EXHIBIT 99.1
KELLER & COMPANY, INC.
FINANCIAL INSTITUTION CONSULTANTS
555 METRO PLACE NORTH
SUITE 524
DUBLIN, OHIO 43017
(614) 766-1426 (614) 766-1459 FAX
keller@ee.net
August 10, 2004
Board of Directors
Naugatuck Valley Savings & Loan
333 Church Street
Naugatuck, Connecticut 06770
To the Board:
We hereby submit an independent appraisal update ("Update") of the pro forma
market value of the to-be-issued stock of Naugatuck Valley Financial Corporation
(the "Corporation"), which is the mid-tier holding company of Naugatuck Valley
Savings & Loan ("Naugatuck Valley" or the "Bank"), in response to a request from
the Office of Thrift Supervision ("OTS"). The Corporation is a subsidiary of
Naugatuck Valley Mutual Holding Company. Such stock is to be issued in
connection with a minority stock offering by the Corporation, with Naugatuck
Valley Mutual Holding Company to own 55 percent of the Corporation. This Update
of the Corporation's pro forma market value as of August 5, 2004, was prepared
after a review of our original appraisal report as of May 21, 2004, ("Original
Appraisal") and is being submitted to the OTS as an update of the Original
Appraisal.
This Update is based on conversations with the management of Naugatuck Valley
and the law firm of Muldoon Murphy Faucette & Aguggia LLP, Washington, D.C. As
in the preparation of the Original Appraisal, we believe the data and
information used herein are accurate and reliable, but we cannot guarantee the
accuracy of such data.
In preparing this Update, we have given consideration to current market
conditions, the recent performance and future performance of Naugatuck Valley
and the recent performance of publicly-traded thrift institutions, including
those institutions in Naugatuck Valley's comparable group, and recently
converted thrift institutions. The comparable group was screened to eliminate
any institutions involved in merger/acquisition activities, but none of the
comparable group institutions was eliminated due to such involvement. Further
investigation into merger/acquisition activity involving publicly-traded thrift
institutions in Naugatuck Valley's city, county and market area revealed no
institutions involved in such activity, as indicated in Exhibit 1.
We have recognized a reinvestment rate of 1.25 percent before taxes in this
Update, the same rate indicated in the Original Appraisal, based on current
short term interest rates.
We have updated the three valuation methods used in the Original Appraisal based
on Naugatuck Valley's June 30, 2004, financials and using the stock prices of
publicly-traded thrift institutions as of August 5, 2004. Exhibits 2 and 3
provide stock prices, key valuation ratios and other pertinent
Board of Directors
Naugatuck Valley Savings and Loan
August 10, 2004
Page 2
data for all publicly-traded, FDIC-insured thrift institutions excluding mutual
holding companies. Exhibits 4 and 5 provide stock prices, key valuation ratios
and other pertinent data for all publicly-traded, FDIC-insured mutual holding
companies. Exhibit 6 identifies the Bank's comparable group and provides
comparative operating and financial data on Naugatuck Valley and the comparable
group institutions.
Exhibit 7 provides a summary of publicly-traded thrift conversions since January
1, 2003, and the relative movement of their share prices. For the nineteen
conversions completed from January 1, 2003, to August 5, 2004, including nine
mutual holding companies, the average percentage price change one day after IPO
in 2003 was a positive 46.82 percent with a median of 58.50 percent, from a low
of 15.10 percent to a high of 69.90 percent. The average percentage price change
one day after IPO to date in 2004 has been a much lower 22.36 percent with a
median of 22.50 percent, from a low of (0.50) percent to a high of 51.70
percent. The average percentage price changes one week after IPO for those
nineteen conversions were a similar 47.17 percent and 23.64 percent in 2003 and
2004 to date, respectively. It should be noted that of the eleven conversions
completed since January 1, 2004, two were trading at prices lower than their IPO
prices one month after IPO and two additional 2004 conversions were trading
below their first day prices one month after IPO.
As presented in Exhibit 8, since May 21, 2004, there have been varying movements
in the price to earnings multiple, the price to core earnings multiple, the
price to book value ratio and the price to assets ratio of Naugatuck Valley's
comparable group, all publicly-traded, FDIC-insured thrifts in the United States
("all thrifts") and all FDIC-insured thrifts traded on NASDAQ. The average price
to net earnings multiple for the comparable group increased by 6.97 percent,
while the average price to core earnings multiple for the comparable group
increased by 5.34 percent from 17.78 times earnings to 18.73 times earnings
during that period. The average market price to book value ratio for all thrifts
increased by 0.66 percent from 146.90 percent at May 21, 2004, to 147.87 percent
at August 5, 2004, and increased 3.26 percent from 120.40 percent to 124.33
percent for the comparable group. The average price to assets ratio decreased
from 14.70 percent to 14.32 percent for all thrifts and decreased from 13.65
percent to 13.38 percent for the comparable group for the same time period.
Exhibit 8 also presents the values, numerical changes and percentage changes of
the SNL Thrift Index, the Dow Jones Industrial Average (DJIA) and the Standard
and Poors 500 (S & P 500) as of May 21, 2004, and August 5, 2004. As indicated,
from May 21, 2004, to August 5, 2004, the SNL Thrift Index decreased 3.31
percent, while the DJIA decreased 0.87 percent and the S & P decreased 1.18
percent. The trend in the market price of thrift stocks since the Original
Appraisal indicates a 3.04 percent decrease in the average price per share for
all publicly-traded thrifts and an increase of 2.67 percent for the comparable
group.
Exhibit 9 presents detailed market, pricing and financial ratios for Naugatuck
Valley, all thrifts, the two publicly-traded Connecticut thrifts and the
comparable group as of August 5, 2004.
Exhibit 10 provides Naugatuck Valley's June 30, 2004, assets and equity, which
are different from those used in the Original Appraisal. The Bank had assets of
$253,653,000 and equity of
Board of Directors
Naugatuck Valley Savings and Loan
August 10, 2004
Page 3
$21,577,000 at June 30, 2004, and net and core income after taxes of $1,663,000
and $1,621,000, respectively, for the twelve months ended June 30, 2004. This
Update recognizes and incorporates such current assets, equity and earnings.
The trend in the market price of thrift stocks since the Original Appraisal
indicates a $0.59 or 2.67 percent increase in the average price per share of the
ten comparable group institutions. Of those ten institutions, six experienced
decreases in their price per share and four experienced increases, dominated by
a 19.0 percent increase for one institution. As previously detailed, the pricing
ratios also demonstrated varying movement since May 21, 2004. From May 21, 2004,
to August 5, 2004, the comparable group's average price to core earnings
multiple increased by 5.34 percent, and its average price to book value ratio
increased by 3.26 percent.
This Update is based on a review of each of the adjustments made in the Original
Appraisal relative to the comparable group and of the pro forma closing pricing
ratios of converting thrift institutions and trends in market pricing and
pricing ratios. This Update incorporates four adjustments as shown below with no
adjustments made for the remaining items of Market Area, Financial Condition,
Liquidity of the Stock, Management and Marketing of the Issue.
Original Appraisal Update
------------------ ---------
Earnings Performance Downward Upward (1)
Asset, Loan and Deposit Growth Downward None
Dividend Payments Downward None
Subscription Interest Upward None
(1) The adjustment is focused on the Bank's planned use of proceeds in large
measure for its branch expansion and the potential of this expansion to
increase earnings in the future.
In our opinion, a 15.0 percent upward adjustment to the pro forma midpoint value
of the Corporation is warranted at this time, based on all the foregoing
factors, current market conditions and Naugatuck's planned expansion and
effective use of proceeds.
Board of Directors
Naugatuck Valley Savings and Loan
August 10, 2004
Page 4
This updated valuation of the Corporation is based on the following valuation
ratios as of August 5, 2004:
Price to earnings multiple:
Midpoint 31.11x
Super maximum 39.90x
Price to core earnings multiple:
Midpoint 31.89x
Super maximum 40.80x
Price to book value ratio:
Midpoint 77.59%
Super maximum 83.30%
Price to assets ratio:
Midpoint 18.83%
Super maximum 23.44%
As indicated above, at the midpoint, the price to book value ratio increased
from 74.91 percent at May 21, 2004, to 77.59 percent as of August 5, 2004; the
price to net earnings multiple increased from 27.22 to 31.11; the price to core
earnings multiple increased from 28.17 to 31.89; and the price to assets ratio
increased from 17.43 percent to 18.83 percent as of August 5, 2004. At the super
maximum, the price to book value ratio increased from 81.08 percent at May 21,
2004, to 83.30 percent as of August 5, 2004; the price to net earnings multiple
increased from 35.55 to 39.90; the price to core earnings multiple increased
from 36.69 to 40.80; and the price to assets ratio increased from 21.93 percent
to 23.44 percent as of August 5, 2004.
Exhibit 15 details the fully converted pricing ratio premium or discount applied
to the comparable group to determine the value of the Corporation. The midpoint
discount from the comparable group average price to book value ratio was 37.59
percent at August 5, 2004, lower than the discount of 37.78 percent at May 21,
2004. The price core earnings multiple premium at the midpoint increased from
58.43 percent to 70.25 percent during that time period. The midpoint premium of
27.74 percent in the price to assets ratio at May 21, 2004, increased to a
premium of 40.71 percent. At August 5, 2004, the super maximum price to book
value ratio discount was 33.00 percent, the price to core earnings multiple
premium was 117.83 percent and the price to assets ratio premium was 75.23
percent.
As indicated in the Prospectus, at or for the three months ended March 31, 2004,
based on the minority shares to be sold in the offering, representing 45 percent
of the total number of shares to be issued, and the actual net proceeds of the
offering, the price to book value ratio will range from
Board of Directors
Naugatuck Valley Savings and Loan
August 10, 2004
Page 5
116.41 percent at the minimum to 146.63 percent at the super maximum; and the
price to core earnings multiple will range from 27.78 times earnings at the
minimum to 41.67 times earnings at the super maximum.
The valuation range in the Original Appraisal indicated a fully converted
midpoint value of $50,000,000, with a minimum of $42,500,000, a maximum of
$57,500,000, and a super maximum of $66,125,000. In our opinion, based on
Naugatuck Valley's June 30, 2004, financials, the pricing ratios and price
fluctuation of the Bank's comparable group, current pricing ratios and trends in
the market since the Original Appraisal and the revised adjustments relative to
the comparable group indicated previously, the fully converted midpoint value of
the Corporation as of August 5, 2004, is $57,500,000, with a minimum of
$48,875,000, a maximum of $66,125,000, and a super maximum of $76,043,750,
representing 4,887,500 shares, 5,750,000 shares, 6,612,500 shares and 7,604,375
shares at $10.00 per share at the minimum, midpoint, maximum and super-maximum,
respectively.
The fully converted pro forma market value or appraised value of the Corporation
is $57,500,000 at the midpoint as of August 5, 2004.
Sincerely,
KELLER & COMPANY, INC.
[IN ACCORDANCE WITH RULE 202 OF REGULATION S-T, THE EXHIBITS TO THIS CONVERSION
VALUATION APPRAISAL REPORT UPDATE ARE BEING FILED IN PAPER PURSUANT TO A
CONTINUING HARDSHIP EXEMPTION.]