% 28.00% 28.00%
35 - 54 29.00% 30.00% 30.00% 28.00% 30.00% 30.00%
55+ 24.00% 24.00% 25.00% 27.00% 22.00% 22.00%
</Table>
The age distribution of Bell, Harlan, Claiborne and Campbell Counties reflects a
mature population base, which is concentrated in the 35-54 age group.
-10-
INCOME TRENDS
<Table>
<Caption>
PERCENT PERCENT
CHANGE ESTIMATE CHANGE
1990 2002 90 - 02 2007 02 - 07
------- ------- ------- -------- -------
Bell County
Median HH Income $13,081 $20,444 56.29% $24,306 18.89%
Per Capita $ 7,024 $12,120 72.55% $14,720 21.45%
Harlan County
Median HH Income $14,782 $19,273 30.38% $21,493 11.52%
Per Capita $ 7,493 $10,791 44.01% $12,183 12.90%
Claiborne County
Median HH Income $17,140 $26,867 56.75% $31,359 16.72%
Per Capita $ 8,407 $15,239 81.27% $19,007 24.73%
Campbell County
Median HH Income $16,448 $23,624 43.63% $26,932 14.00%
Per Capita $ 8,044 $13,286 65.17% $15,848 19.28%
State of Kentucky
Median HH Income $22,533 $35,427 57.22% $40,870 15.36%
Per Capita $11,136 $19,962 79.26% $24,733 23.90%
State of Tennessee
Median HH Income $24,805 $40,049 61.46% $46,634 16.44%
Per Capita $12,240 $22,059 80.22% $27,401 24.22%
</Table>
The median and per-capita household income levels for all the counties presented
are significantly below those exhibited by both the State of Kentucky and the
State of Tennessee.
The tables below present household growth trends and the 2002 income
distribution levels for Bell County, Harlan County, Claiborne County, Campbell
County, the State of Kentucky and the State of Tennessee.
-11-
NUMBER OF HOUSEHOLDS
<Table>
<Caption>
PERCENT PERCENT
CHANGE ESTIMATE CHANGE
1990 2002 90 - 02 2007 02 - 07
--------- --------- ------- --------- -------
Bell County 11,512 11,991 4.16% 11,958 -0.28%
Harlan County 13,269 13,112 -1.18% 12,683 -3.27%
Claiborne County 9,629 12,061 25.26% 12,757 5.77%
Campbell County 13,150 16,417 24.84% 17,238 5.00%
State of Kentucky 1,379,782 1,616,159 17.13% 1,688,594 4.48%
State of Tennessee 1,853,725 2,278,316 22.90 2,395,166 5.13%
</Table>
The number of households in both Bell and Harlan Counties is projected to
decline from 2002 to 2007. Claiborne County and Campbell County are expected to
experience an increase in total households over the 2002 to 2007 time period.
-12-
2002 HOUSEHOLD INCOME DISTRIBUTION
<Table>
<Caption>
BELL HARLAN CLAIBORNE CAMPBELL STATE OF STATE OF
COUNTY COUNTY COUNTY COUNTY KENTUCKY TENNESSEE
------ ------ --------- -------- --------- ---------
Households 11,991 13,112 12,061 16,417 1,616,159 2,278,316
$ 0 - 24K 58.00% 60.00% 46.00% 52.00% 36.00% 31.00%
$25 - 49K 26.00% 26.00% 32.00% 30.00% 29.00% 29.00%
$50K+ 16.00% 13.00% 21.00% 17.00% 35.00% 40.00%
</Table>
In 2002, 58.0% of the households in Bell County, 60.0% of the households in
Harlan County, 46% of the households in Claiborne County and 52% of the
households in Campbell County earn less than $24,000 per year compared to 36.0%
for the State of Kentucky and 31.0% for the State of Tennessee. In addition,
projected 2007 income distribution data reflects a similar trend and level of
affluence.
2007 PROJECTED HOUSEHOLD INCOME DISTRIBUTION
<Table>
<Caption>
BELL HARLAN CLAIBORNE CAMPBELL STATE OF STATE OF
COUNTY COUNTY COUNTY COUNTY KENTUCKY TENNESSEE
------ ------ --------- -------- --------- ---------
Households 11,958 12,683 12,757 17,238 1,688,594 2,395,166
$ 0 - 24K 51.00% 57.00% 39.00% 46.00% 30.00% 25.00%
$25 - 49K 29.00% 27.00% 34.00% 32.00% 28.00% 28.00%
$50K+ 20.00% 16.00% 27.00% 22.00% 42.00% 47.00%
</Table>
-13-
COMPETITIVE MARKET OVERVIEW
HFB Financial Corporation, Middlesboro, Kentucky (the "Company") operates its
main office in Bell County, Kentucky. Bell County's total deposit base as of
June 30, 2002 equals $399.5 million and has exhibited a three-year compound
growth rate of 3.54%. At June 30, 2002 the Bell County marketplace is serviced
by six financial institutions with a total of 14 retail office facilities. As of
June 30, 2002, the Company maintains a total deposit base of $74.6 million
representing an 18.69% marketshare position. The Company's total Bell County
deposits have increased approximately $13.4 million or at a three-year compound
growth rate of 6.79% since June 30, 1999.
The Company operates two branch offices in Harlan County, Kentucky. Harlan
County's total deposit base as of June 30, 2002 equals $314.6 million and has
exhibited a three-year compound growth rate of 2.92%. At June 30, 2002 the
Harlan County marketplace is serviced by four financial institutions with a
total of 10 retail office facilities. As of June 30, 2002, the Company maintains
a total deposit base of $89.0 million representing a 28.29% marketshare
position. The Company's total Harlan County deposits have increased
approximately $6.7 million or at a three-year compound growth rate of 2.64%
since June 30, 1999.
The Company operates one branch office in Claiborne County, Tennessee. Claiborne
County's total deposit base as of June 30, 2002 equals $390.0 million and has
exhibited a three-year compound growth rate of 5.09%. At June 30, 2002 the
Claiborne County marketplace is serviced by four financial institutions with a
total of 10 retail office facilities. As of June 30, 2002, the Company maintains
a total deposit base of $39.1 million representing a 10.03% marketshare
position. The Company's total Claiborne County deposits have increased
approximately $11.6 million or at a three-year compound growth rate of 12.39%
since June 30, 1999.
The Company operates one branch office in Campbell County, Tennessee that was
opened in January 2003. Therefore, this market is presented for comparative
purposes only. Campbell County's total deposit base as of June 30, 2002 equals
$407.7 million and has exhibited a three-year compound growth rate of 2.01%. At
June 30, 2002 the Campbell County marketplace is serviced by six financial
institutions with a total of 14 retail office facilities.
The following charts present a detailed summary of the Company's deposit growth
and marketshare position within Bell, Harlan, Claiborne and Campbell Counties as
of June 30, 2002.
-14-
BELL COUNTY, KENTUCKY DEPOSIT MARKET SHARE ANALYSIS
<Table>
<Caption>
BRANCH
------------------------------------
HOLDING COMPANY INSTITUTION TYPE ADDRESS CITY
- --------------- ----------- ---- --------------------- -----------
First State Bancshares Inc. First State Bank of Pineville Bank 2202 Cumberland Ave Middlesboro
First State Bancshares Inc. First State Bank of Pineville Bank 200 N 12th St Middlesboro
First State Bancshares Inc. First State Bank of Pineville Bank 1810 Cumberland Ave Middlesboro
First State Bancshares Inc. First State Bank of Pineville Bank Us Hwy 119 Pineville
First State Bancshares Inc. First State Bank of Pineville Bank Main St Pineville
Community Trust Bancorp Community Trust Bank Bank 1918 Cumberland Ave Middlesboro
Community Trust Bancorp Community Trust Bank Bank 1206 E Cumberland Ave Middlesboro
Community Trust Bancorp Community Trust Bank Bank Us Hwy 25e Pineville
HFB FINANCIAL CORP. HOME FEDERAL BANK CORP BANK 1602 CUMBERLAND AVE MIDDLESBORO
Robertson Holding Co. L.P. Commercial Bank Bank 1431 Cumberland Ave Middlesboro
Robertson Holding Co. L.P. Commercial Bank Bank 314 Pine St Pineville
National City Corp. National City Bank of KY Bank 515 N 12th St Middlesboro
National City Corp. National City Bank of KY Bank 1225 N 12th St Middlesboro
ARH Federal CU ARH Federal CU Credit 3805 W Cumberland Ave Middlesboro
<Caption>
THREE YR. 6/02 DEPOSITS DEPOSITS DEPOSITS DEPOSITS
COMP. PCT OF LIST 6/02 6/01 6/00 6/99
HOLDING COMPANY GROWTH (%) ($000) ($000) ($000) ($000)
- --------------- --------- ----------- -------- -------- -------- --------
First State Bancshares Inc. -18.38% 1.23 4,927 21,279 15,530 9,063
First State Bancshares Inc. -4.31% 3.50 13,984 22,799 19,310 15,959
First State Bancshares Inc. 23.54% 14.53 58,030 30,399 28,238 30,779
First State Bancshares Inc. -6.68% 1.39 5,560 16,719 14,872 6,841
First State Bancshares Inc. -0.18% 17.07 68,186 60,797 63,535 68,547
------- --------- -------- -------- --------
4.73% 37.72 150,687 151,993 141,485 131,189
Community Trust Bancorp 7.87% 14.02 56,025 58,008 52,758 44,635
Community Trust Bancorp -9.07% 4.15 16,566 17,166 15,819 22,038
Community Trust Bancorp 6.73% 4.76 19,007 18,326 16,535 15,631
------- --------- -------- -------- --------
3.63% 22.93 91,598 93,500 85,112 82,304
HFB FINANCIAL CORP. 6.79% 18.69 74,649 61,605 58,910 61,291
Robertson Holding Co. L.P. -4.38% 12.55 50,149 53,302 56,365 57,364
Robertson Holding Co. L.P. -8.08% 1.33 5,307 6,822 6,003 6,834
------- --------- -------- -------- --------
-4.76% 13.88 55,456 60,124 62,368 64,198
National City Corp. 5.03% 1.58 6,307 9,177 9,314 5,443
National City Corp. 51.96% 1.89 7,556 4,593 4,000 2,153
------- --------- -------- -------- --------
22.20% 3.47 13,863 13,770 13,314 7,596
ARH Federal CU -0.08% 3.31 13,225 15,671 12,762 13,257
AGGREGATE: 3.54% 100.00 399,478 396,663 373,951 359,835
SNL DataSource
</Table>
-15-
HARLAN COUNTY, KENTUCKY DEPOSIT MARKET SHARE ANALYSIS
THREE YR. 6/02 DEPOSITS DEPOSITS DEPOSITS DEPOSITS
<Table>
<Caption>
BRANCH
------------------------------------
HOLDING COMPANY INSTITUTION TYPE ADDRESS CITY
- --------------- ----------- ---- --------------------- -----------
BB&T Corp. Branch Banking & Trust Co Bank 101 N Main St Harlan
BB&T Corp. Branch Banking & Trust Co Bank Harlan & Yocum Evarts
BB&T Corp. Branch Banking & Trust Co Bank 200 Waldon Rd Harlan
BB&T Corp. Branch Banking & Trust Co Bank E Main St Cumberland
HFB FINANCIAL CORP. HOME FEDERAL BANK CORP BANK 185 FINANCE ST HARLAN
HFB FINANCIAL CORP. HOME FEDERAL BANK CORP BANK 102 CUMBERLAND AVE HARLAN
Banco Harlan Inc. Bank of Harlan Bank First & Central Harlan
Banco Harlan Inc. Bank of Harlan Bank Rt 421 S Harlan
Banco Harlan Inc. Bank of Harlan Bank Main & Mound Harlan
Robertson Holding Co. L.P. Commercial Bank Bank 1520 E Main St Cumberland
<Caption>
THREE YR. 6/02 DEPOSITS DEPOSITS DEPOSITS DEPOSITS
COMP. PCT OF LIST 6/02 6/01 6/00 6/99
HOLDING COMPANY GROWTH (%) ($000) ($000) ($000) ($000)
- --------------- --------- ----------- -------- -------- -------- --------
BB&T Corp. -7.75% 15.24 47,951 57,273 59,360 61,076
BB&T Corp. 41.94% 3.52 11,057 8,123 5,796 3,866
BB&T Corp. 34.33% 3.63 11,421 6,340 4,716 4,711
BB&T Corp. -0.57% 13.75 43,266 42,343 43,478 44,017
------- --------- -------- -------- --------
0.01% 36.14 113,695 114,079 113,350 113,670
HFB FINANCIAL CORP. 3.77% 22.99 72,323 65,626 64,618 64,724
HFB FINANCIAL CORP. -1.76% 5.30 16,668 16,765 15,416 17,582
------- --------- -------- -------- --------
2.64% 28.29 88,991 82,391 80,034 82,306
Banco Harlan Inc. 12.14% 9.16 28,826 25,368 22,110 20,440
Banco Harlan Inc. 14.49% 10.34 32,533 28,992 25,269 21,679
Banco Harlan Inc. 0.86% 6.46 20,333 18,119 15,793 19,820
------- --------- -------- -------- --------
9.66% 25.96 81,692 72,479 63,172 61,939
Robertson Holding Co. L.P. -0.48% 9.59 30,173 30,305 28,288 30,608
AGGREGATE: 2.92% 100.00 314,551 299,254 284,844 288,523
SNL DataSource
</Table>
-16-
CLAIBORNE COUNTY, TENNESSEE DEPOSIT MARKET SHARE ANALYSIS
<Table>
<Caption>
BRANCH
------------------------------------
HOLDING COMPANY INSTITUTION TYPE ADDRESS CITY
- --------------- ----------- ---- --------------------- -----------
Claiborne Hldg Co. Inc. First Century Bank Bank Hwy 25 E Harrogate
Claiborne Hldg Co. Inc. First Century Bank Bank State Hwy 33 New Tazewell
Claiborne Hldg Co. Inc. First Century Bank Bank Us Hwy 25 E Tazewell
Robertson Holding Co. L.P. Commercial Bank Bank 7675 Hwy #63 Speedwell
Robertson Holding Co. L.P. Commercial Bank Bank 6710 Cumberland Gap Harrogate
Robertson Holding Co. L.P. Commercial Bank Bank 1001 N Broad St New Tazewell
Citizens Bancorp Inc Citizens Bank Bank Broad St & Oak Ave New Tazewell
Citizens Bancorp Inc Citizens Bank Bank Hwy 33 Tazewell
Citizens Bancorp Inc Citizens Bank Bank Us Hwy 25 E Harrogate
HFB FINANCIAL CORP. HOME FEDERAL BK CORP BANK 500 5TH AVE NEW TAZEWELL
<Caption>
THREE YR. 6/02 DEPOSITS DEPOSITS DEPOSITS DEPOSITS
COMP. PCT OF LIST 6/02 6/01 6/00 6/99
HOLDING COMPANY GROWTH (%) ($000) ($000) ($000) ($000)
- --------------- -------- ----------- -------- -------- -------- --------
Claiborne Hldg Co. Inc. 4.02% 5.38 20,986 21,195 19,345 18,643
Claiborne Hldg Co. Inc. 4.73% 8.31 32,420 30,194 28,439 28,223
Claiborne Hldg Co. Inc. 7.46% 26.44 103,119 92,355 84,707 83,098
------- --------- -------- -------- --------
6.39% 40.13 156,525 143,744 132,491 129,964
Robertson Holding Co. L.P. 5.92% 3.71 14,462 13,691 12,440 12,171
Robertson Holding Co. L.P. 9.72% 16.02 62,475 61,183 47,217 47,301
Robertson Holding Co. L.P. -1.37% 7.29 28,422 26,554 29,437 29,624
------- --------- -------- -------- --------
5.75% 27.02 105,359 101,428 89,094 89,096
Citizens Bancorp Inc 0.23% 15.43 60,168 62,432 62,530 59,754
Citizens Bancorp Inc 0.44% 3.09 12,034 11,449 10,692 11,876
Citizens Bancorp Inc -1.81% 4.32 16,848 17,609 18,897 17,797
------- --------- -------- -------- --------
-0.14% 22.84 89,050 91,490 92,119 89,427
HFB FINANCIAL CORP. 12.39% 10.03 39,115 37,976 34,492 27,550
AGGREGATE: 5.09% 100.00 390,049 374,638 348,196 336,037
SNL DataSource
</Table>
-17-
CAMPBELL COUNTY, TENNESSEE DEPOSIT MARKET SHARE ANALYSIS
<Table>
<Caption>
BRANCH
------------------------------------
HOLDING COMPANY INSTITUTION TYPE ADDRESS CITY
- --------------- ----------- ---- --------------------- -----------
Lafollette First Natl Corp. First NB of La Follette Bank 101 W Central Ave Lafollette
Lafollette First Natl Corp. First NB of La Follette Bank 1103 W Cherry St Lafollette
Lafollette First Natl Corp. First NB of La Follette Bank Hwy 25-w Lafollette
First Volunteer Corporation First Volunteer Bk of TN Bank Woodson's Mall Lafollette
First Volunteer Corporation First Volunteer Bk of TN Bank 100 5th St Jellico
First Volunteer Corporation First Volunteer Bk of TN Bank Us Hwy 25w Caryville
First Volunteer Corporation First Volunteer Bk of TN Bank Main St Jacksboro
First Volunteer Corporation First Volunteer Bk of TN Bank 161 E Central Ave Lafollette
Peoples NatlLflltte Fncl.Corp Peoples NB of La Follette Bank 100 Central Ave Lafollette
Peoples NatlLflltte Fncl.Corp Peoples NB of La Follette Bank 3501 General Carl Lafollette
Peoples NatlLflltte Fncl.Corp Peoples NB of La Follette Bank 2300 Jacksboro Pike Lafollette
Union Planters Corp. Union Planters Bank NA Bank 2421 Jacksboro Pike Lafollette
Union Planters Corp. Union Planters Bank NA Bank 245 W Central Ave Lafollette
Union Bcshs Campbell Cnty Union Bank Bank 1075 5th St Jellico
McCreary Bancshares Inc. First Trust & Savings Bank Bank 2824 Appalachia Hwy Jacksboro
<Caption>
THREE YR. 6/02 DEPOSITS DEPOSITS DEPOSITS DEPOSITS
COMP. PCT OF LIST 6/02 6/01 6/00 6/99
HOLDING COMPANY GROWTH (%) ($000) ($000) ($000) ($000)
- --------------- -------- ----------- -------- -------- -------- --------
Lafollette First Natl Corp. 2.59% 23.76 96,863 100,701 86,325 89,698
Lafollette First Natl Corp. 3.74% 2.79 11,370 10,253 9,865 10,185
Lafollette First Natl Corp. 2.02% 5.01 20,412 18,551 17,532 19,222
------- --------- -------- -------- --------
2.60% 31.56 128,645 129,505 113,722 119,105
First Volunteer Corporation -2.69% 2.96 12,071 12,823 13,396 13,100
First Volunteer Corporation -0.38% 3.65 14,890 13,737 13,600 15,063
First Volunteer Corporation NA 0.00 0 0 1,377 1,405
First Volunteer Corporation 4.88% 14.75 60,148 62,490 54,157 52,139
First Volunteer Corporation 29.62% 1.78 7,274 4,807 5,012 3,340
------- --------- -------- -------- --------
3.53% 23.14 94,383 93,857 87,542 85,047
Peoples NatlLflltte Fncl.Corp 3.26% 14.00 57,066 53,016 64,394 51,827
Peoples NatlLflltte Fncl.Corp 4.56% 1.60 6,519 6,370 5,556 5,703
Peoples NatlLflltte Fncl.Corp -0.99% 3.84 15,665 15,954 15,683 16,140
------- --------- -------- -------- --------
2.46% 19.44 79,250 75,340 85,633 73,670
Union Planters Corp. -5.43% 7.33 29,871 30,921 31,923 35,319
Union Planters Corp. -15.65% 4.88 19,886 24,163 27,545 33,134
------- --------- -------- -------- --------
-10.09% 12.21 49,757 55,084 59,468 68,453
Union Bcshs Campbell Cnty 5.39% 10.79 43,998 40,186 37,594 37,589
McCreary Bancshares Inc. 328.21% 2.85 11,626 8,219 1,505 148
AGGREGATE: 2.01% 100.00 407,659 402,191 385,464 384,012
SNL DATASOURCE
</Table>
-18-
FINANCIAL HIGHLIGHTS
The selected financial data and ratio analysis exhibits the Company's
fundamental balance sheet composition and earnings performance for the calendar
years ending December 31, 2001 and 2002 and year-to-date June 30, 2003 utilizing
regulatory data filed by the Company. The peer group analysis is derived from
the Company's June 30, 2003 Uniform Holding Company Performance Report and SNL
Securities LLC Financial DataSource.
HFB FINANCIAL CORPORATION
FINANCIAL HIGHLIGHTS
IN THOUSANDS
<Table>
<Caption>
YE 12/31/01 YE 12/31/02 YTD 06/03
----------- ----------- ------------
Total Cash & Bals Due Dep Inst $ 7,507 $ 4,541 $ 4,536
Tot Fed Funds & Reverse Repos 3,323 500 500
Total Securities 62,256 70,418 58,555
Tot Lns & Lses (Incl Lns HFS) $ 141,644 $ 166,809 $ 184,628
Total Reserves 780 1,192 1,391
----------- ----------- -----------
Total Net Loans $ 140,864 $ 165,617 $ 183,237
Premises & Fixed Assets $ 4,542 $ 4,455 $ 4,758
Total Other Real Estate Owned 148 1,674 1 ,766
Total Intangible Assets 220 132 99
Other Assets 6,593 6,400 6,391
----------- ----------- -----------
Total Assets $ 225,453 $ 253,737 $ 259,842
Nonint-bearing Deposits $ 3,352 $ 7,162 $ 10,086
Interest-bearing Deposits 186,034 192,471 194,125
----------- ----------- -----------
Total Deposits (Incl Dom & For) $ 189,386 $ 199,633 $ 204,211
Tot Fed Funds & Repos $ 0 $ 0 $ 0
Subordinated Notes & Debentures 0 0 0
Other Borrowed Money 12,413 27,723 29,081
Other Liabilities 2,677 2,816 2,334
Minority Interest 0 0 0
----------- ----------- -----------
Tot Liabilities (Y -9 Fmt) $ 204,476 $ 230,172 $ 235,626
Total Equity $ 20,977 $ 23,565 $ 24,216
Total Interest Income $ 15,662 $ 16,152 $ 7,889
Total Interest Expense 9,229 7,224 2,962
----------- ----------- -----------
Net Interest Income $ 6,433 $ 8,928 $ 4,927
Total Provision Expense 145 457 210
Total Non interest Income 927 1,175 609
Total Realzd Gns(Ls)-Secs 6 0 1
Total Noninterest Expense 5,064 6,617 3,488
Inc bef Inc Tax & Extra Items 2,157 3,029 1,839
Income Taxes 710 965 572
----------- ----------- -----------
Net Income (Loss) $ 1,447 $ 2,064 $ 1,267
</Table>
-19-
HFB FINANCIAL CORPORATION
FINANCIAL HIGHLIGHTS
RATIO ANALYSIS
<Table>
<Caption>
YE 12/31/01 YE 12/31/02 YTD 06/03
----------- ----------- ---------
ROAA 0.65% 0.84% 0.99%
ROAE 6.90 9.55 10.79
Interest Income/ AA 7.00 6.70 6.29
Interest Expense/ AA 4.11 2.94 2.30
Net Interest Income/ AA 2.89 3.76 3.99
Noninterest Income/ AA 0.41 0.48 0.47
Noninterest Expense/ AA 2.26 2.69 2.71
Net Interest Margin 3.06 4.02 4.35
Yield/ Cost Spread 2.74 3.64 4.03
Oper Exp/ Oper Rev 67.50 65.56 63.03
Leverage Ratio 9.13 8.65 8.81
Tier 1 Risk Based Ratio 16.88 14.99 14.27
Risk Based Capital Ratio 17.53 15.80 15.14
Common Div Decl/Net Inc 34.07 25.82 25.65
Total RE Loans/ Tot Lns 95.01 95.49 95.05
Total C&I Loans/ Tot Lns 1.06 1.32 1.62
Total Cons Lns/ Tot Lns 4.27 3.37 3.40
Agricultural Prod/ Tot Lns 0.03 0.05 0.03
Oth Non-RE Lns/ Tot Lns 0.00 0.10 0.27
Nonint Bearing/Tot Dep 1.77 3.59 4.94
Total Trans Accts/ Deposits 10.12 12.80 14.04
MMDAs+Savings/ Deposits 3.93 3.94 3.94
Retail Time Dep/ Deposits 53.34 51.64 49.89
Jumbo Time Dep/ Deposits 32.61 31.63 32.13
Total Noncurrent Lns/ Loans 2.30 1.42 0.89
NPLs/ Loans 2.13 1.42 0.89
NPAs/ Assets 1.40 1.60 1.31
NPAs/ (Loans+OREO) 2.23 2.40 1.83
NPAs + 90/ Assets 1.51 1.60 1.31
Reserves/ Loans 0.55 0.71 0.75
Reserves/ NPAs 24.64 29.43 40.80
NCOs/Average Loans 0.03 0.03 0.01
Loan Loss Prov/NCOs 315.22 1,015.56 1,909.09
Liquidity Ratio 34.03 32.78 26.94
total Earning Assets/Assets 92.58 93.29 93.26
Core Deposits/Total Assets 56.61 53.79 53.34
Jumbo CDs/ Tot Dom Dep 32.61 31.63 32.13
Yld on Loans and Leases 8.33 7.81 7.37
Yield on Total Secs(Debt+Eq) 5.57 5.71 5.26
Yld on Earning Assets 7.39 7.03 6.70
Cost of Int Bear Deps 4.64 3.29 2.41
Cost of Borrowings (Non Deps) 5.48 4.71 4.59
Cost of Int Bear Liabs 4.65 3.39 2.67
</Table>
-20-
As mentioned the analysis which follows was taken from the Company's June 30,
2003 Uniform Holding Company performance report and some December 31, 2001 data
from SNL Securities LLC. This data consists of regulatory financial information
and is based on calendar year reporting for all institutions. The comparable
group includes only commercial banks with consolidated assets under $300.0
million.
A review of the historic data presented reveals significant growth in assets and
loans since year-end 2001. Overall, total assets have increased $34.4 million or
at a compound growth rate of 9.93% since year-end 2001.
(GRAPH)
HFB FINANCIAL CORPORATION
GROWTH
<Table>
<Caption>
2001 2002 6/30/03
--------- --------- ---------
IN THOUSANDS
ASSETS $ 225,453 $ 253,737 $ 259,842
DEPOSITS $ 189,386 $ 199,633 $ 204,211
TOTAL LOANS $ 141,644 $ 166,809 $ 184,628
</Table>
As indicated above, total deposits of $204.2 million at June 30, 2003, have
increased $14.8 million since year-end 2001 resulting in a compound growth rate
of 5.15%. The growth within the Company's deposit base since 2001 has been
concentrated in non-interest bearing demand deposits and certificates of deposit
over $100,000. As of June 30, 2003 non-interest bearing demand deposits equal
$10.1 million or 4.94% of total deposits. Total time certificates greater then
$100,000 equal $65.6 million and represent 32.13% of the Company's total deposit
base. Overall total time deposits, NOW accounts and MMDA and other savings
accounts, at June 30, 2003, equal $167.5 million, $18.6 million and $8.1
million, respectively. The composition of the Company's total deposit base at
June 30, 2003 is as follows:
-21-
DEPOSIT COMPOSITION
JUNE 30, 2003
<Table>
Demand Deposits 5%
Now 9%
Money Market & Savings 4%
Time <$100M 50%
Time >$100M 32%
---
100%
</Table>
From year-end 2001 through June 30, 2003, total loans increased $43.0 million
resulting in a compound growth rate of 19.33%. The loan growth achieved since
2001 has been concentrated within the Company's real estate related portfolio.
Since year-end 2001, the Company's total real estate related loans have
increased $40.9 million. Approximately 69% of the Company's real estate related
lending is concentrated in 1-4 family loans, 31% are loans secured by commercial
real estate of which non-farm non-residential loans constitute approximately 69%
of total commercial real estate loans. Despite the Company's conversion to a
commercial bank, the composition of the Company's loan portfolio still more
closely resembles that of a thrift institution. As of June 30, 2003, real estate
loans comprise approximately 95.05% of the Company's total loans compared to
69.54% for peer and commercial and industrial loans constitute 1.62% of the
Company's loan portfolio compared to 15.52% for peer. The overall composition of
the Company's loan portfolio as of June 30, 2003 is as follows:
LOAN PORTFOLIO COMPOSITION
<Table>
1-4 Family Real Estate 65%
Commercial Real Estate 30%
Consumer 3%
Commercial 2%
---
100%
</Table>
The Company has historically maintained an adequate capital base well above
regulatory minimum guidelines. As of June 30, 2003, the Company maintains a
total tier one capital base of $22.8 million representing a tier one leverage
ratio of 8.81%.
-22-
(GRAPH)
HFB FINANCIAL CORPORATION
TIER ONE LEVERAGE CAPITAL
<Table>
<Caption>
2001 2002 6/30/03
---------- ---------- ----------
PERCENTAGE
COMPANY 9.13% 8.65% 8.81%
PEER 8.92% 9.10% 9.19%
</Table>
While the Company has exhibited an increasing trend in earnings performance over
the period reviewed, earnings performance has remained below peer levels. For
the six months ending June 30, 2003, the Company's net income equals $1.3
million representing a return on average assets of 0.99% compared to 1.14% for
peer.
(GRAPH)
HFB FINANCIAL CORPORATION
RETURN ON AVERAGE ASSETS
<Table>
<Caption>
2001 2002 6/30/03
---------- ---------- ----------
PERCENTAGE
COMPANY 0.65% 0.84% 0.99%
PEER 1.02% 1.10% 1.14%
</Table>
-23-
(GRAPH)
HFB FINANCIAL CORPORATION
RETURN ON AVERAGE EQUITY
<Table>
<Caption>
2001 2002 6/30/03
---------- ---------- ----------
PERCENTAGE
COMPANY 6.90% 9.55% 10.79%
PEER 10.55% 11.16% 11.34%
</Table>
The Company's net interest margin has increased significantly over the period
reviewed and is now seventeen basis points above peer. The increasing trend in
the Company's net margin relative to the peer group is primarily a result of the
Company's liability sensitive position during the declining interest rate
environment experienced since December 31, 2001 coupled with an increase in the
Company's loan portfolio relative to total assets and above peer yields within
the loan portfolio. Since December 31, 2001 the Company's yield on earning
assets has declined from 7.42% to 6.86% as of June 30, 2003, or 56 basis points,
versus a decline in interest expense to average earning assets from 4.36% to
2.51% or 185 basis points. Over the same period, the peer group's yield on
earning assets has declined by 178 basis points while interest expense to
average earning assets has declined 168 basis points. This trend has been
partially offset by the Company's above peer cost of funds in terms of interest
expense to average earning assets. For the six months ending June 30, 2003, the
Company's interest income to average earning assets equals 6.86% compared to
6.11% for peer. Over the same period, the Company's interest expense to average
earning assets equals 2.51% compared to 1.93% for peer.
-24-
(GRAPH)
HFB FINANCIAL CORPORATION
NET INTEREST MARGIN
<Table>
<Caption>
2001 2002 6/30/03
---------- ---------- ----------
PERCENTAGE
COMPANY 3.06% 4.02% 4.35%
PEER 4.29% 4.31% 4.18%
</Table>
(GRAPH)
HFB FINANCIAL CORPORATION
NON-INTEREST INCOME/AVERAGE ASSETS
<Table>
<Caption>
2001 2002 6/30/03
---------- ---------- ----------
PERCENTAGE
COMPANY 0.41% 0.48% 0.47%
PEER 0.85% 0.87% 0.92%
</Table>
The Company's overall non-interest income to average assets has remained well
below peer level over the period reviewed. The Company's low level of fee income
as well as its above peer cost of funds is primarily a result of the composition
of the Company's deposit base which more closely resembles a thrift institution
than a commercial bank. As of June 30, 2003, time deposits over $100,000
represent 25.25% of the Company's total assets compared to 12.73% for peer.
-25-
(GRAPH)
HFB FINANCIAL CORPORATION
NON-INTEREST EXPENSE/AVERAGE ASSETS
<Table>
<Caption>
2001 2002 6/30/03
---------- ---------- ----------
PERCENTAGE
COMPANY 2.26% 2.69% 2.71%
PEER 3.10% 3.05% 3.03%
</Table>
Over the period reviewed, the Company's level of non-interest expense to average
assets while increasing has remained well below peer. A review of the Company's
total overhead expense components as of June 30, 2003 reveals that the Company's
below peer operating cost can be attributed primarily to lower personnel and
occupancy expenses as the following table indicates:
PERCENT OF AVERAGE ASSETS
<Table>
<Caption>
Company Peer
------- ----
Personnel Expense 1.39% 1.68%
Occupancy Expense 0.35% 0.43%
Other Expense 0.97% 0.96%
---- ----
Total 2.71% 3.03%
</Table>
A fundamental indication of the Company's liquidity position is provided by a
review of the Company's net loan to deposit and net non-core funding dependence
ratios. These ratios provide an indication of the Company's ability to account
for changes in the composition of the balance sheet, as well as provide funds
for future growth. As of June 30, 2003, the Company's net loan to deposit ratio
equals 89.73% compared to 77.34% for peer. In addition, the Company's net loans
to core deposits equals 132.20% compared to 92.85% for peer, at June 30, 2003.
The Company's total borrowings have increased from $12.4 million at December 31,
2001 to $25.6 million at June 30, 2003
-26-
and certificates of deposit over $100,000 have increased from $61.8 million at
December 31, 2001 to $65.6 million at June 30, 2003. The Company's net non-core
funding dependence as of June 30, 2003 equals 37.69% versus the peer group of
14.00%. This ratio coupled with the Company's level of net assets re-pricable
within one year provide an indication of the Company's sensitivity to changes in
interest rates. As of June 30, 2003, the Company's net assets as a percentage of
total assets that re-price within one year equal -33.10% versus 4.35% for peer.
The Company's high level of non-core fund dependence coupled with its
significant negative one-year re-pricing gap indicates an increase in interest
rates could have a significant negative impact on the Company's net income.
(GRAPH)
HFB FINANCIAL CORPORATION
NET LOANS/DEPOSITS
<Table>
<Caption>
2001 2002 6/30/30
------ ------ -------
COMPANY 74.38% 82.96% 89.73%
PEER 77.45% 77.58% 77.34%
</Table>
The Company's net loan to deposit ratio has increased from 74.38% at December
31, 2001, to 89.73% at June 30, 2003. This increasing trend is a result of the
Company aggressively pursuing loan growth. Over the same period, the peer group
posted a slight decline in net loans to deposits from 77.45% to 77.34%. The
Company's significant dependence on non-core funding coupled with its increasing
net loan to deposit ratio, indicates additional loan growth could strain the
Company's liquidity position.
-27-
As indicated below, over the period presented, the Company has experienced an
above peer level of asset quality concerns. As of June 30, 2003, the Company's
non-current loans have declined and now approximate peer at 0.89% of total
loans. However, the Company still has a significant level of loans 30 days +
past due compared to peer.
(GRAPH)
HFB FINANCIAL CORPORATION
NON-CURRENT LOANS/GROSS LOANS
<Table>
<Caption>
2001 2002 6/30/30
------ ------ -------
COMPANY 2.30% 1.42% 0.94%
PEER 0.87% 0.84% 0.89%
</Table>
(GRAPH)
HFB FINANCIAL CORPORATION
30 DAYS + PAST DUE & NON-CURRENT LOANS/GROSS LOANS
<Table>
<Caption>
2001 2002 6/30/30
------ ------ -------
COMPANY 4.08% 1.86% 2.41%
PEER 2.35% 2.20% 2.19%
</Table>
-28-
(GRAPH)
HFB FINANCIAL CORPORATION
NET LOAN LOSSES/AVERAGE TOTAL LOANS
<Table>
<Caption>
2001 2002 6/30/30
------ ------ -------
COMPANY 0.03% 0.03% 0.01%
PEER 0.24% 0.24% 0.16%
</Table>
The Company's historical level of charge-off activity has remained below peer
since 2001.
(GRAPH)
HFB FINANCIAL CORPORATION
ALLOWANCE FOR LOAN LOSSES/TOTAL LOANS
<Table>
<Caption>
2001 2002 6/30/30
------ ------ -------
COMPANY 0.55% 0.71% 0.75%
PEER 1.26% 1.29% 1.31%
</Table>
As of June 30, 2003, the Company maintains an allowance for loan and lease
losses which remains significantly below peer at 0.75% of total loans compared
to peer level of 1.31%. In addition, as of June 30, 2003, the Company's loans
30-89 days past due and still accruing equal 1.52% of total loans compared to
1.18% for peer. At June 30, 2003, 1.08% of the Company's commercial real estate
loan portfolio is on non-accrual
-29-
status and an additional 2.7% is 30-89 days past due and still accruing. In
addition, the Company has $1.8 million in other real estate owned and its total
non-performing loans and other real estate owned equal 245.08% of loan loss
reserves, at June 30, 2003, compared to 69.01% for peer.
Given the Company's level of non-current loans and other asset quality
indicators described above, the Company's allowance for loan and lease losses
may require additional funding to absorb reasonably anticipated charge-offs
within the loan portfolio.
-30-
METHODOLOGY
In order to determine the fair value of a common stock in relation to the
assets, earnings and equity of a company it requires a comprehensive analysis of
the company, its markets, future growth prospects and the micro and macro
economic environment in which it operates. Under the Delaware Block Method and
current Tennessee case law the concept of fair value requires explicit
utilization and the appropriate weighting of three valuation methods normally
considered by analysts and the courts to determine fair value. The Transaction
Value Method of valuing a share of common stock is determined by examining a
limited number of transactions which are assumed to have occurred at arm's
length. The Asset Value Method is based on adjusted value of net assets. The
Earnings Value Method, utilized under the Delaware Block Method and Tennessee
case law, involves an estimation of the present value of a company's future
earnings. Under this method, an estimate of a company's future earnings is
derived by averaging the company's recent earnings over a relevant period and
applying a capitalization rate or price to earnings ratio to this future
earnings estimate.
The following discusses each valuation methodology under the Delaware Block
Method utilized in determining the fair value of the Company's common shares.
For purposes of this analysis the Company's shareholders' equity and shares
outstanding are as follows.
VALUATION ADJUSTMENTS
June 30, 2003 Shareholders' Common Equity $24,216,000
August 11, 2003 Common Shares Outstanding 1,301,101
-31-
TRANSACTION VALUE METHOD
The Transaction Value represents the price(s) at which shares of common stock in
the Company have exchanged hands between a willing buyer and seller. As of
August 11, 2003 the Company has 1,301,101 common shares outstanding. As of
September 26, 2003 the Company's common shares closed trading on the NASDAQ at
$19.91 per share. Since June 25, 2003 the Company has had 28,826 of its common
shares trade on NASDAQ between $18.35 and $20.50 per common share.
Based upon this recent activity, the transaction price is $19.91 per share. The
following summarizes the results. Exhibit Two of this report details the
Company's common stock trading history since September 24, 2002.
Transaction Value
Per Common Share $19.91
Multiple of Book Value (06/30/03) 1.07X
-32-
ASSET VALUE METHOD
The Asset Value Method considers the value of assets based on information
available. The valuation is based on "market adjusted" book value. Analysis of
the Company's financial statements as of June 30, 2003 indicates the Company has
intangible assets of $99,000. The following presents the Asset Value based on
adjustments derived from the Company's June 30, 2003 FR Y-9C and Form 10-Q.
<Table>
Shareholders' Common Equity (6/30/03) $24,216,000
Total Intangible Assets (99,000)
-----------
Net Market Adjusted Book Value $24,117,000
===========
Per Common Share $ 18.54
Multiple of Book Value 1.00X
</Table>
-33-
EARNINGS VALUE METHOD
The Earnings Value Method equates the fair value of a company to the present
value of its anticipated future earnings. An estimate of the Company's future
earnings is derived utilizing an average of the Company's reported earnings
since 2001. As mentioned previously, the Bank converted to a state chartered
commercial bank in December 2001. Due to this change in the Company's operations
and higher earnings in the last three years, we are of the opinion that the
Company's earnings over the last three years are a more accurate predictor of
the Company's future earnings than what would be attained by including more
historic operating results. The following table demonstrates the Company's
estimated future earnings to be utilized in the Earnings Value Method:
<Table>
June 30, 2001 Company Net Income $1,489,000
June 30, 2002 Company Net Income 1,589,000
June 30, 2003 Last Twelve Month Net Income 2,484,000
----------
Average Company Net Income Since 2001 $1,854,000
</Table>
Under the Earnings Method the Company's estimated future earnings are multiplied
by an appropriate price earnings ratio in order to determine the fair value of
the Company's common shares. The price to earnings multiple utilized in
determination of fair value under this methodology is 15.67 times earnings. The
15.67X earnings ratio represents the median last twelve month price earnings
ratio of a large subsection of publicly traded banks and thrifts. The
composition of this group consists of all 292 exchange traded banks and thrifts,
excluding mutual holding companies, in the states of Alabama, Arkansas, Florida,
Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan,
Minnesota, Mississippi, Missouri, Nebraska, North Carolina, North Dakota, Ohio,
Pennsylvania, South Carolina, South Dakota, Tennessee, Virginia, West Virginia
and Wisconsin which are not currently being acquired and have total assets
between $100.0 million and $5.0 billion and have a last twelve month return on
average equity greater then 5.0%. This price to earnings multiple embodies a
median of what community banks and thrifts currently trade for without
significant consideration being given to the size, location, balance sheet
structure or operating results of this group beyond a minimum level. The
-34-
following table demonstrates the application of this last twelve month price
earnings ratio to the Company's estimated future earnings.
<Table>
Three Year Average Company Net Income $ 1,854,000
Price/Earnings Multiple 15.67X
-----------
Earnings Value $29,052,000
===========
Per Common Share $ 22.33
Multiple of Book Value 1.20X
</Table>
-35-
CONCLUSION - DELAWARE BLOCK METHOD
The following table presents a summary and weighting of the previously derived
methodologies.
<Table>
<Caption>
VALUE PER SHARE FAIR VALUE WEIGHT
--------------- -----------------
Transaction Value $19.91 55.00%
Asset Value Method 18.54 0.00%
Earnings Value Method 22.33 45.00%
DELAWARE BLOCK METHOD
FAIR VALUE $21.00 100.00%
</Table>
Over the last three months ending September 25, 2003 the Company has had 28,826
common shares trade between $18.35 per share and $20.50 per share which equates
to an average daily trading volume of 313 shares per day over this period of
time. In addition, from December 31, 2002 through June 30, 2003 institutional
ownership in the Company's common stock increased from 3.1% to 5.48% of the
Company's total common shares outstanding. Based on the level of trading
activity in the Company's shares as well as the increasing level of
institutional interest in the Company's common stock, we are of the opinion that
the market for the Company's common shares is relatively efficient and the
current price at which the Company trades is an accurate reflection of investor
perceptions of the Company's value.
In determination of the fair value of the Company's common shares under the
Delaware Block Method we are of the opinion that the Asset Value Method is more
of an accounting valuation or liquidation value which does reflect the going
concern aspect of the Company's business and is not included in our opinion of
value.
In the utilization of the Earnings Value Method in determining the fair value of
the Company we are of the opinion that the average of the Company's earnings
over the last three years may somewhat understate the Company's future earnings
potential. However,
-36-
we are of the opinion that the Company's current price to earnings ratio should
be below that of median of the 292 financial institutions that were utilized in
the determination of the Earnings Value Method. In our opinion, the Company has
lower potential long-term earnings growth prospects than the median of these
institutions. In addition, the Company has a significant reliance on interest
sensitive non-core funding. Over the long-term, once an institution has
maximized its current operations and efficiency ratio, a financial institution's
growth in net income must be driven by core deposit growth. Over the long-term
an institution can only grow its deposits faster than the aggregate deposit
growth in the markets in which it operates by increasing deposit rates which in
turn reduces net margins and profitability. Over the last twelve months ending
June 30, 2003, the Company has increased its deposits 1.19% compared to last
twelve month median deposit growth of 9.14% for the 292 financial institutions
utilized in the Earnings Value Method. In addition, the core markets in which
the Company operates have exhibited an aggregate three-year compound rate of
deposit growth of only 3.38%. Given our analysis of these facts, we have
weighted the Earnings Value Method less heavily in our determination of the fair
value of the Company's common shares under the Delaware Block Method.
Based on the foregoing as well as all other factors deemed relevant and assuming
accuracy and completeness of information provided by the Company, it is our
opinion as an independent appraiser that the fair value of the Company's common
stock under current Tennessee statutes utilizing the Delaware Block Method of
determining fair value is $21.00 per common share without the application of any
marketability or minority discounts.
-37-
CONSIDERATION OF RECENT FAIR VALUE CASE LAW
In recent years the courts in Delaware and a number of other states have
augmented the original Delaware Block Method with a number of additional
valuation techniques in determining fair value. It is our opinion the most
theoretically sound and fundamentally significant of these additional methods
utilized in the determination of fair value are as follows:
The Adjusted Book Value Method evaluates prevailing market conditions for
companies by comparing the market price to book value ratios of comparable
publicly traded organizations to the subject company. The Investment Value
Method relates investor's perception of comparable publicly traded organizations
by comparing the market price to earnings per share of these organizations to
the subject company's current earnings. The Discounted Cash Flow Method relates
fair value to the future earnings and dividend capacity of a company.
In addition to the previous valuation methodologies, some courts have held that
the appraiser should also consider control premiums in the determination of fair
value. The appraiser must use extreme care in employing whole bank acquisition
transactions as a proxy for control premiums and fair value. In utilizing
acquisition comparables in the determination of fair value, the appraiser must
be cautious in the selection of comparable banks and transactions. The
acquisition market is dynamic and influenced by significantly more factors than
simply comparing transactions to a subject company. There are three major issues
of concern which can have a dramatic impact on acquisition transactions. The
following presents the three primary factors to be considered when and if
acquisition comparables are utilized:
Utilizing Stock Transactions in Comparables
It is a very common practice when a bank acquires another bank to trade shares
of common stock. In these transactions, the acquiring bank issues new shares to
the shareholders of the selling bank in exchange for their common shares. What a
bank can pay for another bank utilizing common stock, in most cases, is
significantly different than what an acquirer may or could pay in cash. There
are many factors that influence the price a bank can sell for in a stock
transaction that have nothing to do with the selling entity. These would include
the price of the acquiring company's shares, the bank stock market, the
price-to-earnings and price-to-equity ratios of the acquiring company and the
current and projected level of earnings of the acquirer. These factors have
nothing to do with the acquired company, but these factors
-38-
comprise at least one-half of the factors that determine what a bank may sell
for in a stock transaction.
In a dissenters' action, the dissenters receive cash in return for their shares.
Comparing a cash based transaction to a stock exchange merger is like comparing
apples to oranges.
Acquisition Accounting
Prior to June 30, 2001, acquisitions were accounted for utilizing two different
accounting methods. Transactions that were not all common stock of the acquiring
company were, in most instances, accounted for under the purchase method of
accounting for business combinations. Transactions where the acquired company
received their entire sale price in the acquiring company's common stock were
typically accounted for under the pooling of interest method of accounting.
Experts should agree that the accounting and financial impact of stock pooling
of interest transactions produced superior financial results when compared to
the purchase method of accounting utilized in reporting cash transactions.
Synergies/Cost Savings
The majority of bank acquisition transactions involve transactions in which the
acquiring entity is also a bank. Because of the banking industry's uniformity in
operations and ability to realize economies of scale in consolidation, an
acquiring bank is able to pay a premium due to the potential for cost savings
from employee lay-offs, branch closings and consolidation of operations. These
actions allow an acquirer to significantly increase the earnings of the acquired
institution and justify paying a control premium.
If acquisition comparables are utilized in the determination of fair value, they
must be acquisitions where the seller receives cash and there should be a
minimum of synergies between the companies that are being combined. While most
opinions regarding fair value are focused on making sure that the dissenters are
treated fairly, the improper utilization of acquisition comparables can be
extremely damaging to the corporation and produce an unrealistic valuation
level.
The following pages demonstrate the utilization of these additional valuation
methods in determining fair value.
-39-
ADJUSTED BOOK VALUE METHOD
The adjusted book value method adjusts the shareholders' equity (book value) of
the Company to reflect investors perceptions of future returns of the Company. A
multiple is applied due to book value not accurately reflecting these investor
perceptions which help determine the fair value of the Company. The factor
applied to book value reflects current market conditions and is the median ratio
of the market price to book value for a set of publicly traded comparable
banking institutions.
The comparable peer group consists of all banks and thrifts traded on the
NASDAQ, AMEX or NYSE which are not currently under agreement to be acquired,
have total assets between $150 million and $500 million headquartered in
Alabama, Arkansas, Georgia, Indiana, Kentucky, Mississippi, North Carolina,
Ohio, Tennessee or Virginia, have a core return on average equity between 8.00%
and 12.00% over the most recently reported last twelve month period, have an
equity to assets ratio between 8.50% and 10.50% and also regularly pay dividends
to common shareholders (the "Comparable Bank Group"). While no two financial
institutions are exactly alike, the institutions in the Comparable Bank Group
were chosen due to their similarities to the Company in terms of asset size, use
of financial leverage and balance sheet structure, operating performance and
geographic location.
The following section presents the financial characteristics of these
organizations followed by the determination of the Comparable Bank Group median
multiple of market price-to-book value and the application of this multiple to
the June 30, 2003 book value of the Company.
COMPARABLE BANK GROUP FINANCIAL HIGHLIGHTS
<Table>
<Caption>
NET EFFICIENCY DIVIDEND NPAS+90+
TOTAL EQUITY/ LOANS/ ROAA ROAE MARGIN RATIO PAYOUT DAYS DELINQ/
ASSETS ASSETS DEPOSITS 6/30/03 6/30/03 6/30/03 6/30/03 6/30/03 ASSETS
6/30/03 6/30/03 6/30/03 LTM LTM LTM LTM LTM 6/30/03
COMPANY NAME STATE TYPE ($000) (%) (%) (%) (%) (%) (%) (%) (%)
- ------------ ----- ---- ------- ------- -------- ------- ------- ------- ---------- ------- ------------
BOE Financial Services of VA VA Bank 235,403 9.61 80.64 0.84 8.95 4.26 60.30 33.33 NA
Classic Bancshares, Inc. KY Bank 329,617 9.84 98.03 1.25 12.09 4.53 59.11 12.17 0.79
Community Financial Corp VA Thrift 306,682 8.92 102.66 1.09 11.84 3.99 68.49 24.49 0.59
FFW Corporation IN Thrift 242,771 9.74 80.34 1.00 10.08 2.98 51.96 34.68 1.13
Shore Financial Corporation VA Bank 187,468 10.38 81.78 1.05 10.09 3.65 58.92 16.67 0.39
Logansport Financial Corp. IN Thrift 160,249 9.97 103.87 1.08 10.31 2.99 49.18 30.56 0.86
LSB Financial Corp. IN Thrift 310,932 8.52 116.58 0.86 10.50 3.49 56.22 24.10 1.77
Pinnacle Bancshares, Inc. AL Bank 220,916 8.98 61.03 1.07 11.69 3.64 56.92 28.78 1.31
HFB FINANCIAL CORPORATION KY BANK 259,484 9.33 90.80 0.98 10.65 3.92 61.66 23.35 1.31
MEDIAN: 239,087 9.68 89.91 1.06 10.41 3.65 57.92 26.64 0.86
</Table>
-40-
COMPARABLE BANK GROUP
The following table provides detailed analysis of the market price-to-book value
per share multiple of the Comparable Bank Group.
RATIO OF MARKET PRICE-TO-BOOK VALUE PER SHARE
SEPTEMBER 26, 2003
<Table>
<Caption>
BANK CITY PRICE/BOOK VALUE
- ---- ---- ----------------
BOE Financial Services of Virginia Tappahannock, VA 1.36X
Classic Bancshares, Inc. Ashland, KY 1.40
Community Financial Corporation Staunton, VA 1.36
FFW Corporation Wabash, IN 1.20
Shore Financial Corporation Olney, VA 1.43
Logansport Financial Corporation Logansport, IN 1.10
LSB Financial Corp. Lafayette, IN 1.24
Pinnacle Bancshares, Inc. Jasper, AL 1.10
MEDIAN 1.30X
</Table>
Source: Financial information supplied by SNL Financial L.P. DataSource. Pricing
as of September 26, 2003
The following presents the application of the median multiple to the Company's
June 30, 2003 shareholders' equity.
<Table>
Company June 30, 2003 Shareholders' Equity $24,216,000
Comparable Bank Group Multiple 1.30X
-----------
Adjusted Book Value $31,481,000
===========
Per Common Share $ 24.20
Multiple of Book Value 1.30X
</Table>
-41-
INVESTMENT VALUE METHOD
The Investment Value Method establishes a proxy for value based on the earnings
capacity of a company. This technique is based on the premise that investors'
value shares of stock by analyzing the earnings of the organization and
subsequently apply a multiple that reflects future growth prospects.
A price/earnings multiple is computed by utilizing the median price/earnings
multiple of the previously established Comparable Bank Group. This multiple
reflects investor perceptions of the future earnings capacity and value of the
Comparable Bank Group.
-42-
COMPARABLE BANK GROUP
The median multiple for the Comparable Bank Group is derived in the following
table.
RATIO OF MARKET PRICE TO YEAR-TO-DATE ANNUALIZED CORE EARNINGS PER SHARE
SEPTEMBER 26, 2003
<Table>
<Caption>
BANK CITY PRICE/YTD CORE EPS
- ---- ---- ------------------
BOE Financial Services of Virginia Tappahannock, VA 13.27X
Classic Bancshares, Inc. Ashland, KY 13.53
Community Financial Corporation Staunton, VA 11.25
FFW Corporation Wabash, IN 12.59
Shore Financial Corporation Olney, VA 15.71
Logansport Financial Corporation Logansport, IN 14.24
LSB Financial Corp. Lafayette, IN 12.18
Pinnacle Bancshares, Inc. Jasper, AL 10.83
MEDIAN 12.93X
</Table>
Source: Financial information supplied by SNL Financial L.P. DataSource. Pricing
as of September 26, 2003
Applying the median price-to-YTD annualized core earnings multiple of the
Comparable Bank Group to the Company's annualized June 30, 2003 six month net
income results in the Investment Value for the Company.
<Table>
6/30/03 Annualized Six Month Company Net Income $ 2,534,000
Price/Earnings Multiple 12.93X
-----------
Investment Value $32,765,000
===========
Per Common Share $ 25.18
Multiple of Book Value 1.35X
</Table>
-43-
DISCOUNTED CASH FLOW METHOD
The Discounted Cash Flow Method is based on the premise that common stock value
is equivalent to that price at which its future dividends and residual earnings
will produce a particular yield. The yield or discount rate utilized in the
appraisal is 15.50 percent based on analysis of available market information and
consideration of risk factors.
The following is an analysis and disaggregation of the 15.50% discount rate
utilized for the purposes of this appraisal. The analysis utilizes data from SNL
Securities for the Comparable Bank Group.
Discount Rate Analysis Comparable Bank Group
<Table>
Median P/E Ratio Comparable Bank Group 12.93X
Median E/P Ratio Comparable Bank Group 7.73%
Median Core Retention Ratio Comparable Bank Group 73.36%
Median LTM 6/30/03 Return on Average Equity 10.41%
1) Sustainable Growth Rate 7.64%
Implied Median Discount Rate Comparable Bank Group 15.37%
</Table>
1) Sustainable Growth is equal to the median Core ROAE times the median
retention ratio.
The median required return is equal to the E/P ratio plus the median sustainable
growth rate. The disaggregation of the P/E ratio demonstrates the required
return for the Comparable Bank Group, as of September 26, 2003, equals 15.37%.
The Company's below Comparable Bank Group loan loss reserves to total loans,
higher level of non-performing assets and lower level of equity to assets
implies a higher level of risk associated with the Company's common stock. As of
June 30, 2003, the Company's loan loss reserves to total loans equals 0.75%
compared to the Comparable Bank Group median loan loss reserves to total loans
of 1.27%. Based on the above information, a discount rate of 15.50% will be
utilized for the purposes of this appraisal.
-44-
Two earnings methods are established:
1. Short-term value based on 5 years projections and cash flows;
2. Long-term value based on 20 year projections and cash flows.
The June 30, 2003 average asset and total equity levels are used as the basis
for the projections. These projections are based on the Company realizing very
aggressive financial performance goals. As mentioned previously, the core
markets in which the Company operates have exhibited an aggregate three-year
compound rate of deposit growth of only 3.38% from June 30, 1999 to June 30,
2002 and over the last twelve months ending June 30, 2003 the Company has
increased its deposit base 1.19%. We are of the opinion however that the
Company's de-novo branch strategy into new markets may provide the Company with
the opportunity to potentially realize above market average deposit growth at
least over the short-term without significantly hindering profitability. In
addition, the Company currently pays out approximately 25% of its earnings in
dividends. Financial theory suggests that if the Company cannot realize above
market average deposit and asset growth, dividends would be increased
significantly to maintain optimum use of leverage. Consequently we have utilized
an aggressive asset growth rate of 7% in the short-term and 6% in the long-term.
Return on average assets ("ROA") will equal 0.95% in year 1 and increase five
basis points per year until it reaches 1.25% in year 7 and remain constant
thereafter. Dividends will equal 25% of net income in years 1 through 5 and then
increase to 60% of income in years 6 through 20. The net income at the end of
the fifth year, for the short-term, and the end of the twentieth year, for the
long-term, are given a terminal value equal to the Comparable Bank Group median
price to earnings multiple of 12.93 times ending net income.
5 YEAR SUMMARY PROJECTED DATA
<Table>
<Caption>
Year Assets Net Income Dividends Equity
- ---- -------- ---------- --------- -------
1 $274,326 $2,606 $ 652 $26,171
2 293,528 2,935 734 28,372
3 314,075 3,298 824 30,845
4 336,061 3,697 924 33,618
5 359,585 4,135 1,034 36,719
</Table>
-45-
FINANCIAL RATIOS
<Table>
<Caption>
Year Return on Assets Return on Equity Equity/Assets
- ---- ---------------- ---------------- -------------
1 0.95% 9.96% 9.54%
2 1.00 10.35 9.67
3 1.05 10.69 9.82
4 1.10 11.00 10.00
5 1.15 11.26 10.21
</Table>
Value of the Company in the short-term method is derived by applying a terminal
value equal to 12.93 times the ending net income. The use of the 12.93 multiple
reflects the median price to earnings ratio of the publicly traded Comparable
Bank Group previously discussed in the Methodology Section.
The short-term valuation analysis is presented below:
<Table>
Short-term Value $28,684,000
===========
Per Common Share $ 22.05
Multiple of Book Value 1.18X
</Table>
Utilizing the five-year projections prepared for the short-term valuation as a
base, twenty-year projections are prepared. Assumptions utilized in the
long-term projections are:
o Return on assets will equal 0.95% in years 1 and increase 5 basis
points per year thereafter until it reaches 1.25% in year 7.
o Dividends will equal 25% of adjusted net income in years 1 through 5
and then increase to 60% of adjusted income in years 6 through 20.
Based on these assumptions and a terminal value equal to 12.93 times ending net
income, the long-term valuation analysis is presented below:
<Table>
Long-term Value $21,026,000
===========
Per Common Share $ 16.16
Multiple of Book Value 0.87X
</Table>
-46-
ACQUISITION COMPARABLE METHOD
PBS performed an analysis of bank and thrift acquisition transactions in the
states of Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kansas,
Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Carolina, North Dakota,
Ohio, South Dakota, Tennessee, Virginia, West Virginia and Wisconsin in which
the seller had a return on average equity greater then 5.0% and assets over
twenty million (the "Comparable Acquisition Group"). In order to limit some of
the potential concerns discussed in the methodology section concerning the
utilization of acquisition comparable transactions in determining fair value,
the analysis utilized cash transactions where the acquirer was a newly formed
holding company formed for the purpose of acquiring the seller. In addition, the
search was limited to acquisition transactions announced since June 30, 2001
when transaction accounting rules were changed.
As previously discussed, all acquisition pricing usually contains some element
of the synergistic effect of the combination of two companies. We are unaware of
a method of completely isolating or excluding these effects from the overall
price. To somewhat mitigate this concern, all of the acquirers contained in the
Acquisition Comparable Group were new holding companies formed by investor
groups for the purpose of acquiring the seller. These companies would typically
be unable to realize the degree of cost savings and synergies available in most
transactions where the acquirer is an existing financial institution. As
mentioned previously, it is the cost savings and synergies in operations that
allow acquirers to pay a higher price than would otherwise be possible. The
following table demonstrates the results of this analysis:
<Table>
<Caption>
BUYER NAME TARGET NAME TARGET CITY STATE SELLER DATE
- ---------- ----------- ----------- ----- ------ ----
Marshall Bancorp Inc. Norkitt Bancorp, Inc. Hallock MN Bank 11/05/2001
Investor Group Financial Services of Lowry, Inc. Lowry MN Bank 07/10/2002
Olmsted Holding Corp. Olmsted National Bank Rochester MN Bank 10/28/2002
Investor Group North Star Holding Company, Inc. Jamestown ND Bank 06/10/2002
FEB Bancshares Inc. Golden Sands Bankshares Inc. Neshkoro WI Bank 09/19/2002
Investor Group First Schaumburg Bancorporation Schaumburg IL Bank 01/14/2002
First Southern Bancshares Shawnee Bancshares,Inc. Grand Tower IL Bank 04/29/2002
MEDIAN
</Table>
-47-
<Table>
<Caption>
SELLER
SELLER EQUITY/ SELLER SELLER DEAL PRICE/ PRICE/
ASSETS ASSETS ROAA ROAE VALUE LTM NI BOOK
BUYER NAME TARGET NAME ($000) (%) (%) (%) ($M) (X) (%)
- ---------- ----------- ------- ------ ------ ------ ----- ------ ------
Marshall Bancorp Inc. Norkitt Bancorp, Inc. 51,116 15.94 1.09 7.10 13.6 20.03 114.05
Investor Group Financial Services of Lowry, Inc. 20,196 10.10 1.46 14.98 2.8 10.23 147.03
Olmsted Holding Corp. Olmsted National Bank 27,092 9.72 1.29 13.07 5.5 17.03 208.89
Investor Group North Star Holding Company, Inc. 114,400 9.32 1.18 12.69 15.8 11.72 154.99
FEB Bancshares Inc. Golden Sands Bankshares Inc. 36,242 8.51 2.09 25.11 1.6 11.60 171.82
Investor Group First Schaumburg Bancorporation 92,813 4.88 2.33 33.71 14.2 10.53 313.33
First Southern Bancshares Shawnee Bancshares,Inc. 20,374 7.60 1.15 16.83 0.9 121.74
MEDIAN 36,242 9.32 1.29 14.98 5.5 11.66 154.99
</Table>
Applying the above median price to book value and price to LTM earnings to the
Company results in the following Comparable Acquisition Group Values:
COMPARABLE ACQUISITION GROUP
(MEDIAN MULTIPLES)
<Table>
Multiple of Book Value $37,535,000
===========
Per Common Share $ 28.85
Multiple of Book Value 1.55X
</Table>
<Table>
Multiple of Earnings $29,547,000
===========
Per Common Share $22.71
Multiple of Book Value 1.22X
</Table>
-48-
CONCLUSION
The following table presents a summary of previously derived methodologies.
<Table>
<Caption>
VALUE PER SHARE MULTIPLE OF BOOK
--------------- ----------------
Transaction Value $19.91 1.07X
Asset Value Method 18.54 1.00
Earnings Value Method 22.33 1.20
Adjusted Book Value:
Comparable Bank Group 24.20 1.30
Investment Value:
Comparable Bank Group 25.18 1.35
Earnings Value:
Short Term 22.05 1.18
Long Term 16.16 0.87
Acquisition Comparables:
Multiple of Book Value 28.85 1.55
Multiple of Earnings 22.71 1.22
AVERAGE 22.21 1.19
MEDIAN 22.33 1.20
</Table>
The average and median of the above values are $22.21 and $22.33, respectively,
including the Asset Value Method. The Asset Value Method is more of an
accounting valuation or liquidation value which does accurately reflect the
going concern aspect of the Company's business and is not included in our
opinion of value. The median and average of the above values excluding the Asset
Value Method is $22.52 and $22.67, respectively.
-49-
These values assume that the Company's operating attributes equal the median of
the Comparable Bank Group and will also meet our financial projections. In
determining the fair value of the Company's common shares we have also
considered the following factors for difference in operating performance,
dividends and other performance characteristics:
o SLIGHT PREMIUM FOR FINANCIAL PERFORMANCE ABOVE THE COMPARABLE BANK GROUP. A
slight premium on the Company's common shares could be justified due to its
financial performance when compared to the Comparable Bank Group. For
example, the median return on average equity for the Comparable Bank Group
over the last twelve months ending June 30, 2003 equals 10.41% compared to
10.65% for the Company. As an offset to the Company's above Comparable Bank
Group last twelve month return on equity, the Company's last twelve month
efficiency ratio of 61.66% is above the Comparable Bank Group median
efficiency ratio of 57.92% and the Company's LTM return on average assets
of 0.98% is below the Comparable Bank Group median of 1.06%.
o SLIGHT DISCOUNT FOR LOWER LEVEL OF DIVIDENDS COMPARED TO THE COMPARABLE
BANK GROUP. A slight discount on the Company's common shares could be
justified due to its lower dividend payout ratio when compared to the
Comparable Bank Group. The Company's semi-annual dividend payments equal
23.35% of its net income over the last twelve months ending June 30, 2003
compared to the Comparable Bank Group's median last twelve month dividend
payout ratio of 26.64%
o DISCOUNT FOR RISKS ASSOCIATED WITH RAPID LOAN GROWTH AND ASSET QUALITY
ISSUES. The premium which could be justified on the Company's common shares
relative to the Comparable Bank Group for financial performance is more
than offset by risks associated with the adequacy of the Company's
allowance for loan and lease losses. As of June 30, 2003, the Company's
loan loss allowance equals 0.75% of total loans compared to the median of
the Comparable Bank Group of 1.27%. As of June 30, 2003, the Company's loan
loss reserves equals 40.80% of non-accrual loans plus loans 90+ days past
due and still accruing and other real estate owned compared to
-50-
the median of the Comparable Bank Group of 110.77%. In addition, the
Company's non-accrual loans plus loans 90+ days past due and still accruing
and other real estate owned equal 1.31% of assets at June 30, 2003 compared
to the median of the Comparable Bank Group of 0.86%. Of further concern, as
of June 30, 2003 the Company has an additional $2.8 million in loans 30 to
89 days past due and still accruing.
Based on the foregoing, the economic and demographic characteristics of the
specific markets in which the Company operates, as well as, all other factors
deemed relevant and assuming accuracy and completeness of information provided
by the Company, it is our opinion as an independent appraiser that the fair
value of the Company's common stock is $22.75 per common share taking into
consideration potential control premiums and other fair value methodologies
without the application of any marketability or minority discounts.
-51-
PROFESSIONAL BANK SERVICES, INC.
INVESTMENT BANKING ENGAGEMENTS
Professional Bank Services, Inc. ("PBS"), a consulting firm for financial
institutions with offices in Orlando, FL., New York, NY, Louisville, KY. and
Nashville, TN. was established in 1978. Since its inception, the firm has
assisted over 1,000 institutions in various capacities. One area of
specialization is the firm's appraisal services. The company is continually
engaged to provide assistance with corporate expansion, holding company
formation, and to perform fairness opinions and stock appraisals. PBS' wholly
owned subsidiary, Investment Bank Services, Inc., is a registered Broker Dealer
with the Securities and Exchange Commission ("S.E.C.").
The firm's stock appraisals have been recognized by various courts and
regulatory agencies in settling dissenting shareholder suits. In addition to
appraisal valuations, the firm also specializes in valuations that facilitate
the merger or acquisition process. The firm has valued institutions with assets
totaling over $5.0 billion and fair market values over $600 million.
PBS utilizes proven industry accepted methods in providing common stock
appraisals. The appraisal and support documents are prepared in a fashion that
is easily understood and are often accompanied by professional presentation. The
appraisals have been used for reverse common stock splits, consummation of
interim bank mergers and valuing stock for Employee Stock Ownership Plans, as
well as other traditional purposes.
-52-
CHRISTOPHER L. HARGROVE
President and Senior Consultant
Professional Bank Services, Inc.
Mr. Hargrove has an in-depth understanding of the acquisition process. As a
senior analyst for a major mid-south bank holding company, Mr. Hargrove assisted
in the successful acquisition of several commercial banks with assets totaling
over $2.0 billion. Mr. Hargrove is also experienced in analyzing financial data
concerning common stock and other securities. His expertise includes:
ACQUISITION STRATEGY Designing and implementing plans for
continual growth through acquisition
to ensure the client remains competitive
in an industry of transition.
CAPITAL ANALYSIS Determining the optimal use of a bank's
capital resources in order to
accurately plan for growth and
profitability.
COMMON STOCK APPRAISAL Determining through market and fundamental
analyses the value of common stock for the
purpose of preparing fairness opinions and
special actions called for by management.
PROFESSIONAL EXPERIENCE
Professional Bank Services, Inc. 1996 - Present
Louisville, Kentucky President and Senior Consultant
Professional Bank Services, Inc. 1989 - 1996
Louisville, Kentucky Vice President and Senior Consultant
Professional Bank Services, Inc. 1985 - 1989
Nashville, Tennessee Senior Consultant
Investment Bank Services, Inc. 1987 - Present
Louisville, Kentucky President
Investment Bank Services, Inc. 1986 - 1987
Louisville, Kentucky Vice President
First American Corporation 1982 - 1985
Nashville, Tennessee Senior Financial Analyst
EDUCATIONAL EXPERIENCE
Middle Tennessee State University B.B.A. Finance
Murfreesboro, Tennessee 1980
M.A. Finance
1982
National Association of Registered Representative
Securities Dealers 1987
Washington, D.C.
National Association of Registered Principal
Securities Dealers 1988
Washington, D.C.
-53-
SUSAN S. RAPIER
Senior Consultant
Professional Bank Services, Inc.
Ms. Rapier has a strong finance and accounting background that allows her to
bring a broad-based analytical and financial approach to assignments. She has
assisted clients in evaluating candidates for acquisitions and mergers and has
provided database analysis on costs and profitability. Her expertise includes:
FAIRNESS OPINIONS Evaluating proposed mergers and
acquisitions for acquired institutions to
ensure fair and equitable treatment to
shareholders.
COMMON STOCK APPRAISALS Appraising majority and minority interests
in the ownership of banks and holding
companies, thereby improving management's
knowledge of the value of the institution.
FINANCIAL ANALYSIS Analyses and recommendations to financial
institutions regarding profitability,
expansion, capital and long-range
strategic planning.
PROFESSIONAL EXPERIENCE
Professional Bank Services, Inc. October 1990 - Present
Louisville, Kentucky Senior Consultant
Investment Bank Services, Inc. May 1992 - Present
Louisville, Kentucky Director/Secretary
EDUCATIONAL EXPERIENCE
University of Kentucky B.S. Accounting
Lexington, Kentucky 1990
National Association of Registered Representative
Securities Dealers 1991
Washington, D.C.
National Association of State Agent Exam
Securities Dealers 1991
Washington, D.C.
National Association of Registered Principal
Securities Dealers 1992
Washington, D.C.
-54-
PAUL D. REESE, CFA
Managing Director
Professional Bank Services, Inc.
Mr. Reese has a strong background in finance and bank accounting, excellent
familiarity with the capital markets in general, and the banking industry in
particular. Skilled in the development of macro and micro economic forecasts and
models, as well as, company and industry fundamental and technical analysis. His
expertise includes:
VALUATION ANALYSIS Valuation analysis for minority and
majority stock transactions, ESOPs,
mergers and acquisitions, and the
long-term effect of these transactions on
strategic shareholder value.
SECURITY AND MARKET ANALYSIS Analysis of publicly traded securities and
markets. In-depth knowledge of financial
institution common stock valuation
techniques and forecasting for publicly
traded securities. Experienced in fixed
income securities valuation.
FINANCIAL FORECASTING Skilled in short and long term economic
and financial forecasting. Development of
spreadsheet models, interest rate
forecasts and micro and macro economic
forecasts.
PROFESSIONAL EXPERIENCE
Professional Bank Services, Inc. October 1995 - Present
Louisville, Kentucky Current Title: Managing Director
SNL Securities March 1994 - October 1995
Charlottesville, Virginia Financial Analyst
ESOP Services, Inc. March 1994 - December 1994
Scottsville, Virginia Financial Analyst
EDUCATIONAL EXPERIENCE
University of Virginia B.S. Finance
McIntire School of Commerce 1992
Charlottesville, Virginia
Completed Level I
Chartered Financial Analyst Exam June 1995
Completed Level II
Chartered Financial Analyst Exam June 1996
Completed Level III
Chartered Financial Analyst Exam June 1997
National Association of Registered Representative
Securities Dealers 1997
Washington, D.C.
-55-
CODE OF PROFESSIONAL CONDUCT
Professional Bank Services, Inc. ("PBS"), is a consulting firm whose mission is
the provision of quality business advice, and superior service to the financial
industry. Our services reflect the firm's extensive experience in the financial
industry, its keen awareness of a financial institution's special position of
trust, and acknowledge of financial and regulatory issues.
The firm and its employees are committed to the highest standards of
professional conduct.
CONFLICTS OF INTEREST
The firm shall not represent a client if its ability to consider, recommend or
carry out a course of action on behalf of the client could be adversely affected
by its responsibilities to another client, a third party, its own interests or
those of its principals. Neither the firm nor its employees shall acquire an
equity interest in or become indebted to any organization where such
relationship creates a conflict of interest. The firm shall use its best efforts
to avoid even the appearance of a conflict of interest.
THE CLIENT
When engaged by a financial institution, the firm's sole duty of loyalty shall
be to the welfare and the best interests of the institution, as distinct from
the sometimes inconsistent interests of employees, management, directors or
shareholders.
When engaged by an individual or other party, the firm's duty of loyalty shall
be to that individual or other party. PBS is often engaged to carry out
difficult and challenging assignments in situations where conflict with third
parties is inevitable. Such engagements will be conducted efficiently, fairly
and in the best interest of the client, with a view towards constructive
management of conflict.
DUTY OF COMPETENCE
The firm shall provide competent services to its clients and decline to render
advice in matters for which it is not qualified. The firm shall not provide
legal advice and when appropriate shall request that the client seek the
services of other qualified professionals.
The firm's consultants shall continue to develop their skill and knowledge
through ongoing programs of continuing education and professional development.
The firm's consultants shall not violate or in any way participate in the
violation of any law, regulation or technical standard applicable to financial
institutions, their directors, officers or shareholders.
ENGAGEMENT LETTERS AND FEES
Each engagement of the firm shall be described in an engagement letter which
specifies the services which the firm shall perform and which has been approved
by the client or the client's board of directors or authorized officer. Each
engagement letter shall set forth an estimate of the fees for services to be
rendered and the basis for determination of those fees. The firm's fees shall,
except in unusual circumstances and when otherwise agreed, be based on the
firm's usual and customary rates. Fees for services take into account (a) the
nature of the particular services to be performed, (b) the novelty and
difficulty of the matter, (c) the skill, standing and experience of the
consultants performing the work, and (d) the urgency of the matter.
NATURE OF ADVICE
The firm shall always keep clients reasonably informed about all matters
relevant to its professional services. In matters requiring action by a client,
the firm shall explain all aspects of a matter and alternate courses of action
as reasonably necessary to permit the client to make informed decisions.
INTEGRITY OF COMMUNICATIONS
The firm shall never disclose any confidential or other information about a
client to any other party except with the consent of the client and in the
course of providing its services. When dealing with third parties, the firm
shall always identify its clients except when clearly inappropriate to do so.
CODE OF PROFESSIONAL CONDUCT
This Code of Professional Conduct shall be prominently displayed in the firm's
informational material and included as part of engagement letters.
PROFESSIONALBANKSERVICES
-56-
BEGINNING EQUITY 24,216 (06/30/03)
BEGINNING AVERAGE ASSETS $256.4 (06/30/03)
SHORT TERM GROWTH RATE 7.00%
LONG TERM GROWTH RATE 6.00%
DISCOUNT RATE 15.50%
DIVIDEND SHORT TERM 25.00%
DIVIDEND LONG TERM (Beginning in Year 6) 60.00%
PRICE TO EARNINGS MULTIPLE 12.93 X
HFB FINANCIAL CORPORATION
STATUS QUO
SHORT-TERM EARNINGS VALUATION
<Table>
<Caption>
NET PRESENT EQUITY/
PD YEAR EQUITY INCOME ASSETS DIVS. PVIF VALUE ROE ROA ASSETS
1.0 1 $26,171 $ 2,606 $274,326 $ 652 86.58% $ 564 9.96% 0.95% 9.54%
2.0 2 28,372 2,935 293,528 734 74.96% 550 10.35% 1.00% 9.67%
3.0 3 30,845 3,298 314,075 824 64.90% 535 10.69% 1.05% 9.82%
4.0 4 33,618 3,697 336,061 924 56.19% 519 11.00% 1.10% 10.00%
5.0 5 36,719 4,135 359,585 1,034 48.65% 503 11.26% 1.15% 10.21%
TERMINAL VALUE 53,468 48.65% 26,013
-------
PRESENT VALUE WITH TERMINAL VALUE EQUAL
TO 12.93X ENDING NET INCOME $28,684
=======
PER COMMON SHARE $ 22.05
=======
MULTIPLE OF BOOK VALUE 1.18
</Table>
STATUS QUO
LONG-TERM EARNINGS VALUATION
<Table>
<Caption>
NET PRESENT EQUITY/
PD YEAR EQUITY INCOME ASSETS DIVS. PVIF VALUE ROE ROA ASSETS
1.0 1 $26,171 $ 2,606 $274,326 $ 652 86.58% $ 564 9.96% 0.95% 9.54%
2.0 2 28,372 2,935 293,528 734 74.96% 550 10.35% 1.00% 9.67%
3.0 3 30,845 3,298 314,075 824 64.90% 535 10.69% 1.05% 9.82%
4.0 4 33,618 3,697 336,061 924 56.19% 519 11.00% 1.10% 10.00%
5.0 5 36,719 4,135 359,585 1,034 48.65% 503 11.26% 1.15% 10.21%
6.0 6 38,549 4,574 381,160 2,744 42.12% 1,156 11.87% 1.20% 10.11%
7.0 7 40,569 5,050 404,029 3,030 36.47% 1,105 12.45% 1.25% 10.04%
8.0 8 42,710 5,353 428,271 3,212 31.58% 1,014 12.53% 1.25% 9.97%
9.0 9 44,980 5,675 453,968 3,405 27.34% 931 12.62% 1.25% 9.91%
10.0 10 47,386 6,015 481,206 3,609 23.67% 854 12.69% 1.25% 9.85%
11.0 11 49,937 6,376 510,078 3,826 20.49% 784 12.77% 1.25% 9.79%
12.0 12 52,640 6,759 540,683 4,055 17.74% 719 12.84% 1.25% 9.74%
13.0 13 55,506 7,164 573,124 4,298 15.36% 660 12.91% 1.25% 9.68%
14.0 14 58,543 7,594 607,511 4,556 13.30% 606 12.97% 1.25% 9.64%
15.0 15 61,763 8,050 643,962 4,830 11.52% 556 13.03% 1.25% 9.59%
16.0 16 65,176 8,532 682,599 5,119 9.97% 510 13.09% 1.25% 9.55%
17.0 17 68,794 9,044 723,555 5,427 8.63% 468 13.15% 1.25% 9.51%
18.0 18 72,629 9,587 766,969 5,752 7.47% 430 13.20% 1.25% 9.47%
19.0 19 76,694 10,162 812,987 6,097 6.47% 395 13.25% 1.25% 9.43%
20.0 20 81,002 10,772 861,766 6,463 5.60% 362 13.30% 1.25% 9.40%
TERMINAL VALUE 139,283 5.60% 7,803
-------
PRESENT VALUE WITH TERMINAL VALUE EQUAL
TO 12.93X ENDING NET INCOME $21,026
=======
PER COMMON SHARE $ 16.16
=======
MULTIPLE OF BOOK VALUE 0.87
</Table>
-57-
Download This File in Excel Format
<Table>
<Caption>
Date Close Volume
---- ----- ------
09/24/2003 19.490 426
09/23/2003 19.150 0
09/22/2003 19.150 0
09/19/2003 19.150 0
09/18/2003 19.150 0
09/17/2003 19.150 0
09/16/2003 19.150 1,000
09/15/2003 19.010 0
09/12/2003 19.010 1,000
09/11/2003 20.250 0
09/10/2003 20.250 0
09/09/2003 20.250 500
09/08/2003 20.249 0
09/05/2003 20.249 200
09/04/2003 19.990 800
09/03/2003 19.750 0
09/02/2003 19.750 0
08/29/2003 19.750 0
08/28/2003 19.750 0
08/27/2003 19.750 0
08/26/2003 19.750 0
08/25/2003 19.750 0
08/22/2003 19.750 0
08/21/2003 19.750 0
08/20/2003 19.750 0
08/19/2003 19.750 200
08/18/2003 19.960 0
08/15/2003 19.960 0
08/14/2003 19.960 0
08/13/2003 19.960 300
08/12/2003 19.000 0
08/11/2003 19.000 0
08/08/2003 19.000 0
08/07/2003 19.000 0
08/06/2003 19.000 0
08/05/2003 19.000 1,000
08/04/2003 19.800 0
08/01/2003 19.800 0
07/31/2003 19.800 0
07/30/2003 19.800 0
07/29/2003 19.800 0
07/28/2003 19.800 0
07/25/2003 19.800 0
07/24/2003 19.800 600
07/23/2003 20.500 700
07/22/2003 20.260 0
07/21/2003 20.260 0
07/18/2003 20.260 1,200
07/17/2003 19.800 200
07/16/2003 20.150 800
07/15/2003 20.130 0
07/14/2003 20.130 2,300
07/11/2003 19.810 0
07/10/2003 19.810 0
07/09/2003 19.810 200
07/08/2003 19.240 1,600
07/07/2003 18.400 0
07/03/2003 18.400 2,000
07/02/2003 18.500 2,500
07/01/2003 18.350 0
06/30/2003 18.350 0
06/27/2003 18.350 6,900
06/26/2003 18.350 1,200
06/25/2003 18.350 2,500
06/24/2003 18.350 0
06/23/2003 18.350 200
</Table>
-58-
<Table>
06/20/2003 18.500 1,400
06/19/2003 18.400 1,100
06/18/2003 18.000 100
06/17/2003 18.050 100
06/16/2003 18.280 1,100
06/13/2003 18.000 1,000
06/12/2003 18.280 800
06/11/2003 18.001 0
06/10/2003 18.001 0
06/09/2003 18.001 1,100
06/06/2003 18.000 100
06/05/2003 18.100 900
06/04/2003 18.000 2,300
06/03/2003 18.000 0
06/02/2003 18.300 0
05/30/2003 18.300 0
05/29/2003 18.300 11,000
05/28/2003 18.000 0
05/27/2003 18.000 0
05/23/2003 18.000 0
05/22/2003 18.000 0
05/21/2003 18.000 0
05/20/2003 18.000 5,300
05/19/2003 18.000 0
05/16/2003 18.000 0
05/15/2003 18.000 0
05/15/2003 18.000 100
05/13/2003 18.000 0
05/12/2003 18.000 0
05/09/2003 18.000 0
05/08/2003 18.000 7,700
05/07/2003 17.750 2,500
05/06/2003 18.000 5,900
05/05/2003 17.000 300
05/02/2003 18.000 0
05/01/2003 18.000 0
04/30/2003 18.000 0
04/29/2003 18.000 2,800
04/28/2003 17.000 400
04/25/2003 16.500 2,000
04/24/2003 16.500 0
04/23/2003 16.500 5,400
04/22/2003 15.250 0
04/21/2003 15.250 300
04/17/2003 15.500 0
04/16/2003 15.550 1,329
04/15/2003 15.550 2,000
04/14/2003 15.400 900
04/11/2003 15.090 34,000
04/10/2003 16.700 0
04/09/2003 16.700 0
04/08/2003 16.700 0
04/07/2003 16.700 100
04/04/2003 17.000 0
04/03/2003 17.000 0
04/02/2003 17.000 300
04/01/2003 16.750 0
03/31/2003 16.750 400
03/28/2003 17.000 0
03/27/2003 17.000 0
03/26/2003 17.000 100
03/25/2003 16.500 0
03/24/2003 16.500 0
03/21/2003 16.500 0
03/20/2003 16.500 0
03/19/2003 16.500 500
03/18/2003 16.500 0
03/17/2003 16.500 0
03/14/2003 16.500 0
03/13/2003 16.500 0
</Table>
-59-
<Table>
03/12/2003 16.500 800
03/11/2003 17.000 0
03/10/2003 17.000 100
03/07/2003 17.000 0
03/06/2003 17.000 0
03/05/2003 17.000 1,300
03/04/2003 16.500 0
03/03/2003 16.500 800
02/28/2003 16.500 0
02/27/2003 16.500 1,000
02/26/2003 16.500 200
02/25/2003 16.750 200
02/24/2003 15.660 100
02/21/2003 15.170 400
02/20/2003 14.770 0
02/19/2003 14.770 0
02/18/2003 14.770 0
02/14/2003 14.770 0
02/13/2003 14.770 0
02/12/2003 14.770 0
02/11/2003 14.770 200
02/10/2003 14.500 0
02/07/2003 14.500 0
02/06/2003 14.500 0
02/05/2003 14.500 0
02/04/2003 14.500 0
02/03/2003 14.500 0
01/31/2003 14.500 0
01/30/2003 14.500 0
01/29/2003 14.500 0
01/28/2003 14.500 0
01/27/2003 14.500 0
01/24/2003 14.500 0
01/23/2003 14.500 5,100
01/22/2003 14.500 0
01/21/2003 14.500 0
01/17/2003 14.500 0
01/16/2003 14.500 0
01/15/2003 14.500 0
01/14/2003 14.500 0
01/13/2003 14.500 0
01/10/2003 14.500 0
01/09/2003 14.500 0
01/08/2003 14.500 0
01/07/2003 14.500 0
01/06/2003 14.500 500
01/03/2003 14.240 200
01/02/2003 13.790 0
12/31/2002 13.790 0
12/30/2002 13.790 0
12/27/2002 13.790 0
12/26/2002 13.790 100
12/24/2002 13.260 0
12/23/2002 13.260 0
12/20/2002 13.260 0
12/19/2002 13.260 0
12/18/2002 13.260 0
12/17/2002 13.260 0
12/16/2002 13.260 100
12/13/2002 13.500 0
12/12/2002 13.500 0
12/11/2002 13.500 0
12/10/2002 13.500 0
12/09/2002 13.500 0
12/06/2002 13.500 0
12/05/2002 13.500 0
12/04/2002 13.500 0
12/03/2002 13.500 0
12/02/2002 13.500 0
11/29/2002 13.500 0
</Table>
-60-
<Table>
11/27/2002 13.500 0
11/26/2002 13.500 0
11/25/2002 13.500 0
11/22/2002 13.500 0
11/21/2002 13.500 0
11/20/2002 13.500 0
11/19/2002 13.500 0
11/18/2002 13.500 2,000
11/15/2002 13.560 0
11/14/2002 13.560 100
11/13/2002 14.250 0
11/12/2002 14.250 100
11/11/2002 14.250 1,400
11/08/2002 14.000 0
11/07/2002 14.000 0
11/06/2002 14.000 700
11/05/2002 14.000 0
11/04/2002 14.000 0
11/01/2002 14.000 0
10/31/2002 14.000 0
10/30/2002 14.000 500
10/29/2002 14.500 1,500
10/28/2002 14.500 0
10/25/2002 14.500 0
10/24/2002 14.500 0
10/23/2002 14.500 0
10/22/2002 14.500 0
10/21/2002 14.500 0
10/18/2002 14.500 0
10/17/2002 14.500 700
10/16/2002 13.500 2,500
10/15/2002 14.500 0
10/14/2002 14.500 0
10/11/2002 14.500 0
10/10/2002 14.500 0
10/09/2002 14.500 0
10/08/2002 14.500 0
10/07/2002 14.500 0
10/04/2002 14.500 0
10/03/2002 14.500 0
10/02/2002 14.500 0
10/01/2002 14.500 0
09/30/2002 14.500 0
09/27/2002 14.500 0
09/26/2002 14.500 0
09/25/2002 14.500 100
09/24/2002 14.500 200
</Table>
-61-