AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 2004
REGISTRATION NO. 333-________
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
ATLANTIC COAST FEDERAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
FEDERAL 6712 59-3764686
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
505 HAINES AVENUE
WAYCROSS, GEORGIA 31501
(912) 284-2211
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
ROBERT J. LARISON, JR.
505 HAINES AVENUE
WAYCROSS, GEORGIA 31501
(912) 284-2211
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Agent for Service)
Copies to:
RICHARD S. GARABEDIAN, ESQ.
ROBERT I. LIPSHER, ESQ.
LUSE GORMAN POMERENK & SCHICK, P.C.
5335 WISCONSIN AVENUE, N.W., SUITE 400
WASHINGTON, D.C. 20015
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES
EFFECTIVE.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following box: /X/
If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check
the following box and list the Securities Act registration statement number of the earlier effective registration statement for the
same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering: / /
If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / /
CALCULATION OF REGISTRATION FEE
======================================== =================== ==================== ==================== =====================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- ---------------------------------------- ------------------- -------------------- -------------------- ---------------------
Common Stock, $0.01 par value per share 6,348,000 shares $10.00 $63,480,000 (1) $8,043
- ---------------------------------------- ------------------- -------------------- -------------------- ---------------------
Participation Interests 413,320 interests -- -- (2)
======================================== =================== ==================== ==================== =====================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) The securities of Atlantic Coast Federal Corporation to be purchased by the Atlantic Coast Federal 401(k) Plan are included
in the amount shown for common stock. However, pursuant to Rule 457(h) of the Securities Act of 1933, as amended, no
separate fee is required for the participation interests. Pursuant to such rule, the amount being registered has been
calculated on the basis of the number of shares of common stock that may be purchased with the current assets of such plan.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL
THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION SHALL THEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE
AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
o PROSPECTUS
Up to 6,348,000 Shares of Common Stock
ATLANTIC COAST
FEDERAL CORPORATION
(Holding Company for Atlantic Coast Federal)
Atlantic Coast Federal Corporation is a federally-chartered stock
corporation that is offering for sale up to 6,348,000 shares of its common stock
to the public at $10.00 per share. Atlantic Coast Federal Corporation is the
holding company for Atlantic Coast Federal. The shares being offered will
represent 40.0% of the outstanding common stock of Atlantic Coast Federal
Corporation after the completion of this stock offering. Atlantic Coast Federal,
MHC, a federally-chartered mutual holding company, will own the remainder of the
outstanding common stock of Atlantic Coast Federal Corporation. Atlantic Coast
Federal Corporation expects its common stock to be listed for trading on the
Nasdaq National Market under the symbol "ACFC."
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TERMS OF THE OFFERING
MAXIMUM,
MINIMUM MAXIMUM AS ADJUSTED(1)
------- ------- --------------
Per Share Price....................................... $ 10.00 $ 10.00 $ 10.00
Number of Shares...................................... 4,080,000 5,520,000 6,348,000
Underwriting Commission and Other Expenses............ $ 1,257,000 $ 1,376,000 $ 1,445,000
Net Proceeds to Atlantic Coast Federal Corporation.... $ 39,543,000 $ 53,824,000 $ 62,035,000
Net Proceeds Per Share................................ $ 9.69 $ 9.75 $ 9.77
---- ---- ----
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(1) Represents an amount that is 15% more than the maximum of the offering range as a result of changes in
financial or market conditions. The sale of stock at this amount does not require the resolicitation of subscribers.
THIS INVESTMENT INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 1 OF THIS DOCUMENT.
Friedman Billings Ramsey will use its best efforts to assist Atlantic
Coast Federal Corporation in selling at least the minimum number of shares shown
above but does not guarantee that this number will be sold. Friedman Billings
Ramsey is not obligated to purchase any shares of common stock in the offering.
Friedman Billings Ramsey intends to make a market in the common stock. The
minimum number of shares an individual investor may purchase is 25 shares or
$250. Directors and executive officers of Atlantic Coast Federal Corporation,
together with their associates, and the employee stock ownership plan intend to
purchase 668,300 and 783,500 shares of common stock in the offering, or 16.37%
and 14.19% of the offering based on the minimum and maximum, respectively, of
the total shares sold in the offering. The employee stock ownership plan intends
to purchase 8.0% of the stock sold in the offering. These purchases will count
towards the minimum purchases needed to complete the offering, and will be made
for investment purposes only and not for resale.
The stock offering to the depositors of Atlantic Coast Federal
Corporation will end at 12:00 Noon, Eastern Daylight Time, on _________, 2004.
We may also commence a community offering and a syndicated community offering
concurrently with, during or promptly after the subscription offering. We may
extend the offerings without notice to you until August __, 2004, but it must be
completed or terminated by ________, 2006. Atlantic Coast Federal Corporation
will hold all funds of subscribers in an interest-bearing account at Atlantic
Coast Federal or in an interest bearing trust account at ______________until the
stock offering is completed or terminated. Funds will be returned promptly with
interest if the stock offering is terminated.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT
SUPERVISION, NOR ANY OTHER FEDERAL AGENCY OR STATE SECURITIES REGULATOR HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FOR INFORMATION ON HOW TO SUBSCRIBE,
CALL THE STOCK INFORMATION CENTER AT (___) ______
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FRIEDMAN BILLINGS RAMSEY
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___________________, 2004
[MAP of Registrant's market area to be produced here.]
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SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To fully understand
the stock offering, you should read this entire document carefully, including
the consolidated financial statements and the notes to the consolidated
financial statements of Atlantic Coast Federal Corporation.
THE COMPANIES:
ATLANTIC COAST FEDERAL CORPORATION
505 HAINES AVENUE
WAYCROSS, GEORGIA 31501
(912) 284-2211
Atlantic Coast Federal Corporation is a federally-chartered stock
corporation that was formed in January, 2003 for the purpose of acquiring all of
the capital stock that Atlantic Coast Federal issued upon its reorganization
into a mutual holding company structure. Currently, all of the outstanding
common stock of Atlantic Coast Federal Corporation is held by Atlantic Coast
Federal, MHC, a federally-chartered mutual holding company.
The shares being offered will represent 40.0% of the outstanding common
stock of Atlantic Coast Federal Corporation after the completion of this stock
offering. Atlantic Coast Federal, MHC will own the remainder of the outstanding
common stock of Atlantic Coast Federal Corporation. The following chart shows
the corporate structure after completion of the stock offering.
- -------------------------------------------- -----------------------------------------------
Atlantic Coast Federal, MHC Minority Stockholders of
Atlantic Coast Federal Corporation
- ---------------------- --------------------- ---------------------- ------------------------
60.0% 40.0%
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Atlantic Coast Federal Corporation
- ------------------------------------------------ -----------------------------------------------------
100%
-----------------------------------
Atlantic Coast Federal
-----------------------------------
Atlantic Coast Federal Corporation has not engaged in any significant
business since its formation in January 2003. Its primary activity is holding
all of the stock of Atlantic Coast Federal. Atlantic Coast Federal Corporation
will invest the proceeds of the offering as discussed under "How We Intend to
Use the Proceeds." In the future, it may pursue other business activities,
including mergers and acquisitions, investment alternatives and diversification
of operations. There are, however, no current understandings or agreements
regarding these activities.
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ATLANTIC COAST FEDERAL, MHC
505 HAINES AVENUE
WAYCROSS, GEORGIA 31501
(800) 234-0642
Atlantic Coast Federal, MHC is a federally-chartered mutual holding
company that was formed in January, 2003 in connection with the mutual holding
company reorganization of Atlantic Coast Federal.
Atlantic Coast Federal, MHC currently owns 100% of the outstanding
common stock of Atlantic Coast Federal Corporation. So long as Atlantic Coast
Federal, MHC is in existence, it will at all times own at least a majority of
the outstanding common stock of Atlantic Coast Federal Corporation. Atlantic
Coast Federal, MHC is not expected to engage in any business activity other than
owning a majority of Atlantic Coast Federal Corporation's common stock following
completion of the stock offering.
ATLANTIC COAST FEDERAL
505 HAINES AVENUE
WAYCROSS, GEORGIA 31501
(800) 234-0642
Atlantic Coast Federal is a federally-chartered stock savings
association that was organized in 1939 as a credit union to serve the employees
of the Atlantic Coast Line Railroad. Over the years the field of membership was
enlarged to include residents of the southeastern Georgia Counties of Atkinson,
Bacon, Brantley, Charlton, Church, Coffee, Pierce and Ware and the employees of
CSX Transportation, Inc., located in Jacksonville, Florida. In November 2000,
Atlantic Coast Federal Credit Union converted its charter from a federal credit
union to a federal mutual savings association and, as a result, also serves the
general public. Atlantic Coast Federal reorganized into a mutual holding company
structure in January 2003.
We serve the counties in southeastern Georgia noted above and the
Jacksonville metropolitan area through our 13 offices. Our principal business
consists of attracting retail deposits from the general public by paying
competitive interest rates on our deposit accounts. We invest those funds
primarily in loans secured by first mortgages on owner-occupied, one- to
four-family residences, and to a lesser extent home equity loans, automobile and
consumer loans and loans secured by commercial real estate. We also offer
multi-family loans, commercial and residential construction loans, and
commercial business loans. At December 31, 2003, we had total assets of $499.0
million, total deposits of $392.3 million and total equity of $43.2 million. See
"Business of Atlantic Coast Federal - General."
THE FOLLOWING ARE HIGHLIGHTS OF OUR OPERATING STRATEGY.
Since our organization in 1939, we have since evolved into a
full-service multi-branch financial institution serving southeastern Georgia and
northeastern Florida. Since the credit union charter conversion we have
continued to pursue a growth strategy focused on the opportunities in our
market, in particular the Jacksonville, Florida market, which has a large and
growing population with significant loan demand and funds available for deposit
growth. Throughout this process we have remained committed to our high level of
customer service we
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have always provided our customers. Our growth strategy has been focused
on several key areas: (i) expanding our products to offer a full array
of banking services (ii) employing several experienced individuals to
build out our commercial and multi-family mortgage lending areas and
(iii) branching through acquisition and de novo activity, particularly
in the Jacksonville market . The benefits of our strategy include an
improvement in our net income and greater sources of income while
continuing to focus on serving the needs of our customers throughout our
market area.
o HIGH QUALITY CUSTOMER SERVICE CULTURE
We are committed to personal service and enhancing customer satisfaction
with products and services that address our customers' needs. We strive to offer
high quality service to our customers and are constantly evaluating ways to
broaden the products and services offered to enhance our market penetration in
the local communities we serve. We continually survey our customers to ensure
that their needs are being met.
o INCREASED EMPHASIS ON COMMERCIAL REAL ESTATE AND MULTI-FAMILY
LENDING
We believe that an increased emphasis on commercial real estate and
multi-family lending will allow us to increase the yield on, and to diversify,
our loan portfolio. Additionally, we believe it will assist us in attracting
more businesses as customers and allow us to obtain low cost deposits through
these relationships. Since we converted from a credit union we have continued to
reduce our consumer loan portfolio in favor of various forms of mortgage
lending. Although we began underwriting and originating commercial real estate
loans in early 2001, we have strengthened our processes and procedures by hiring
several individuals in 2003 with significant commercial lending experience,
including a vice president to manage this department's operations.
o EXPANDING OUR MARKET PRESENCE
We believe that a well-positioned branch network is critical to properly
cultivate and service new and existing customers. We currently conduct business
through 13 full service locations, which cover a broad section of southeastern
Georgia and northeastern Florida. A key element of our future strategy is to
achieve loan and deposit growth through the acquisition of additional branch
offices in targeted areas within our market. Over the last two years, we have
purchased three branches in the Jacksonville market from another financial
institution. In addition, we have added one de novo branch also in the
Jacksonville market. We will continue to explore growth through acquisition of
branches or whole institutions as well as de NOVO branch opportunities.
REASONS FOR THE STOCK OFFERING
The stock offering is intended to provide an additional source of
capital not currently available to us. Funds raised in the stock offering will
allow us to better serve the needs of the community through:
o Increased lending to support continued growth in its mortgage,
commercial and multifamily real estate as well as consumer loan
portfolio;
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o Opening or acquiring additional branch offices;
o Enhancing the quality of its facilities so that it may better
serve the needs of its customers;
o Acquiring other financial institutions or other businesses
related to banking, although no specific mergers or acquisitions
are planned at the present time; and
o Expanding the financial products and services currently offered
by Atlantic Coast Federal
The stock offering is also intended to provide an additional source of
capital to Atlantic Coast Federal Corporation in order to allow us to:
o Pay dividends to stockholders;
o Repurchase shares of our common stock;
o Acquire other financial institutions or other businesses related
to banking, although no mergers or acquisitions are specifically
planned at the present time; and
o Use the net proceeds for other general corporate purposes.
THE STOCK OFFERING
We are offering for sale between 4,080,000 and 5,520,000 shares of
Atlantic Coast Federal Corporation common stock at $10.00 per share. Because of
possible changes in financial market conditions or that of Atlantic Coast
Federal, among other factors, before we complete the stock offering, the number
of shares we offer may increase to 6,348,000 shares with the approval of the
Office of Thrift Supervision, without any notice or resolicitation opportunity
provided to you. If so, you will not have the chance to change or cancel your
stock order.
Friedman Billings Ramsey will assist us in selling the stock. For
further information about Friedman Billings Ramsey's role in the offering, see
"The Stock Offering - Marketing Arrangements."
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HOW WE DETERMINED THE OFFERING RANGE AND THE $10.00 PRICE PER SHARE
The independent appraisal by RP Financial, LC. ("RP Financial") dated as
of March 5,, 2004, established the offering range. This appraisal was based on
our financial condition and operations and the effect of the additional capital
raised in the stock offering.
The appraisal incorporated an analysis of a peer group of
publicly-traded thrift holding companies and mutual holding companies that RP
Financial considered to be comparable to Atlantic Coast Federal Corporation.
This analysis included an evaluation of the average and median price-to-earnings
and price-to-book value ratios indicated by the market prices of the peer
companies. RP Financial applied the peer group's pricing ratios, as adjusted for
certain qualitative valuation factors, to account for differences between
Atlantic Coast Federal Corporation and the peer group, to Atlantic Coast Federal
Corporation's pro forma earnings and book value to derive the estimated pro
forma market value of Atlantic Coast Federal Corporation.
RP Financial has estimated that as of March 5,, 2004, the pro forma
market value of Atlantic Coast Federal Corporation on a fully converted basis
ranged from a minimum of $102.0 million to a maximum of $138.0 million. Based on
this valuation and the $10.00 per share price, the number of shares of common
stock to be issued by Atlantic Coast Federal Corporation will range from
10,200,000 shares to 13,800,000 shares. The $10.00 price per share was selected
primarily because $10.00 is the price per share most commonly used in stock
offerings of this type. Atlantic Coast Federal Corporation is offering 40.0% of
these shares, or between 4,080,000 and 5,520,000 shares, for purchase by
eligible depositors of Atlantic Coast Federal, our tax qualified employee plans
and to the general public in a community offering if all the shares offered in
the subscription offering are not subscribed for in that offering. Atlantic
Coast Federal, MHC will own between 6,120,000 and 8,280,000 shares of Atlantic
Coast Federal Corporation at the completion of the stock offering.
The following table presents a summary of selected pricing ratios for
the peer group companies and the resulting pricing ratios for Atlantic Coast
Federal Corporation, with such ratios adjusted to their fully converted
equivalent basis. Compared to the average pricing of the peer group, Atlantic
Coast Federal Corporation's pro forma pricing ratios at the maximum of the
offering range indicated a premium of 3.8% on a price-to-earnings basis and a
discount of 16.0% on a price-to-book basis. The estimated appraised value and
the resulting premium/discount took into consideration the potential financial
impact of the stock offering.
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Fully Converted Equivalent Pro Forma
--------------------------------------------
Price-to- Price-to- Price-to-
Earnings Book Tangible
Multiple Value Ratio Book Value
--------------------------------------------
ATLANTIC COAST FEDERAL CORPORATION
Maximum (5,520,000 shares sold)............... 34.81x 85.97% 87.42x
Minimum (4,080,000 shares sold)............... 24.98 78.51 80.15
VALUATION OF PEER GROUP COMPANIES AS OF
MARCH 5, 2004(1)
Averages...................................... 3.53 102.33 105.86
Medians....................................... 34.88 102.67 107.22
- ---------------
(1) Reflects earnings for the most recent trailing twelve month period for
which data is publicly available.
THE INDEPENDENT APPRAISAL IS NOT NECESSARILY INDICATIVE OF THE POST-STOCK
ISSUANCE MARKET VALUE. DO NOT ASSUME OR EXPECT THAT THE VALUATION OF ATLANTIC
COAST FEDERAL CORPORATION AS INDICATED ABOVE MEANS THAT THE COMMON STOCK WILL
TRADE AT OR ABOVE THE $10.00 PURCHASE PRICE AFTER THE STOCK OFFERING.
The independent valuation must be updated before we complete the stock
offering. The amount of common stock being offered may be increased by up to 15%
without notice to persons who have subscribed for stock, so that a total of
6,348,000 shares would be sold in the offering. We received authorization from
the Office of Thrift Supervision to conduct the stock offering on ________,
2004. The updated independent valuation will be subject to the further approval
of the Office of Thrift Supervision before we can complete the stock offering.
If the updated independent valuation would result in more than 6,348,000 shares
being sold, we would notify subscribers and they would have the opportunity to
confirm, change or cancel their subscription orders. See "Pro Forma Data."
TERMS OF THE OFFERING
We are offering the shares of common stock to those with subscription
rights in the following order of priority:
(1) Depositors who held at least $50.00 with us on December 31,
2002.
(2) The Atlantic Coast Federal Corporation Employee Stock Ownership
Plan.
(3) Depositors who held at least $50.00 with us on March 31, 2004.
Shares of common stock not subscribed for in the subscription offering
will be offered to the general public in a direct community offering with a
preference to natural persons residing in counties where we have an office, and,
if necessary, a syndicated community offering. We reserve the right, in our sole
discretion, to accept or reject any orders to purchase shares of common stock
received in the direct community offering and the syndicated community offering.
See "The Stock Offering."
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TERMINATION OF THE OFFERING
The subscription offering will end at 12:00 Noon, Eastern Daylight Time
on ________, 2004, unless extended. If fewer than the minimum number of shares
are subscribed for in the subscription offering and we do not get orders for the
remaining shares by ________, 2004, we will either:
(1) promptly return any payment you made to us, with interest, or
cancel any withdrawal authorization you gave us; or
(2) extend the offering, if allowed, and give you notice of the
extension and of your rights to confirm, cancel or change your
order. If we extend the offering and you do not respond to the
notice, then we will cancel your order and return your payment,
with interest, or cancel any withdrawal authorization you gave
us. We must complete or terminate the offering by ________,
2006.
HOW WE WILL USE THE PROCEEDS RAISED FROM THE SALE OF COMMON STOCK
We intend to use the net proceeds received from the stock offering as
follows:
Maximum, as
Minimum Maximum adjusted
------------ ---------------- ---------------
(In Thousands)
Gross Proceeds............................................ $40,800 $55,200 $63,480
Less: Estimated underwriting commission and other
offering expenses....................................... 1,257 1,376 1,445
------------ ---------------- ---------------
Net Proceeds.............................................. 39,543 53,824 62,035
Less:
Investment in Atlantic Coast Federal................... 19,772 26,912 31,018
Loan to our employee stock ownership plan.............. 3,264 4,416 5,078
Funding of Restricted Stock Plan....................... 1,632 2,208 2,539
------------ ---------------- ---------------
Net cash proceeds retained by
Atlantic Coast Federal Corporation....................... $14,875 $20,288 $23,400
============ ================ ===============
The net proceeds retained by Atlantic Coast Federal Corporation and
Atlantic Coast Federal may ultimately be used to support lending activities and
possible future expansion of Atlantic Coast Federal through acquisitions and new
offices, although no such acquisitions are specifically being considered at this
time. We intend to use the proceeds at Atlantic Coast Federal Corporation for
general corporate purposes which may include investments in securities,
repurchasing stock and paying dividends. See "How We Intend to Use the
Proceeds."
WE CURRENTLY INTEND TO PAY A CASH DIVIDEND IN THE FUTURE
We currently intend to pay cash dividends in the future. The amount and
timing of any dividends, however, have not yet been determined. Although future
dividends are not guaranteed, based on our pro forma net income and
stockholders' equity, we believe Atlantic Coast Federal Corporation will be
capable of paying a dividend after completion of this offering.
Atlantic Coast Federal Corporation currently has no intention to
initiate any action which leads to a return of capital (as distinguished from a
dividend) to stockholders of Atlantic Coast
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Federal Corporation. Regulations of the Office of Thrift Supervision prohibit a
return of capital during the term of the three year business plan submitted by
Atlantic Coast Federal to the Office of Thrift Supervision in connection with
the stock offering.
If we pay dividends to stockholders of Atlantic Coast Federal
Corporation, it is anticipated that any dividends payable to Atlantic Coast
Federal, MHC would be waived, subject to Office of Thrift Supervision approval.
Under Office of Thrift Supervision regulations, such dividends would not result
in dilution to public stockholders in the event Atlantic Coast Federal, MHC
converts to stock form in the future. See "How We Are Regulated."
THE COMMON STOCK IS EXPECTED TO BE LISTED FOR TRADING ON THE NASDAQ NATIONAL
MARKET
We expect our common stock to be listed for trading on the Nasdaq
National Market under the symbol "ACFC." Our application to list our stock on
the Nasdaq National Market is currently pending. However, due to the
unpredictability of the stock market and other factors, persons purchasing
shares may not be able to sell their shares when they want to, or at a price
equal to or above $10.00 per share.
LIMITATIONS ON THE PURCHASE OF COMMON STOCK IN THE STOCK OFFERING
The minimum purchase is 25 shares.
The maximum purchase in the subscription offering by any person or group
of persons through a single deposit account is $500,000 of common stock, which
equals 50,000 shares.
The maximum purchase by any person in the community offering is $500,000
of common stock, which equals 50,000 shares.
The maximum purchase by any person in the subscription offering and
community offering combined with any person, related persons or persons acting
together is $500,000 or 50,000 shares of the common stock sold in the stock
offering.
If any of the following persons purchase common stock, their purchases
when combined with your purchases cannot exceed $500,000 or 50,000 shares of the
common stock sold in the stock offering:
o your spouse or relatives of you or your spouse living in your
house;
o companies, trusts or other entities in which you have an
interest or hold a position; or
o other persons who may be acting in concert with you.
HOW TO PURCHASE COMMON STOCK
NOTE: ONCE WE RECEIVE YOUR ORDER, YOU CANNOT CANCEL OR CHANGE IT WITHOUT
OUR CONSENT. IF ATLANTIC COAST FEDERAL CORPORATION INTENDS TO SELL FEWER THAN
4,080,000 SHARES OR MORE THAN 5,520,000 SHARES, ALL SUBSCRIBERS WILL BE NOTIFIED
AND GIVEN THE OPPORTUNITY TO CONFIRM, CHANGE OR CANCEL THEIR ORDERS. IF YOU DO
NOT RESPOND TO THIS NOTICE, WE WILL RETURN YOUR FUNDS PROMPTLY WITH INTEREST.
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If you want to subscribe for shares, you must complete an original stock
order form and drop it off at any office of Atlantic Coast Federal or send it,
together with full payment or withdrawal authorization, to Atlantic Coast
Federal in the postage-paid envelope provided. You must sign the certification
that is part of the stock order form. We must receive your stock order form
before the end of the offering period.
You may pay for shares in any of the following ways:
o BY CHECK OR MONEY ORDER made payable to Atlantic Coast Federal
Corporation. In the case of an order for $50,000 or more, the
check must be certified.
o BY AUTHORIZING A WITHDRAWAL FROM AN ACCOUNT AT ATLANTIC COAST
FEDERAL including certificates of deposit designated on the
stock order form. To use funds in an individual retirement
account ("IRA") at Atlantic Coast Federal, you must transfer
your account to a self-directed account with an unaffiliated
institution or broker. Please contact the stock information
center at (___) ___-____ for assistance as soon as possible but
not later than at least one week before the end of the offering.
We will pay interest on your subscription funds at the rate Atlantic
Coast Federal pays on regular savings accounts, currently 0.__%, from the date
we receive your funds until the stock offering is completed or terminated. All
funds authorized for withdrawal from deposit accounts with Atlantic Coast
Federal will earn interest at the applicable account rate until the stock
offering is completed. There will be no early withdrawal penalty for withdrawals
from certificates of deposit used to pay for stock.
TAX CONSEQUENCES OF THE STOCK OFFERING
Atlantic Coast Federal Corporation and Atlantic Coast Federal have
received an opinion of its special counsel, Luse Gorman Pomerenk & Schick, P.C.,
that among other things:
o Atlantic Coast Federal Corporation will incur no gain or loss
upon its receipt of money in exchange for the issuance of its
shares of common stock.
o It is more likely than not that no gain or loss will be
recognized by Atlantic Coast Federal's eligible account holders
and supplemental eligible account holders upon the distribution
to them of non-transferable subscription rights to purchase
common stock.
Atlantic Coast Federal Corporation and Atlantic Coast Federal have also
obtained an opinion from Crowe Chizek and Company LLC, Oak Brook, Illinois, that
the tax effects of the stock offering under Georgia and Florida tax laws will be
substantially the same as described above with respect to the federal income tax
laws.
For a further discussion of the tax consequences of the stock offering,
see "The Stock Offering - Effects of the Stock Offering - Tax Effects of the
Stock Offering."
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BENEFITS TO MANAGEMENT FROM THE OFFERING
We intend to establish the Atlantic Coast Federal Corporation Employee
Stock Ownership Plan, which will purchase 8.0% of the shares sold in this
offering, not including shares issued to Atlantic Coast Federal, MHC. A loan
from Atlantic Coast Federal Corporation to the plan, funded by a portion of the
proceeds from this offering, will be used to purchase these shares. The loan
will accrue interest at the prime rate in effect at the time the loan is made.
The Atlantic Coast Federal Corporation Employee Stock Ownership Plan will
provide a retirement benefit to all employees eligible to participate in the
plan.
We also intend to adopt a stock option plan and a restricted stock plan
for the benefit of directors, officers and employees, subject to stockholder
approval. If we adopt the restricted stock plan, some of these individuals will
be awarded stock at no cost to them. As a result, the employee stock ownership
plan and the restricted stock plan will increase the voting control of
management without a cash outlay by the recipient.
Moreover, in addition to the employee stock ownership plan under the
plan of stock issuance, we may grant awards under one or more stock benefit
plans, including stock option plans and recognition and retention plans, in an
amount up to 25% of the number of shares of common stock held by persons other
than Atlantic Coast Federal, MHC. The recognition and retention plan and stock
option plan cannot be established sooner than six months after the stock
offering and would require the approval of our stockholders other than Atlantic
Coast Federal, MHC. The number of options granted or shares awarded under any
initial stock option plan or recognition and retention plan may not exceed 10%
and 4%, respectively of the shares sold in the offering, if such plans are
adopted within one year from the date of completion of the offering. If adopted
within one year, the recognition and retention plan would be subject to such
other limitations as may be imposed by the Office of Thrift Supervision. If the
stock option plan or recognition and retention plan is adopted after one year
from the date of the completion of the reorganization and offering, such plan
would be permitted to grant or award a greater number of options and shares of
common stock, subject to stockholder approval and the overall limitations
provided for in the plan of stock issuance.
The following table presents the total value of the shares of common
stock, at the maximum of the offering range, which would be acquired by the
employee stock ownership plan and the total value of all shares to be available
for award and issuance under the restricted stock plan. The table assumes that
the value of the shares is $10.00 per share and the amount of the shares in the
plan is equal to 4.0% of the shares sold at the maximum of the offering range.
The table does not include a value for the options because the price paid for
the option shares will be equal to the fair market value of the common stock on
the day that the options are granted. As a result, financial gains can be
realized under an option only if the market price of common stock increases.
x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Number Estimated Percentage of
of Value of Shares Sold
Shares Shares in the Offering
-------------- ---------------- -----------------
Employee stock ownership plan............................... 441,600 $4,416,000 8.0%
Restricted stock awards..................................... 220,800 2,208,000 4.0
Stock options............................................... 552,000 -- 10.0
-------------- ---------------- -----------------
Total................................................... 1,214,400 $6,624,000 22.0%
============== ================ =================
For a further discussion of benefits to management, see "Management."
STOCK INFORMATION CENTER
If you have any questions regarding the stock offering or the stock
order form, please call the stock information center at (___) ___-____ between
the hours of ________ and _______, Monday through Friday.
SUBSCRIPTION RIGHTS
Subscription rights are not allowed to be transferred and we will act to
ensure that you do not do so. We will not accept any stock orders that we
believe involve the transfer of subscription rights.
IMPORTANT RISKS IN OWNING ATLANTIC COAST FEDERAL CORPORATION'S COMMON STOCK
Before you decide to purchase stock, you should read the "Risk Factors"
section on pages 1 to 6 of this document for information regarding certain risks
of the stock offering.
POSSIBLE CONVERSION OF ATLANTIC COAST FEDERAL, MHC TO STOCK FORM
In the future, Atlantic Coast Federal, MHC may convert from the mutual
to capital stock form, in a transaction commonly known as a "second-step
conversion." This second-step conversion may be undertaken in order to, among
other things, raise additional capital for Atlantic Coast Federal or facilitate
an acquisition transaction. Atlantic Coast Federal, MHC is not fully converting
to stock form at this time because the expected net proceeds from the stock
offering are sufficient in our opinion to support the growth of Atlantic Coast
Federal, MHC and Atlantic Coast Federal anticipated at this time.
In a second-step conversion, members of Atlantic Coast Federal, MHC
would have subscription rights to purchase common stock of Atlantic Coast
Federal Corporation or its successor, and the public stockholders of Atlantic
Coast Federal Corporation would be entitled to exchange their shares of common
stock for an equal percentage of shares of the converted Atlantic Coast Federal,
MHC. This percentage may be adjusted to reflect any assets owned by Atlantic
Coast Federal, MHC. Atlantic Coast Federal Corporation's public stockholders,
therefore, would own approximately the same percentage of the resulting entity
as they owned
xi
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
prior to the second-step conversion. The Board of Directors has no current plans
to undertake a "second-step conversion" transaction.
RESTRICTIONS ON ACQUISITION OF ATLANTIC COAST FEDERAL CORPORATION AND ATLANTIC
COAST FEDERAL
Federal law restricts the ability of any person, firm or entity to
acquire Atlantic Coast Federal Corporation, Atlantic Coast Federal or their
respective capital stock. No such person, firm or entity may acquire more than
25% of any class of voting stock of Atlantic Coast Federal Corporation or
Atlantic Coast Federal without prior written approval by the Office of Thrift
Supervision. In addition, for a period of three years following completion of
the stock offering, Office of Thrift Supervision regulations generally prohibit
any person from acquiring or making an offer to acquire beneficial ownership of
more than 10% of the stock of Atlantic Coast Federal Corporation or Atlantic
Coast Federal without prior written approval from the Office of Thrift
Supervision. Certain provisions of the charter and bylaws of Atlantic Coast
Federal Corporation and Atlantic Coast Federal affect the ability of any person,
firm or entity to acquire control of Atlantic Coast Federal Corporation and
Atlantic Coast Federal. These provisions include limitations on voting rights of
persons owning more than 10% of any class of outstanding voting stock of
Atlantic Coast Federal Corporation or Atlantic Coast Federal.
xii
- --------------------------------------------------------------------------------
RISK FACTORS
YOU SHOULD CONSIDER THESE RISK FACTORS, IN ADDITION TO THE OTHER
INFORMATION IN THIS PROSPECTUS, BEFORE DECIDING WHETHER TO MAKE AN INVESTMENT IN
ATLANTIC COAST FEDERAL CORPORATION'S COMMON STOCK.
OUR LOAN PORTFOLIO POSSESSES INCREASED RISK DUE TO OUR SUBSTANTIAL NUMBER OF
MULTI-FAMILY, COMMERCIAL REAL ESTATE, COMMERCIAL BUSINESS AND CONSUMER LOANS,
WHICH COULD INCREASE THE LEVEL OF OUR PROVISION FOR LOAN LOSSES.
Our outstanding commercial real estate, commercial business,
construction, multi-family, and automobile and other consumer loans accounted
for approximately 37.3% of our total loan portfolio as of December 31, 2003.
Generally, we consider these types of loans to involve a higher degree of risk
compared to first mortgage loans on one- to four-family, owner occupied
residential properties. These loans have higher risks than loans secured by
residential real estate for the following reasons:
o COMMERCIAL REAL ESTATE AND COMMERCIAL BUSINESS LOANS. Repayment
is dependent on income being generated by the rental property or
business in amounts sufficient to cover operating expenses and
debt service.
o COMMERCIAL AND MULTI-FAMILY CONSTRUCTION LOANS. Repayment is
dependent upon the completion of the project and income being
generated by the rental property or business in amounts
sufficient to cover operating expenses and debt service.
o SINGLE FAMILY CONSTRUCTION LOANS. Repayment is dependent upon
the successful completion of the project and the ability of the
contractor or builder to repay the loan from the sale of the
property or obtaining permanent financing.
o MULTI-FAMILY REAL ESTATE LOANS. Repayment is dependent on income
being generated by the rental property in amounts sufficient to
cover operating expenses and debt service.
o CONSUMER LOANS. Consumer loans (such as automobile loans) are
collateralized, if at all, with assets that may not provide an
adequate source of repayment of the loan due to depreciation,
damage or loss.
Because of our planned increased emphasis on multi-family and commercial
real estate loans, we may determine it necessary to increase the level of our
provision for loan losses. Increased provisions for loan losses would reduce our
profits. For further information concerning the risks associated with commercial
real estate, multi-family construction and consumer loans, see "Business of
Atlantic Coast Federal - Lending Activities" and "- Asset Quality."
In addition, as a result of weaknesses identified by the Office of
Thrift Supervision in its 2003 examination of Atlantic Coast Federal, we ceased
originating commercial real estate, commercial construction, commercial business
and multi-family loans until revised policies and procedures were implemented.
We believe we addressed these concerns regarding multi-family and commercial
real estate loans and resumed making such loans in the fall of 2003. Our ability
to originate commercial business loans and commercial construction loans, which
makes up less than 4.0% of our loan portfolio, was also reinitiated in after a
review by the Office of Thrift Supervision during our examination in early.
OUR LOAN PORTFOLIO POSSESSES INCREASED RISK DUE TO ITS RAPID EXPANSION AND THE
UNSEASONED NATURE OF THE PORTFOLIO.
Since December 31, 2000 to December 31, 2003, our loan portfolio has
grown from $291.7 million to $441.7 million, an increase of 51.4%. From December
31, 2002 to December 31, 2003, our loan portfolio grew by $57.0 million, an
increase of 14.8%. Our loans are secured by properties generally located
throughout southeastern Georgia and northeastern Florida. As a result of this
rapid expansion, a significant portion of our portfolio is unseasoned, , with
the risk that these loans may not have had sufficient time to perform to
properly indicate the potential magnitude of losses. During this time frame, we
have also experienced a declining rate environment. Our unseasoned adjustable
rate loans have not, therefore, been subject to an interest rate environment
which causes them to adjust to the maximum level and may involve risks resulting
from potentially increasing payment obligations by the borrower as a result of
repricing.
2
OUR NON-PERFORMING LOANS AND CLASSIFIED ASSETS HAVE INCREASED SUBSTANTIALLY IN
THE PAST YEAR. IF OUR ALLOWANCE FOR LOAN LOSSES IS NOT SUFFICIENT TO COVER OUR
ACTUAL LOSSES, OUR INCOME MAY BE NEGATIVELY AFFECTED.
At December 31, 2003, our loans classified as non-performing loans
totaled $7.6 million, an increase of about $4.7 million from December 31, 2002.
Our ratio of non-performing loans to total loans increase from 0.75% To 1.71%
over the same period. In addition, loans which management has classified as
either substandard, doubtful or loss totaled $14.3 million or 3.2% Of total
gross loans. One loan relationship amounts to $4.8 million of this total. Total
classified assets increased from $2.7 million to $19.9 million from december 31,
2002 to december 31, 2003. In the event our loan customers do not repay their
loans according to their terms and the collateral security for the payments of
these loans is insufficient to pay any remaining loan balance, we may experience
significant loans losses, which could have a material adverse effect on our
operating results. We make various assumptions and judgments about the
collectibility of our loan portfolio, including the creditworthiness of our
borrowers and the value of the real estate and other assets serving as
collateral for the repayment of many of our loans. In determining the amount of
the allowance for loans losses, we review our loans and our loss and delinquency
experience, and we evaluate economic conditions as well. If our assumptions are
incorrect, our allowance for loan losses may be insufficient to cover probable
incurred losses in our loan portfolio, resulting in additions to our allowance.
The allowance for loan losses is also periodically reviewed by our regulator,
the office of thrift supervision, who may disagree with our allowance and
require us to increase the amount. The additions to our allowance for loans
losses would be made through increased provisions for loan losses and would
negatively affect our results of operation. We believe we have addressed the
reasons for this increase in our non-performing loans by improving our policies
and procedures and by hiring additional qualified senior lending officers to
oversee our commercial real estate and commercial lending departments. See
"management's discussion and analysis of financial condition and results of
operations" and "business of atlantic coast federal - asset quality."
OUR CHIEF EXECUTIVE OFFICER IS A CRITICAL PART OF OUR SUCCESSFUL OPERATION
We depend heavily on our President and Chief Executive Officer, Robert
J. Larison, Jr., 45, who has served in such position since 1983, for our
successful operations. Although we are currently revising our management
succession plan and have a number of experienced officers in other key areas of
our operations, in the event that Mr. Larison reduces his involvement in
Atlantic Coast Federal's operations, which is not currently contemplated, our
business could be significantly and adversely affected.
CHANGES IN INTEREST RATES MAY HURT OUR PROFITS.
To be profitable, we have to earn more money in interest that we receive
on loans and our investments than we pay in interest to our depositors and
lenders. Interest rates are at historically low levels. If interest rates rise,
our net interest income could be reduced because interest paid on
interest-bearing liabilities, including deposits and borrowings, increases more
quickly than interest received on interest-earning assets, including loans and
mortgage-backed and related securities. In addition, rising interest rates may
negatively effect our income because they may reduce the demand for loans and
the value of our mortgage-related and investment securities. In
3
the alternative, if interest rates decrease, our net interest income could
increase. However, in a declining rate environment, we may also be susceptible
to the payoff or refinance of high rate mortgage loans that could reduce our net
interest income. For a further discussion of how changes in interest rates could
impact us, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset and Liability Management."
AFTER THIS OFFERING, OUR RETURN ON EQUITY WILL BE LOW COMPARED TO OTHER
COMPANIES AND OUR COMPENSATION EXPENSES WILL INCREASE. THIS COULD NEGATIVELY
IMPACT THE PRICE OF OUR STOCK.
The proceeds we will receive from the sale of our common stock will
significantly increase our capital and it will take us time to fully use this
capital in our business operations. Our compensation expenses will also increase
because of the costs associated with stock-based incentive plans. Therefore, we
expect our initial return on equity to be below our historical level and less
than our regional and national peers. For the year ended December 31, 2003, our
return on equity was 10.8%. On a pro forma basis, at the maximum of the offering
range, our return on equity would have been 5.1% for the year ended December 31,
2003, compared to industry and peer group averages of 9.0% and 5.1%,
respectively. This low return on equity could hurt our stock price. We cannot
guarantee when or if we will achieve returns on equity that are comparable to
industry peers. For further information regarding pro forma income and expenses,
see "Pro Forma Data."
WE INTEND TO GRANT STOCK OPTIONS AND RESTRICTED STOCK TO THE BOARD AND
MANAGEMENT FOLLOWING THE STOCK OFFERING WHICH COULD REDUCE YOUR OWNERSHIP
INTEREST.
If approved by a vote of the stockholders, we intend to establish a
stock option plan with a number of shares equal to 10.0% of the shares sold in
the stock offering and a restricted stock plan with a number of shares equal to
4.0% of the shares sold in the stock offering, or 772,800 shares assuming the
maximum of the offering range, for the benefit of directors, officers and
employees of Atlantic Coast Federal Corporation and Atlantic Coast Federal.
Stock options are paid for by the recipient in an amount equal to the fair
market value of the stock on the date of the grant. The payments are not made
until the option is actually exercised by the recipient. Restricted stock is a
bonus paid in the form of stock rather than cash, and is not paid for by the
recipient. Awards under these plans will reduce the ownership interest of all
stockholders. For further discussion regarding these plans, see "Pro Forma Data"
and "Management - Benefits - Stock Benefit Plans." Under the plan of stock
issuance, we are authorized to grant awards under one or more stock benefit
plans, including the recognition and retention plan and stock option plan, in an
amount up to 25% of the number of shares of common stock held by persons other
than Atlantic Coast Federal, MHC. The recognition and retention plan and stock
option plan cannot be implemented until at least six months after the offering,
and if they are adopted within twelve months after the offering, they will be
subject to certain Office of Thrift Supervision regulations regarding vesting
and allocation of awards. In the event that a portion of the shares use to (i)
fund the recognition and retention plan or (ii) satisfy the exercise of options
from our stock option plan, is obtained from authorized but unissued shares, the
issuance of such additional shares will decrease our net income per share and
stockholders' equity per share.
PERSONS WHO PURCHASE STOCK IN THE OFFERING WILL OWN A MINORITY OF ATLANTIC COAST
FEDERAL CORPORATION'S COMMON STOCK AND WILL NOT BE ABLE TO EXERCISE VOTING
CONTROL OVER MOST MATTERS PUT TO A VOTE OF STOCKHOLDERS.
4
Public stockholders will own a minority of the outstanding shares of
Atlantic Coast Federal Corporation's common stock after the stock offering. The
same directors and executive officers who manage Atlantic Coast Federal
Corporation also manage Atlantic Coast Federal, MHC. The Board of Directors of
Atlantic Coast Federal, MHC will be able to exercise voting control over most
matters put to a vote of stockholders because it will own a majority of Atlantic
Coast Federal Corporation's common stock. For example, Atlantic Coast Federal,
MHC may exercise its voting control to prevent a sale or merger transaction in
which stockholders could receive a premium for their shares or to approve
employee benefit plans.
In addition, Atlantic Coast Federal Corporation's directors, executive
officers and their associates are expected to purchase approximately 341,900
shares sold in the offering, which represent 6.19% of the shares sold at the
maximum of the offering range, respectively. These purchases, together with the
purchase of 8.0% of the shares sold in the offering by the Atlantic Coast
Federal Corporation Employee Stock Ownership Plan will result in the inside
ownership of Atlantic Coast Federal Corporation common stock of 14.19% at the
maximum of the offering range. Furthermore, if stockholders of Atlantic Coast
Federal Corporation approve the restricted stock plan and the stock option plan,
and provided that all shares under the restricted stock plan are awarded and all
options under the stock option plan are awarded and exercised, directors and
executive officers may own up to an additional 14.0% or 772,800 shares of the
outstanding common stock at the maximum of the offering range. See "Management -
Benefits" and "Proposed Stock Purchases by Management."
HOLDERS OF ATLANTIC COAST FEDERAL CORPORATION COMMON STOCK MAY NOT BE ABLE TO
SELL THEIR SHARES WHEN DESIRED IF A LIQUID TRADING MARKET DOES NOT DEVELOP, OR
FOR $10.00 OR MORE PER SHARE EVEN IF A LIQUID TRADING MARKET DEVELOPS.
We have never issued common stock to the public. Consequently, there is
no established market for the common stock. We expect our common stock to be
listed for trading on the Nasdaq national market under the symbol "ACFC." We
cannot predict whether a liquid trading market in shares of Atlantic Coast
Federal Corporation's common stock will develop or how liquid that market might
become. Persons purchasing shares may not be able to sell their shares when they
desire if a liquid trading market does not develop or sell them at a price equal
to or above $10.00 per share even if a liquid trading market develops.
MANAGEMENT WILL HAVE SUBSTANTIAL DISCRETION OVER INVESTMENT OF THE OFFERING
PROCEEDS AND MAY MAKE INVESTMENTS WITH WHICH YOU DISAGREE.
The net offering proceeds to Atlantic Coast Federal Corporation are
estimated to range from $39.5 million to $53.8 million at the minimum and the
maximum of the offering range, respectively, and management intends to use these
funds for general business purposes and for other purposes such as the payment
of dividends, stock repurchases or acquisitions, giving management substantial
discretion over their investment. You may disagree with investments that
management makes. Our failure to use these funds effectively; could reduce our
profitability .See "How We Intend to Use the Proceeds."
STRONG COMPETITION IN OUR PRIMARY MARKET AREA MAY REDUCE OUR ABILITY TO ATTRACT
AND RETAIN DEPOSITS AND OBTAIN LOANS.
5
We operate in a competitive market for the attraction of deposits, which
is our primary source of funds, and the ability to obtain loans through
origination or purchase. Historically, our most direct competition for savings
deposits has come from credit unions, community banks, large commercial banks
and thrift institutions in our primary market areas. Particularly in times of
extremely low or extremely high interest rates, we have faced additional
significant competition for investors' funds from short-term money market
securities and other corporate and government securities. Our competition for
loans comes principally from mortgage bankers, commercial banks, other thrift
institutions, insurance companies and credit unions. . Such competition for
deposits and the origination and purchase of loans may limit our future growth
and earnings prospects.
IF ECONOMIC CONDITIONS DETERIORATE, OUR RESULTS OF OPERATIONS AND FINANCIAL
CONDITION COULD BE ADVERSELY IMPACTED AS BORROWERS' ABILITY TO REPAY LOANS
DECLINES AND THE VALUE OF THE COLLATERAL SECURING OUR LOANS DECREASES.
Our financial results may be adversely affected by changes in prevailing
economic conditions, including decreases in real estate values, changes in
interest rates which may cause a decrease in interest rate spreads, adverse
employment conditions, the monetary and fiscal policies of the federal and the
Georgia and Florida state governments and other significant external events.
Because we have a significant amount of real estate loans, decreases in real
estate values could adversely affect the value of property used as collateral.
Adverse changes in the economy may also have a negative effect on the ability of
our borrowers to make timely repayments of their loans, which would have an
adverse impact on our earnings.
6
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The summary information presented below under "Selected Financial
Condition Data" and "Selected Operations Data" for, and as of the end of, each
of the years ended December 31, 2003, 2002, 2001, 2000 and 1999, is derived from
our audited consolidated financial statements. The following information is only
a summary and you should read it in conjunction with our consolidated financial
statements and notes beginning on page F-2.
At December 31,
----------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ -------------- ------------ ------------
(In Thousands)
Selected Consolidated Financial Data:
- ------------------------------------
Total assets.................... $499,040 $447,721 $376,862 $334,231 $310,230
Cash and cash equivalents....... 8,978 13,975 10,666 15,589 18,562
Securities available-for-sale... 26,039 28,599 13,670 12,923 12,765
Loans receivable, net........... 435,614 379,778 333,656 287,907 266,409
FHLB stock...................... 3,082 2,305 1,729 1,286 1,104
Deposits........................ 392,256 360,880 305,541 274,513 263,308
Total borrowings................ 60,971 45,443 32,757 25,071 17,786
Total equity.................... 43,218 38,924 35,694 33,380 27,752
Years Ended December 31,
----------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ -------------- ------------ ------------
Selected Consolidated Operations Data: (In Thousands)
- -------------------------------------
Total interest income........... $31,213 $30,813 $29,136 $27,013 $25,829
Total interest expense.......... 11,781 13,035 15,221 13,551 12,189
---------- ----------- ---------- --------- ---------
Net interest income........... 19,432 17,778 13,915 13,462 13,640
Provision for loan losses....... 4,238 3,683 2,081 1,700 2,963
---------- ----------- ---------- --------- ---------
Net interest income after
provision for loan losses..... 15,194 14,095 11,834 11,762 10,677
Noninterest income.............. 7,533 5,388 4,009 3,734 3,248
Noninterest expense............. 15,911 14,711 12,357 11,984 11,115
---------- ----------- ---------- --------- ---------
Income before income taxes...... 6,816 4,772 3,486 3,512 2,810
Income tax expense(benefit)(1),
(2),(3)....................... 2,399 1,585 1,290 (2,062) --
---------- ----------- ---------- --------- ---------
Net income(2), (3).............. $ 4,417 $ 3,187 $ 2,196 $ 5,574 $ 2,810
========== =========== ========== ========= =========
7
Selected Consolidated Financial Ratios and
- ------------------------------------------
Other Data: At or For the Year Ended
- ---------- December 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ----------- ---------- ----------- ---------
PERFORMANCE RATIOS:
Return on assets (ratio of net
income to average total assets)......... 0.91% 0.76% 0.61% 1.68% 0.92%
Return on equity (ratio of net
income to average equity)............... 10.77% 8.49% 6.38% 20.46% 10.71%
Return on assets, net of tax.............. 0.91% 0.76% 0.61% 1.68% 0.57%
Return on equity, net of tax.............. 10.77% 8.49% 6.38% 20.46% 6.64%
Interest rate spread information:
Average during period..................... 3.96% 3.94% 3.38% 3.43% 3.96%
Net interest margin(4).................... 4.30% 4.45% 4.05% 4.31% 4.61%
Ratio of operating expense to
average total........................... 3.28% 3.50% 3.43% 3.62% 3.63%
Efficiency ratio(5)....................... 59.01% 63.50% 68.94% 69.69% 65.82%
Ratio of average interest-earning
assets to average interest-bearing
liabilities............................. 113.02% 115.76% 115.29% 120.35% 115.72%
ASSET QUALITY RATIOS:
Non-performing assets to total assets
at end of period........................ 1.73% 0.90% 0.44% 0.34% 0.52%
Allowance for loan losses to non
performing loans........................ 87.13% 161.96% 314.88% 392.03% 310.23%
Allowance for loan losses to total
loans................................... 1.49% 1.22% 1.12% 1.25% 1.59%
Net charge-offs to average
outstanding loans....................... 0.57% 0.76% 0.65% 0.84% 0.90%
Non-performing loans to total
loans................................... 1.71% 0.75% 0.35% 0.32% 0.51%
CAPITAL RATIOS:
Equity to total assets at end of period... 8.66% 8.69% 9.47% 9.99% 8.95%
Average equity to average assets.......... 8.46% 8.93% 9.56% 9.90% 9.49%
OTHER DATA:
Number of full-service offices............ 13 10 9 9 9
Number of loans........................... 15,378 16,558 19,172 21,536 22,682
Number of deposit accounts................ 65,954 68,253 76,788 77,206 78,729
- ---------------------------------------
(1) On November 1, 2000, Atlantic Coast Federal converted from a
federally-chartered credit union to a federally-chartered thrift. Upon
this conversion, Atlantic Coast Federal became a taxable organization.
As a result, a net deferred tax asset of $2.0 million was recorded in
November 1, 2000 due to temporary differences between the financial
statements and tax basis of assets and liabilities. Accordingly, a tax
benefit of $2.0 million was recorded through the income statement.
(2) Had Atlantic Coast Federal been subject to federal and state income
taxes for the year ended December 31, 1999, income tax expense and net
income would have been approximately $1.1 million and $1.7 million,
respectively.
(3) Had Atlantic Coast Federal been subject to federal and state income
taxes for the period January 1, 2000 through October 31, 2000,
additional income tax expense of approximately $1.4 million would have
been incurred and net income would have been approximately $4.1 million.
(4) Net interest income divided by average interest earning assets.
(5) Efficiency ratio represents noninterest expense as a percentage of net
interest income plus noninterest income.
ATLANTIC COAST FEDERAL CORPORATION
Atlantic Coast Federal Corporation is a federally-chartered stock
corporation formed in January 2003. Atlantic Coast Federal Corporation has not
engaged in any business to date and serves as the holding company of Atlantic
Coast Federal. Atlantic Coast Federal Corporation is a savings association
holding company registered with the Office of Thrift Supervision. Atlantic Coast
Federal Corporation's executive offices are located at 505 Haines Avenue,
Waycross, Georgia and its telephone number is 912-284-2211.
8
Atlantic Coast Federal Corporation's current principal assets are the
common stock of Atlantic Coast Federal and $50,000 in cash it received from
Atlantic Coast Federal as its initial capitalization. Atlantic Coast Federal
Corporation will invest the proceeds of the offering as discussed under "How We
Intend to Use the Proceeds." In the future, it may pursue other business
activities, including mergers and acquisitions, investment alternatives and
diversification of operations. There are, however, no current understandings or
agreements for these activities.
Initially following the completion of the stock offering, Atlantic Coast
Federal Corporation will not be an operating company and will have no
significant assets other than 100% of the outstanding common stock of Atlantic
Coast Federal, the net proceeds it retains from the stock offering and its loan
to the Atlantic Coast Federal Corporation Employee Stock Ownership Plan and it
will have no significant liabilities. See "How We Intend to Use the Proceeds."
Atlantic Coast Federal Corporation intends to utilize the support staff and
offices of Atlantic Coast Federal and will pay Atlantic Coast Federal for these
services. If Atlantic Coast Federal Corporation expands or changes its business
in the future, it may hire its own employees.
ATLANTIC COAST FEDERAL
Atlantic Coast Federal is a federally-chartered and insured stock
savings association providing banking services to the general public through 13
offices serving Atkinson, Bacon, Brantley, Charlton, Church, Coffee, Pierce and
Ware Counties in Georgia and Columbia, Nassau and Duval Counties in Florida.
Atlantic Coast Federal converted from a federal credit union to a federally
chartered mutual savings association on November 1, 2000 and to a stock savings
association on January 1, 2003 when Atlantic Coast Federal reorganized into a
mutual holding company structure. At December 31, 2003, Atlantic Coast Federal
had total assets of $499.0 million, total deposits of $392.3 million, and total
equity of $43.2 million. For more information regarding the business and
operations of Atlantic Coast Federal, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business of Atlantic
Coast Federal."
Our principal business consists of attracting retail deposits from the
general public and investing those funds primarily in permanent loans secured by
first mortgages on owner-occupied, one- to four-family residences. We also
originate home equity, commercial and residential construction loans, commercial
real estate loans, automobile loans and consumer loans and, to a lesser extent,
multi-family and commercial business loans. See "Business of Atlantic Coast
Federal - General."
Atlantic Coast Federal is examined and regulated by the Office of Thrift
Supervision, which is our primary federal regulator. Atlantic Coast Federal is
also regulated by the Federal Deposit Insurance Corporation ("FDIC"). Atlantic
Coast Federal is required to have certain reserves set by the Federal Reserve
Board and is a member of the Federal Home Loan Bank of Atlanta, which is one of
the 12 regional banks in the Federal Home Loan Bank System. The executive
offices of Atlantic Coast Federal are located at 505 Haines Avenue, Waycross,
Georgia and its telephone number is 912-284-2211.
ATLANTIC COAST FEDERAL, MHC
Atlantic Coast Federal, MHC is a federally-chartered mutual holding
company formed in January 2003 and registered as a mutual holding company with
the Office of Thrift Supervision.
9
Atlantic Coast Federal, MHC's executive offices are located at 505 Haines
Avenue, Waycross, Georgia and its telephone number is 912-284-2211.
Atlantic Coast Federal, MHC's principal assets are the common stock of
Atlantic Coast Federal Corporation and $50,000 in cash it received from Atlantic
Coast Federal as its initial capitalization. At the present time, we expect that
Atlantic Coast Federal, MHC will not engage in any business activity other than
its investment in a majority of the common stock of Atlantic Coast Federal
Corporation. Federal law and regulations require that as long as Atlantic Coast
Federal, MHC is in existence, it must own a majority of Atlantic Coast Federal
Corporation's common stock. Following completion of the stock offering, Atlantic
Coast Federal, MHC will own approximately 60.0% of Atlantic Coast Federal
Corporation's outstanding common stock. Federal law, regulation, and the plan of
stock issuance permit Atlantic Coast Federal, MHC to convert to the stock form
of organization. For additional information regarding a stock conversion of
Atlantic Coast Federal, MHC, see "How We are Regulated - Atlantic Coast Federal
Corporation - Conversion of Atlantic Coast Federal, MHC to Stock Form."
HOW WE INTEND TO USE THE PROCEEDS
Although the actual net proceeds from the sale of the shares of common
stock cannot be determined until the stock offering is completed, we presently
anticipate that the net proceeds from the sale of the shares of common stock
will be between $39.5 million at the minimum of the offering range and $53.8
million at the maximum of the offering range and may be up to $62.0 million
assuming an increase in the estimated value of the common stock sold in the
estimated offering range by 15%. See "Pro Forma Data" and "The Stock Offering -
How We Determined Our Price and the Number of Shares to be Sold in the Stock
Offering" as to the assumptions used to arrive at such amounts.
We intend to use the net proceeds received from the stock offering as
follows:
Maximum, as
Minimum Maximum adjusted
------------ ---------------- ---------------
(In Thousands)
Gross Proceeds............................................ $40,800 $55,200 $63,480
Less: Estimated underwriting commission and other
offering expenses....................................... 1,257 1,376 1,445
------------ ---------------- ---------------
Net Proceeds.............................................. 39,543 53,824 62,035
Less:
Investment in Atlantic Coast Federal................... 19,772 26,912 31,018
Loan to our employee stock ownership plan.............. 3,264 4,416 5,078
Funding of restricted stock plan....................... 1,632 2,208 2,539
------------ ---------------- ---------------
Net cash proceeds retained by
Atlantic Coast Federal Corporation....................... $14,875 $20,288 $23,400
============ ================ ===============
Atlantic Coast Federal Corporation will retain up to 50.0% of the net
stock offering proceeds from which the loan will be made to the employee stock
ownership plan, and will invest the remaining proceeds in Atlantic Coast
Federal. The portion of the net proceeds used by Atlantic Coast Federal
Corporation to make a loan to the employee stock ownership plan will enable the
employee stock ownership plan to purchase up to 8.0% of the shares of common
stock sold in the stock offering. Based upon the sale of 4,080,000 shares of
common stock and 5,520,000 shares of common stock at the minimum and maximum of
the estimated offering range, respectively, the loan to the employee stock
ownership plan would be $3.26 million and
10
$4.42 million, respectively. See "Management - Benefits - Employee Stock
Ownership Plan." The remaining net proceeds initially retained by Atlantic Coast
Federal Corporation may be used for general business purposes and to invest in
U.S. Government and federal agency securities of various maturities,
mortgage-backed or other securities, deposits in either Atlantic Coast Federal
or other financial institutions, or a combination thereof. The net proceeds may
ultimately be used to support Atlantic Coast Federal's lending activities and
any future expansion of operations, although no specific acquisition
transactions are being considered at this time.
The net proceeds from the stock offering may also be used for other
business and investment purposes, including the payment of regular or special
cash dividends, possible repurchases of the common stock or returns of capital,
subject to applicable regulatory limtations. Atlantic Coast Federal Corporation
and Atlantic Coast Federal have no current plans, however, to declare or pay any
return of capital on the common stock. Management of Atlantic Coast Federal
Corporation may consider expanding or diversifying its activities, as
opportunities become available.
In the future, the board of directors of Atlantic Coast Federal
Corporation may determine, based on the existing facts and circumstances, to
repurchase shares of common stock, subject to any applicable regulatory
requirements. Repurchases of stock by Atlantic Coast Federal Corporation, which
may be at prices above or below the initial offering price, will generally be
conducted through an open market repurchase program subject to applicable
regulations. Any stock repurchases will be subject to the determination of
Atlantic Coast Federal Corporation's board of directors that Atlantic Coast
Federal will be capitalized in excess of all applicable regulatory requirements
after any such repurchases. Such facts and circumstances may include, but will
not be limited to:
o market and economic factors such as the price at which the stock
is trading in the market, the volume of trading, the
attractiveness of other investment alternatives in terms of the
rate of return and risk involved in the investment, the ability
to increase the book value and/or earnings per share of the
remaining outstanding shares, and an improvement in Atlantic
Coast Federal Corporation's return on equity;
o the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to
fund employee stock benefit plans; and
o any other circumstances in which repurchases would be in the
best interests of Atlantic Coast Federal Corporation and its
stockholders.
The portion of the net proceeds used by Atlantic Coast Federal
Corporation to invest in Atlantic Coast Federal will be added to Atlantic Coast
Federal's general funds to be used for general corporate purposes, including
increased lending activities. While the amount of net proceeds received by
Atlantic Coast Federal will further strengthen its capital position, which
already exceeds all regulatory requirements, the stock offering is not planned
solely to increase Atlantic Coast Federal's regulatory capital. The net proceeds
may be used as described above to support lending activities as well as future
expansion of operations, although no specific acquisitions are being considered
at this time.
11
The net proceeds may vary because total expenses of the stock offering
may be more or less than those estimated. The net proceeds will also vary if the
number of shares to be sold in the stock offering is adjusted to reflect a
change in the estimated pro forma market value of Atlantic Coast Federal.
Payments for shares made through withdrawals from existing deposit accounts at
Atlantic Coast Federal will not result in the receipt of new funds for
investment by Atlantic Coast Federal but will result in a reduction of Atlantic
Coast Federal's interest expense and liabilities as funds are transferred from
interest-bearing certificates or other deposit accounts.
OUR POLICY REGARDING DIVIDENDS
The board of directors of Atlantic Coast Federal Corporation intends to
pay cash dividends on the common stock in the future. The payment of dividends
will depend upon a number of factors, including capital requirements, Atlantic
Coast Federal Corporation's and Atlantic Coast Federal's financial condition and
results of operations, tax considerations, statutory and regulatory limitations
and general economic conditions. No assurances can be given that any dividends
will be paid or that, if paid, will not be reduced or eliminated in future
periods. Special cash dividends, stock dividends or returns of capital may, to
the extent permitted by regulations, be paid in addition to, or in lieu of,
regular cash dividends. Accordingly, it is anticipated that any cash
distributions made by Atlantic Coast Federal Corporation to its stockholders
would be treated as cash dividends and not as a non-taxable return of capital
for federal and state tax purposes. See "Taxation."
Dividends from Atlantic Coast Federal Corporation will depend, in large
part, upon receipt of dividends from Atlantic Coast Federal, because Atlantic
Coast Federal Corporation initially will have no source of income other than
dividends from Atlantic Coast Federal, earnings from the investment of proceeds
from the sale of shares of common stock retained by Atlantic Coast Federal
Corporation and interest payments with respect to Atlantic Coast Federal
Corporation's loan to the Atlantic Coast Federal Corporation Employee Stock
Ownership Plan. A regulation of the Office of Thrift Supervision imposes
limitations on "capital distributions" by savings institutions. See "How We are
Regulated - Limitations on Dividends and Other Capital Distributions."
If we pay dividends to stockholders of Atlantic Coast Federal
Corporation, it is anticipated that any dividends payable to Atlantic Coast
Federal, MHC would be waived, subject to Office of Thrift Supervision approval.
Under Office of Thrift Supervision regulations, such dividends would not result
in dilution to public stockholders if Atlantic Coast Federal, MHC converts to
stock form in the future. See "How We are Regulated - Limitations on Dividends
and Other Capital Distributions."
Atlantic Coast Federal Corporation currently has no intention to
initiate any action which leads to a return of capital (as distinguished from a
dividend) to stockholders of Atlantic Coast Federal Corporation. Regulations of
the Office of Thrift Supervision prohibit a return of capital during the
three-year term of the business plan submitted by Atlantic Coast Federal to the
Office of Thrift Supervision in connection with the stock offering.
12
MARKET FOR THE COMMON STOCK
Atlantic Coast Federal Corporation has never issued capital stock, other
than to Atlantic Coast Federal, MHC, and consequently, there is no established
market for the common stock at this time. Atlantic Coast Federal Corporation has
applied to have its common stock quoted on the Nasdaq National Market under the
symbol "ACFC" upon completion of the stock offering. There can be no assurance,
however, that Atlantic Coast Federal Corporation will meet Nasdaq's listing
requirements. The development of a liquid public market depends on the existence
of willing buyers and sellers, the presence of which is not within the control
of Atlantic Coast Federal Corporation, Atlantic Coast Federal or any market
maker. Accordingly, the number of active buyers and sellers of the common stock
at any particular time may be limited. In addition, Friedman Billings Ramsey has
indicated its intention to register with the National Association of Securities
Dealers, Inc. to be able to trade Atlantic Coast Federal Corporation shares and
to assist Atlantic Coast Federal Corporation in identifying other firms to do
the same. See "Risk Factors."
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the stock offering is completed. However, net proceeds are
currently estimated to be between $39.5 million and $53.8 million, or $62.0
million in the event the estimated offering range is increased by 15%, based
upon the following assumptions:
o all shares of common stock will be sold through non-transferable
rights to subscribe for the common stock, in order of priority,
to eligible account holders, the proposed employee stock
ownership plan and supplemental eligible account holders and,
should shares remain, also through a community offering;
o Friedman Billings Ramsey will receive a marketing fee equal to
0.90% of the gross proceeds of the stock offering excluding
shares sold to directors, officers, employees and the employee
stock ownership plan upon completion of the stock offering;
o total expenses, excluding the marketing fees paid to Friedman
Billings Ramsey are estimated to be approximately $950,000.
Actual expenses may vary from those estimated.
Pro forma consolidated net income and stockholders' equity of Atlantic
Coast Federal Corporation have been calculated for the year ended December 31,
2003, as if the common stock to be sold in the stock offering had been sold at
the beginning of the periods and the net proceeds had been invested at 1.26%,
which represents the yield on one-year U.S. Government securities at December
31, 2003. The effect of withdrawals from deposit accounts for the purchase of
common stock has not been reflected. A tax rate of 38.0% has been assumed for
the periods, resulting in an after-tax yield of .78%. Historical and pro forma
per share amounts have been calculated by dividing historical and pro forma
amounts by the indicated number of shares of common stock, as adjusted to give
effect to the restricted stock plan and the employee stock ownership plan. See
Notes 3 and 4 to the tables below. No effect has been given in the pro forma
stockholders' equity calculations for the assumed earnings on the net proceeds.
Atlantic Coast Federal Corporation intends to retain up to 50.0% of the net
13
proceeds from the stock offering and to make a loan to fund the purchase of 8.0%
of the common stock by the employee stock ownership plan. See "How We Intend to
Use the Proceeds."
No effect has been given in the tables to the issuance of additional
shares of common stock pursuant to the proposed stock option plan. The table
below gives effect to the restricted stock plan, which is expected to be adopted
by Atlantic Coast Federal Corporation following the stock offering and presented
along with the stock option plan to stockholders for approval at an annual or
special meeting of stockholders to be held at least six months following the
completion of the stock offering. If the restricted stock plan is approved by
stockholders, the restricted stock plan intends to acquire an amount of common
stock equal to 4.0% of the shares of common stock sold in the stock offering,
either through open market purchases or from authorized but unissued shares of
common stock, if permissible. The table below assumes that stockholder approval
has been obtained, as to which there can be no assurance, and that the shares
acquired by the restricted stock plan are purchased in the open market at $10.00
per share. No effect has been given to Atlantic Coast Federal Corporation's
results of operations after the stock offering, the market price of the common
stock after the stock offering or a less than 4.0% purchase by the restricted
stock plan. See "Management - Benefits - Stock Benefit Plans."
The pro forma stockholders' equity is not intended to represent the fair
market value of the common stock and may be different than amounts that would be
available for distribution to stockholders in the event of liquidation.
THE FOLLOWING PRO FORMA INFORMATION MAY NOT BE REPRESENTATIVE OF THE
FINANCIAL EFFECTS OF THE FOREGOING TRANSACTIONS AT THE DATES ON WHICH SUCH
TRANSACTIONS ACTUALLY OCCUR AND SHOULD NOT BE TAKEN AS INDICATIVE OF FUTURE
RESULTS OF OPERATIONS.
14
At or For the Year Ended
December 31, 2003
---------------------------------------------------------------
6,348,000
4,080,000 4,800,000 5,520,000 Shares Sold
Shares Sold Shares Sold Shares Sold at $10.000
at $10.00 at $10.00 at $10.00 Per Share
Per Share Per Share Per Share (Maximum of
(Minimum of (Midpoint (Maximum of Range, as
Range) of Range) Range) Adjusted)(1)
------------- ------------- ------------- -------------
(Dollars in Thousands, Except Per Share Data)
Gross proceeds................................................ $ 40,800 $ 48,000 $ 55,200 $ 63,480
Less offering expenses and commissions........................ 1,257 1,317 1,376 1,445
------------- ------------- ------------- -------------
Estimated net proceeds.................................... 39,543 46,683 53,824 62,035
Less:
Shares purchased by the employee stock ownership
plan(3)................................................ (3,264) (3,840) (4,416) (5,078)
Shares purchased by the restricted stock plan(4)......... (1,632) (1,920) (2,208) (2,539)
------------- ------------- ------------- -------------
Estimated proceeds available for investment(2)................ $ 34,647 $ 40,923 $ 47,200 $ 54,417
============= ============= ============= =============
Net income:
Historical.................................................. $ 4,417 $ 4,417 $ 4,417 $ 4,418
Pro forma income on net proceeds............................ 271 320 369 425
Pro forma employee stock ownership plan adjustment(3) (202) (238) (274) (315)
Pro forma restricted stock plan adjustment(4)................. (202) (238) (274) (315)
------------- ------------- ------------- -------------
Pro forma net income.......................................... $ 4,284 $ 4,261 $ 4,238 $ 4,212
============= ============= ============= =============
Net income per share:
Historical.................................................. $ 0.45 $ 0.38 $ 0.33 0.29
Pro forma income on net proceeds, as adjusted............... 0.03 0.03 0.02 0.03
Pro forma employee stock ownership plan adjustment(3)....... (0.02) (0.02) (0.02) (0.02)
Pro forma restricted stock plan adjustment(4)............... (0.02) (0.02) (0.02) (0.02)
------------- ------------- ------------- -------------
Pro forma net income per share(4)(5)(6)....................... $ 0.44 $ 0.37 $ 0.32 0.28
------------- ------------- ------------- -------------
Number of shares outstanding for pro forma net income per
share calculations(5)..................................... 9,906,240 11,654,400 13,402,560 15,412,944
Offering price to pro forma net income per share.............. 22.73x 27.03x 31.25x 35.71x
============= ============= ============= =============
15
At or For the Year Ended
December 31, 2003
---------------------------------------------------------------
6,348,000
4,080,000 4,800,000 5,520,000 Shares Sold
Shares Sold Shares Sold Shares Sold at $10.000
at $10.00 at $10.00 at $10.00 Per Share
Per Share Per Share Per Share (Maximum of
(Minimum of (Midpoint (Maximum of Range, as
Range) of Range) Range) Adjusted)(1)
------------- ------------- ------------- -------------
(Dollars in Thousands, Except Per Share Data)
Stockholders' equity:
Historical.................................................. $ 43,218 $ 43,218 $ 43,218 $ 43,218
Estimated net proceeds...................................... 39,543 46,683 53,824 62,035
Less:
Common stock purchased by the employee
stock ownership plan(3)............................... (3,264) (3,840) (4,416) (5,078)
Common stock purchased by the restricted
stock plan(4)......................................... (1,632) (1,920) (2,208) (2,539)
------------- ------------- ------------- -------------
Pro forma stockholders' equity(3)(4).......................... $ 77,865 $ 84,141 $ 90,418 $ 97,636
============= ============= ============= =============
Stockholders' equity per share:
Historical.................................................. $ 4.24 $ 3.60 $ 3.13 $ 2.72
Estimated net proceeds...................................... 3.88 3.89 3.90 3.91
Less:
Common stock purchased by the employee
stock ownership plan(3)............................... (0.32) (0.32) (0.32) (0.32)
Common stock purchased by the restricted
stock plan(4)......................................... (0.16) (0.16) (0.16) (0.16)
------------- ------------- ------------- -------------
Pro forma stockholders' equity(4)(5)(6)....................... $ 7.64 $ 7.01 $ 6.55 $ 6.15
============= ============= ============= =============
Offering price as a percentage of pro forma
stockholders' equity(5)..................................... 130.89% 142.65% 152.67% 162.60%
Number of shares outstanding for pro forma
stockholders' equity per share calculations(5).............. 10,200,000 12,000,000 13,800,000 15,870,000
- -----------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the estimated offering range of up to
15% to reflect changes in market and financial conditions following the
commencement of the stock offering.
(2) Estimated net proceeds, available for investment, consist of the
estimated net proceeds from the stock offering minus (i) the proceeds
attributable to the purchase by the employee stock ownership plan and
(ii) the value of the shares to be purchased by the restricted stock
plan, subject to stockholder approval, after the stock offering at an
assumed purchase price of $10.00 per share.
(3) It is assumed that 8.0% of the shares of common stock sold in the stock
offering will be purchased by the employee stock ownership plan with
funds loaned by Atlantic Coast Federal Corporation. Atlantic Coast
Federal Corporation and Atlantic Coast Federal intend to make annual
contributions to the employee stock ownership plan in an amount at least
equal to the principal and interest requirement of the debt. The pro
forma net earnings assumes (i) that the loan to the employee stock
ownership plan is payable over 10 years, with the employee stock
ownership plan shares having an average fair value of $10.00 per share
in accordance with Statement of Position ("SOP") 93-6 of the American
Institute of Certified Public Accountants, entitled "Employers'
Accounting for Employee Stock Ownership Plans," and (ii) the effective
tax rate was 38.0% for the period. See "Management - Benefits - Employee
Stock Ownership Plan."
(4) It is assumed that the restricted stock plan will purchase, following
stockholder approval of such plan, a number of shares of common stock
equal to 4.0% of the shares of common stock sold in the stock offering
for issuance to directors, officers and employees. Funds used by the
restricted stock plan
16
to purchase the shares initially will be contributed to the restricted
stock plan by Atlantic Coast Federal Corporation. It is further assumed
that the shares were acquired by the restricted stock plan at the
beginning of the period presented in open market purchases at the
purchase price and that 20% of the amount contributed, net of taxes at
38.0%, was an amortized expense during the year ended December 31, 2003.
Statement of Financial Accounting Standards ("SFAS") No. 128 requires
that unvested shares under the restricted stock plan be excluded from
the basic net income per share calculation and included in the diluted
net income per share calculation only if they are dilutive under the
treasury stock method. The issuance of authorized but unissued shares of
common stock pursuant to the restricted stock plan in the amount of 4.0%
of the common stock sold in the offering would dilute the voting
interests of existing stockholders by approximately 1.54%. See
"Management - Benefits - Stock Benefit Plans."
(5) The per share calculations are determined by adding the number of shares
sold in the stock offering and for purposes of calculating net income
per share, in accordance with SOP 93-6 subtracting 326,400 shares,
384,000 shares, 441,600 shares, and 507,840 shares, at the minimum,
midpoint, maximum and 15% above the maximum of the offering range,
respectively, representing the employee stock ownership plans shares
which have not been committed for release during the year ended December
31, 2003. See Note 3 above. For purposes of calculating pro forma
stockholders' equity per share, it is assumed that shares outstanding
total 10,200,000 shares at the minimum of the range, 12,000,000 shares
at the midpoint of the range, 13,800,000 shares at the maximum of the
range and 15,870,000 shares at 15% above the maximum of the range,
respectively.
(6) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plan, which will be adopted by
Atlantic Coast Federal Corporation following the stock offering and
presented for approval by stockholders at an annual or special meeting
of stockholders of Atlantic Coast Federal Corporation held at least six
months following the completion of the stock offering. If the stock
option plan is approved by stockholders, it is assumed that an amount
equal to 10.0% of the common stock sold in the stock offering, or
408,000 shares at the minimum of the estimated offering range, 480,000
shares at the midpoint of the range, 552,000 shares at the maximum of
the range and 634,800 shares at 15% above the maximum of the range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the stock option plan. The issuance of
common stock pursuant to the exercise of options under the stock option
plan will result in the dilution of existing stockholders' voting
interests by approximately 3.85%. This assumes stockholder approval of
the stock option plan, that all these options were exercised at the
beginning of the period at an exercise price of $10.00 per share and
that the shares to fund the restricted stock plan are acquired through
open market purchases at the purchase price. See "Management - Benefits
- Stock Benefit Plans."
17
CAPITALIZATION
The following table presents the historical consolidated capitalization
of Atlantic Coast Federal Corporation at December 31, 2003, and the pro forma
consolidated capitalization of Atlantic Coast Federal Corporation after giving
effect to the stock offering, based upon the sale of the number of shares shown
below and the other assumptions set forth under "Pro Forma Data."
Atlantic Coast Federal Corporation - Pro Forma
--------------------------------------------------------
6,348,000
Atlantic Coast Shares(1)
Federal 4,080,000 4,800,000 5,520,000 (Maximum
Corporation Shares Shares Shares of Range,
Historical (Minimum (Midpoint (Maximum as
Capitalization of Range) of Range) of Range) Adjusted)
---------------- ------------- ------------ ------------- ------------
(In Thousands)
Deposits(2)........................................... $ 392,256 $ 392,256 $ 392,256 $ 392,256 $ 392,256
Borrowings............................................ 60,971 60,971 60,971 60,971 60,971
---------------- ------------- ------------ ------------- ------------
Total deposits and borrowings......................... $ 453,227 $ 453,227 $ 453,227 $ 453,227 $ 453,227
================ ============= ============ ============= ============
Stockholders' equity
Preferred stock, $0.01 par value, 2,000,000 shares
authorized, none issued............................ $ -- $ -- $ -- $ -- $ --
Common stock, $0.01 par value, 18,000,000 shares
authorized; shares to be issued as reflected(3).... -- 102 120 138 159
Additional paid-in capital...................... -- 39,441 46,563 53,686 61,876
Retained earnings............................... 43,221 43,221 43,221 43,221 43,221
Accumulated other comprehensive income (loss)... (2) (2) (2) (2) (2)
Less:
Common stock to be acquired by the employee stock
ownership plan(4).................................. -- (3,264) (3,840) (4,416) (5,078)
Common stock to be acquired by the restricted
stock plan(5)...................................... -- (1,632) (1,920) (2,208) (2,539)
---------------- ------------- ------------ ------------- ------------
Total stockholders' equity............................ $ 43,219 $ 77,866 $ 84,142 $ 90,419 $ 97,637
================ ============= ============ ============= ============
- -----------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the estimated offering range of up to
15% to reflect changes in market and financial conditions following the
commencement of the offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the stock offering. Any withdrawals would reduce pro
forma deposits by the amount of the withdrawals.
(3) Atlantic Coast Federal, MHC owned 1,000 shares of Atlantic Coast Federal
Corporation at December 31, 2003 . Reflects the issuance of the
additional shares of common stock to be sold in the stock offering. No
effect has been given to the issuance of additional shares of common
stock pursuant to the proposed stock option plan. The plan of stock
issuance permits Atlantic Coast Federal Corporation to adopt one or more
benefit plans in an amount up to 25% of the number of shares of common
stock other than held by persons other than Atlantic Coast Federal, MHC.
The authorized common and preferred stock of Atlantic Coast Federal
Corporation will be increased to these amounts in connection with the
stock offering. See "Pro Forma Data" and "Management - Benefits - Stock
Benefit Plans."
(4) Assumes that 8.0% of the common stock sold in the stock offering will be
purchased by the employee stock ownership plan, which is reflected as a
reduction from stockholders' equity. The employee stock ownership plan
shares will be purchased with funds loaned to the employee stock
ownership plan by Atlantic Coast Federal Corporation. See "Pro Forma
Data" and "Management - Benefits - Employee Stock Ownership Plan."
(5) Atlantic Coast Federal Corporation intends to adopt a restricted stock
plan and to submit such plan to stockholders at an annual or special
meeting of stockholders held at least six months following the
completion of the stock offering. If the plan is approved by
stockholders, Atlantic Coast Federal Corporation intends to contribute
sufficient funds to the restricted stock plan to enable the plan to
purchase a number of shares of common stock equal to 4.0% of the common
stock sold in the stock offering. Assumes that stockholder approval has
been obtained and that the shares have been purchased in the open market
at the purchase price. However, in the event Atlantic Coast Federal
Corporation issues authorized but unissued shares of common stock to the
restricted stock plan in the amount of 4.0% of the common stock sold in
the stock offering, the voting interests of
18
existing stockholders would be diluted by approximately 1.81%. The
shares are reflected as a compensation expense resulting in a reduction
of stockholders' equity. See "Pro Forma Data" and "Management - Benefits
- Stock Benefit Plans."
19
PRO FORMA REGULATORY CAPITAL ANALYSIS
At December 31, 2003, Atlantic Coast Federal exceeded all of its
applicable regulatory capital requirements. The table sets forth the historical
regulatory capital of Atlantic Coast Federal at December 31, 2003 and the pro
forma regulatory capital of Atlantic Coast Federal after giving effect to the
stock offering, based upon the sale of the number of shares shown in the table.
The pro forma regulatory capital amounts reflect the receipt by Atlantic Coast
Federal of 50.0% of the net stock proceeds. The pro forma risk-based capital
amounts assume the investment of the net proceeds received by Atlantic Coast
Federal in assets which have a risk-weight equal to the average risk-weight of
Atlantic Coast Federal's assets, under applicable regulations, as if such net
proceeds had been received and so applied at December 31, 2003. See "How We Are
Regulated."
20
Pro Forma at December 31, 2003
----------------------------------------------------------------------
4,080,000 Shares 4,800,000 Shares 5,520,000 Shares
Historical at Sold at $10.00 Sold at $10.00 Sold at $10.00
December 31, 2003 per Share per Share per Share
-------------------- --------------------- ---------------------- ----------------------
Percent Percent Percent Percent
Amount of Assets Amount of Assets Amount of Assets Amount of Assets
------ --------- ------ --------- ------ --------- ------ ---------
(Dollars in Thousands)
Equity capital under GAAP......... $ 43,168 8.67% $ 58,044 11.24% $ 60,750 11.69% $ 63,456 12.14%
Tangible capital:
Actual........................ $ 40,036 8.09% $ 54,912 10.70% $ 57,618 11.16% $ 60,324 11.61%
Requirement................... 7,425 1.50 7,697 1.50 7,746 1.50 7,795 1.50
-------- ------- -------- ------- --------- ------- --------- -------
Excess........................ $ 32,611 6.59% 47,215 9.20% $ 49,872 9.66% $ 52,529 10.11%
======== ======= ======== ======= ========= ======= ========= =======
Core Capital:
Actual........................ $ 40,036 8.09% $ 54,912 10.70% $ 57,618 11.16% $ 60,324 11.61%
Requirement................... 19,799 4.00 20,525 4.00 20,656 4.00 20,787 4.00
-------- ------- -------- ------- --------- ------- --------- -------
Excess........................ $ 20,237 4.09% $ 34,387 6.70% $ 36,962 7.16% $ 39,537 7.61%
======== ======= ======== ======= ========= ======= ========= =======
Tier I to risk weighted assets:
Actual........................ $ 40,036 11.65% $ 54,912 15.42% $ 57,617 16.08% $ 60,324 16.72%
Requirement................... 13,742 4.00 14,245 4.00 14,336 4.00 14,428 4.00
-------- ------- -------- ------- --------- ------- --------- -------
Excess........................ $ 26,294 7.65% $ 40,666 11.42% $ 43,281 12.08% $ 45,896 12.72%
======== ======== ======== ======= ========= ======= ========= =======
Risk-based capital:
Actual........................ $ 44,351 12.91% $ 59,227 16.63% $ 61,933 17.28% $ 64,639 17.92%
Requirement................... 27,484 8.00 28,491 8.00 28,673 8.00 28,855 8.00
-------- ------- -------- ------- --------- ------- --------- -------
Excess........................ $ 16,867 4.91% $ 30,736 8.63% $ 33,260 9.28% $ 35,784 9.92%
======== ======= ======== ======= ========= ======= ========= =======
21
(Continued)
-----------------------
6,398,000 Shares
Sold at $10.00
per Share
----------------------
Percent
Amount of Assets
------ ---------
Equity capital under GAAP......... $ 66,586 12.64%
Tangible capital:
Actual........................ $ 63,436 12.12%
Requirement................... 7,852 1.50
--------- -------
Excess........................ $ 55,584 10.62%
========= =======
Core Capital:
Actual........................ $ 63,436 12.12%
Requirement................... 20,938 4.00
--------- -------
Excess........................ $ 42,496 8.12%
========= =======
Tier I to risk weighted assets:
Actual........................ $ 63,436 17.46%
Requirement................... 14,532 4.00
--------- -------
Excess........................ $ 48,904 13.46%
========= =======
Risk-based capital:
Actual........................ $ 67,751 18.65%
Requirement................... 29,065 8.00
--------- -------
Excess........................ $ 38,686 10.65%
========= =======
(1) Adjusted total or adjusted risk-weighted assets, as appropriate.
22
THE STOCK OFFERING
THE BOARDS OF DIRECTORS OF ATLANTIC COAST FEDERAL CORPORATION AND
ATLANTIC COAST FEDERAL HAVE ADOPTED AND THE OFFICE OF THRIFT SUPERVISION HAS
APPROVED THE PLAN OF STOCK ISSUANCE. THE OFFICE OF THRIFT SUPERVISION APPROVAL
IS SUBJECT TO SATISFACTION OF CERTAIN CONDITIONS IMPOSED BY THE OFFICE OF THRIFT
SUPERVISION. THE OFFICE OF THRIFT SUPERVISION APPROVAL DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF STOCK ISSUANCE.
GENERAL
On March 12, 2004, we adopted a plan of stock issuance, pursuant to
which we will sell our common stock to eligible depositors of Atlantic Coast
Federal. Under the plan, Atlantic Coast Federal Corporation common stock is
being offered to our eligible depositors, our employee stock ownership plan and
then to the public. The Office of Thrift Supervision has approved Atlantic Coast
Federal Corporation's plan of stock issuance.
The shares of Atlantic Coast Federal Corporation common stock are first
being offered in a subscription offering to holders of subscription rights. To
the extent shares of common stock remain available after the subscription
offering, shares may be offered in a direct community offering on a best efforts
basis through Friedman Billings Ramsey in such a manner as to promote a wide
distribution of the shares. The direct community offering, if any, may commence
with, at any time during, or as soon as practicable after the commencement of
the subscription offering. Shares not subscribed for in the subscription
offering and direct community offering may be offered for sale on a best efforts
basis in a syndicated community offering conducted by Friedman Billings Ramsey.
We have the right, in our sole discretion, to accept or reject, in whole or in
part, any orders to purchase shares of common stock received in the direct
community offering and the syndicated community offering. See "- Direct
Community Offering" and "- Syndicated Community Offering."
Subscriptions for shares will be subject to the maximum and minimum
purchase limitations set forth in the plan of stock issuance. See "- Limitations
on Stock Purchases."
The completion of the offering is subject to market conditions and other
factors beyond our control. No assurance can be given as to the length of time
that will be required to complete the sale of shares being offered in the stock
offering. If delays are experienced, significant changes may occur in the
estimated offering range with corresponding changes in the offering price and
the net proceeds to be realized by us from the sale of the shares. In the event
the stock offering is terminated, we will charge all stock offering expenses
against current income and any funds collected by us in the offering will be
promptly returned, with interest, to each subscriber.
PURPOSES OF THE STOCK OFFERING
Atlantic Coast Federal Corporation is offering for sale its common stock
in the stock offering at an aggregate price based on an independent valuation.
The proceeds from the sale of common stock of Atlantic Coast Federal Corporation
will provide Atlantic Coast Federal with new equity capital, which will support
future deposit growth and expanded operations. While Atlantic Coast Federal
currently exceeds all regulatory capital requirements to be considered
adequately capitalized, the sale of stock, coupled with the accumulation of
earnings, less dividends or other reductions in capital, from year to year,
represents a means for the orderly
23
preservation and expansion of Atlantic Coast Federal's capital base in order to
support our future growth. The investment of the net proceeds of the offering
also will provide additional income to further enhance Atlantic Coast Federal's
future capital position.
Additionally, our stronger capital position after the offering will
enhance operating flexibility, support future expansion, and provide a cushion
for absorbing unanticipated losses. Atlantic Coast Federal will receive
approximately 50.0% of the net proceeds of the stock offering as equity capital,
to be used initially to invest in short-term investments and adjustable rate
mortgage-backed securities, then later for making loans within our market area.
Atlantic Coast Federal Corporation will also use a portion of the cash proceeds
to extend a loan to the Atlantic Coast Federal Corporation Employee Stock
Ownership Plan
EFFECTS OF THE STOCK OFFERING
GENERAL. The stock offering will have no effect on Atlantic Coast
Federal's present business of accepting deposits and investing its funds in
loans and other investments permitted by law. The stock offering will not result
in any change in the existing services provided to depositors and borrowers, or
in our existing office, management and staff. Atlantic Coast Federal will
continue to be subject to regulation, supervision and examination by the Office
of Thrift Supervision and the FDIC.
DEPOSITS AND LOANS. Each holder of a deposit account in Atlantic Coast
Federal at the time of the stock offering will continue as an account holder in
Atlantic Coast Federal after the stock offering, and the stock offering will not
affect the deposit balance, interest rate or other terms of such accounts. Each
account will be insured by the FDIC to the same extent as before the stock
offering. Depositors in Atlantic Coast Federal will continue to hold their
existing certificates and other evidence of their accounts. The stock offering
will not affect the loan terms of any borrower from Atlantic Coast Federal. The
amount, interest rate, maturity, security for and obligations under each loan
will remain as they existed prior to the stock offering.
CONTINUITY. During the process, the normal business of Atlantic Coast
Federal of accepting deposits and making loans will continue without
interruption. Following completion of the stock offering, Atlantic Coast Federal
will continue to be subject to regulation by the Office of Thrift Supervision,
and FDIC insurance of accounts will continue without interruption. After the
stock offering, Atlantic Coast Federal will continue to provide services for
depositors and borrowers under current policies and by its present management
and staff.
The board of directors presently serving Atlantic Coast Federal will
continue to serve as the board of directors of Atlantic Coast Federal after the
stock offering. The members of the board of directors of Atlantic Coast Federal
Corporation will consist of the individuals currently serving on the board of
directors of Atlantic Coast Federal Corporation, which are the same directors
serving for Atlantic Coast Federal. After the stock offering, the voting
stockholders of Atlantic Coast Federal Corporation will elect approximately
one-third of Atlantic Coast Federal Corporation's directors annually. All
current officers of Atlantic Coast Federal Corporation and Atlantic Coast
Federal will retain their positions with Atlantic Coast Federal Corporation and
Atlantic Coast Federal, respectively, after the stock offering.
VOTING RIGHTS. As a federally-chartered stock corporation, all voting
rights of Atlantic Coast Federal Corporation are held solely by its sole
stockholder, Atlantic Coast Federal, MHC. All voting rights of Atlantic Coast
Federal are held solely by its sole stockholder, Atlantic Coast
24
Federal Corporation. All voting rights of Atlantic Coast Federal, MHC are held
by the depositors of Atlantic Coast Federal at the applicable record date. After
the stock offering, the voting rights of Atlantic Coast Federal Corporation will
be held by stockholders consisting of Atlantic Coast Federal, MHC and
individuals who purchased shares in, or following, the stock offering. Atlantic
Coast Federal, MHC will own a majority of the outstanding common stock of
Atlantic Coast Federal Corporation, and thus the board of directors of Atlantic
Coast Federal, MHC, which is compromised of the same individuals who are
directors of Atlantic Coast Federal Corporation, will control the affairs of
Atlantic Coast Federal Corporation, including the election of directors of
Atlantic Coast Federal Corporation.
DEPOSITORS' RIGHTS IF WE LIQUIDATE. In the event of a voluntary
liquidation of Atlantic Coast Federal, the holder of Atlantic Coast Federal's
common stock, which is Atlantic Coast Federal Corporation, would be entitled to
any assets remaining upon a liquidation, dissolution or winding up of Atlantic
Coast Federal and, except through their liquidation interests in Atlantic Coast
Federal, as discussed below, holders of deposit accounts in Atlantic Coast
Federal would not have any interest in these assets.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of Atlantic Coast Federal, MHC following completion of the stock
offering, holders of deposit accounts in Atlantic Coast Federal would be
entitled, pro rata to the value of their accounts and to distribution of any
assets of Atlantic Coast Federal, MHC remaining after the claims of all
creditors of Atlantic Coast Federal are satisfied. Stockholders of Atlantic
Coast Federal Corporation will have no liquidation or other rights with respect
to Atlantic Coast Federal solely as stockholders.
In the event of a liquidation, dissolution or winding up of Atlantic
Coast Federal Corporation, each holder of shares of the common stock would be
entitled to receive, after payment of all debts and liabilities of Atlantic
Coast Federal Corporation, a pro rata portion of all assets of Atlantic Coast
Federal Corporation available for distribution to holders of the common stock.
There currently are no plans to liquidate Atlantic Coast Federal,
Atlantic Coast Federal Corporation or Atlantic Coast Federal, MHC.
TAX EFFECTS OF THE STOCK OFFERING. Atlantic Coast Federal Corporation
and Atlantic Coast Federal have received an opinion from their special counsel,
Luse Gorman Pomerenk & Schick, P.C., Washington, D.C., as to the material
federal income tax consequences of the stock offering on Atlantic Coast Federal
and Atlantic Coast Federal Corporation, and as to the generally applicable
material federal income tax consequences of the stock offering on Atlantic Coast
Federal's account holders and to persons who purchase common stock in the
offering. This opinion has been filed as an exhibit to Atlantic Coast Federal
Corporation's registration statement with the Securities and Exchange Commission
("SEC") of which this prospectus is a part.
The opinion provides that:
o Atlantic Coast Federal Corporation will incur no gain or loss
upon its receipt of money in exchange for the issuance of shares
of its common stock sold in the stock offering; and
25
o It is more likely than not that the fair market value of the
non-transferable subscription rights to purchase Atlantic Coast
Federal Corporation common stock will be zero. Accordingly, no
gain or loss will be recognized by eligible account olders or
supplemental eligible account holders or other eligible
subscribers as a result of the exercise of the nontransferable
subscription rights.
o It is more likely than not that the basis of the Atlantic Coast
Federal Corporation common stock to persons who purchase in the
offering will be the purchase price thereof. The holding period
of a stockholder who purchases shares in the offering will
commence upon the consummation of the sale of such common stock
to such stockholder pursuant to the exercise of the subscription
rights.
The opinion of Luse Gorman Pomerenk & Schick, P.C., is based in part
upon, and subject to the continuing validity in all material respects through
the date of the compliance of the stock offering of various representations of
Atlantic Coast Federal, upon assumptions and qualifications, including that the
stock offering is completed in the manner and according to the terms provided in
the plan of stock issuance. This opinion is also based upon the Internal Revenue
Code, regulations now in effect or proposed, current administrative rulings and
practice and judicial authority, all of which are subject to change and any
change may be made with retroactive effect. Unlike private letter rulings
received from the Internal Revenue Service ("IRS"), an opinion is not binding
upon the IRS and there can be no assurance that the IRS will not take a position
contrary to the positions reflected in this opinion, or that this opinion will
be upheld by the courts if challenged by the IRS.
Atlantic Coast Federal Corporation and Atlantic Coast Federal have also
obtained an opinion from Crowe Chizek and Company LLC, that the tax effects of
the stock offering under Georgia and Florida tax laws will be substantially the
same as described above with respect to federal income tax laws.
Atlantic Coast Federal Corporation and Atlantic Coast Federal have
received a letter from RP Financial LC, stating its belief that the subscription
rights do not have any value, based on the fact that these rights are acquired
by the recipients without cost, are nontransferable and of short duration, and
give the recipients the right only to purchase the common stock at a price equal
to its estimated fair market value, which will be the same price as the purchase
price for the unsubscribed shares of common stock. If the subscription rights
granted to eligible subscribers are deemed to have an ascertainable value,
receipt of these rights would be taxable probably only to those eligible
subscribers who exercise the subscription rights, either as a capital gain or
ordinary income, in an amount equal to such value, and Atlantic Coast Federal
Corporation and Atlantic Coast Federal could recognize gain on any distribution.
Eligible subscribers are encouraged to consult with their own tax advisor as to
the tax consequences in the event that subscription rights are deemed to have an
ascertainable value. Unlike private rulings, our opinion and the letter of RP
Financial is not binding on the IRS, and the IRS could disagree with our opinion
and the conclusions reached in the RP letter. In the event of any disagreement,
there can be no assurance that the IRS would not prevail in a judicial or
administrative proceeding.
26
HOW WE DETERMINED OUR PRICE AND THE NUMBER OF SHARES TO BE SOLD IN THE STOCK
OFFERING
The plan of stock issuance requires that the purchase price of the
common stock must be based on the appraised pro forma market value of Atlantic
Coast Federal, as determined on the basis of an independent valuation. Atlantic
Coast Federal has retained RP Financial, to make this valuation. RP Financial is
a firm with extensive experience in the valuation of companies undertaking a
stock offering such as the proposed offering of Atlantic Coast Federal
Corporation. Atlantic Coast Federal selected RP Financial based upon its
experience and reputation in valuing stock offerings by issuers such as Atlantic
Coast Federal Corporation. For its services in making this appraisal, RP
Financial's fees and out-of-pocket expenses are estimated to be $40,000.
Atlantic Coast Federal has agreed to indemnify RP Financial and any employees of
RP Financial who act for or on behalf of RP Financial in connection with the
appraisal against any and all loss, cost, damage, claim, liability or expense of
any kind, including claims under federal and state securities laws, arising out
of any misstatement or untrue statement of a material fact or an omission to
state a material fact in the information supplied by Atlantic Coast Federal to
RP Financial, unless RP Financial is determined to be negligent or otherwise at
fault.
RP Financial issued its appraisal in reliance upon the information
contained in this prospectus, including the financial statements. RP Financial
also considered the following factors, among others:
o the present and projected operating results and financial
condition of Atlantic Coast Federal Corporation and Atlantic
Coast Federal, which were prepared by Atlantic Coast Federal
then adjusted by RP Financial to reflect the net proceeds of the
offering and the economic and demographic conditions in Atlantic
Coast Federal's existing marketing areas;
o certain historical, financial and other information relating to
Atlantic Coast Federal, which were prepared by Atlantic Coast
Federal;
o a comparative evaluation of the operating and financial
statistics of Atlantic Coast Federal with those of other
similarly situated publicly-traded mutual holding companies;
o the aggregate size of the offering of the common stock;
o the impact of the stock offering on Atlantic Coast Federal's net
worth and earnings potential as calculated by RP Financial;
o the proposed dividend policy of Atlantic Coast Federal
Corporation and Atlantic Coast Federal; and
o the trading market for securities of comparable institutions and
general conditions in the market for such securities.
The appraisal also incorporated an analysis of a peer group of publicly-traded
mutual holding companies that RP Financial considered to be comparable to
Atlantic Coast Federal Corporation. The peer group analysis conducted by RP
Financial included a total of 10 publicly-traded mutual holding companies with
less than $1 billion in assets. The analysis of comparable publicly-
27
traded institutions included an evaluation of the average and median
price-to-earnings and price-to-book value ratios indicated by the market prices
of the peer companies, among other factors. RP Financial applied the peer
group's pricing ratios as adjusted for certain qualitative valuation factors to
account for differences between Atlantic Coast Federal Corporation's and the
peer group, to Atlantic Coast Federal Corporation's pro forma earnings and book
value to derive the estimated pro forma market value of Atlantic Coast Federal
Corporation.
In its review of the appraisal provided by RP Financial, the board of
directors reviewed the methodologies and the appropriateness of the assumptions
used by RP Financial in addition to the factors listed above, and the board of
directors believes that these assumptions were reasonable.
On the basis of the foregoing, RP Financial has advised Atlantic Coast
Federal Corporation and Atlantic Coast Federal that in its opinion, dated March
5, 2004, the estimated pro forma market value of Atlantic Coast Federal
Corporation on a fully converted basis ranged from a minimum of $102.0 million
to a maximum of $138.0 million with a midpoint of $120.0 million. The board of
directors of Atlantic Coast Federal determined that the common stock should be
sold at $10.00 per share. Based on the estimated offering range and the purchase
price, and taking into account that Atlantic Coast Federal Corporation must be
at least a majority owned subsidiary of Atlantic Coast Federal, MHC as long as
Atlantic Coast Federal, MHC is in mutual form, the number of shares of common
stock that Atlantic Coast Federal Corporation will issue will range from between
4,080,000 shares and 5,520,000 shares, with a midpoint of 4,800,000 shares. The
estimated offering range may be amended with the approval of the Office of
Thrift Supervision, if required, or if necessitated by subsequent developments
in the financial condition of Atlantic Coast Federal Corporation and Atlantic
Coast Federal or market conditions generally. In the event the estimated market
value is updated to amend the value of Atlantic Coast Federal Corporation on a
fully converted basis below $102.0 million or above $158.7 million, which is the
maximum of the estimated fully converted valuation range, as adjusted by 15%, a
new appraisal will be filed with the Office of Thrift Supervision.
Based upon current market and financial conditions and recent practices
and policies of the Office of Thrift Supervision, in the event Atlantic Coast
Federal Corporation receives orders for common stock in excess of $55.2 million
(the maximum of the estimated offering range) and up to $63.5 million (the
maximum of the estimated offering range, as adjusted by 15%), Atlantic Coast
Federal Corporation may be required by the Office of Thrift Supervision to
accept all such orders. No assurances, however, can be made that Atlantic Coast
Federal Corporation will receive orders for common stock in excess of the
maximum of the estimated offering range or that, if these orders are received,
that all such orders will be accepted because Atlantic Coast Federal
Corporation's final valuation and number of shares to be issued are subject to
the receipt of an updated appraisal from RP Financial which reflects an increase
in the valuation and the approval of the increase by the Office of Thrift
Supervision. In addition, an increase in the number of shares above 5,520,000
shares, will first be used, if necessary, to fill the order of the employee
stock ownership plan. There is no obligation or understanding on the part of
management to take and/or pay for any shares in order to complete the stock
offering.
The following table presents a summary of selected pricing ratios for
the peer group companies and the resulting pricing ratios for Atlantic Coast
Federal Corporation, reflecting the pro forma impact of the stock offering.
Compared to the average pricing ratios of the peer group, Atlantic Coast Federal
Corporation's pro forma pricing ratios at the midpoint of the offering range
indicated a discount of 11.0% on a price-to-earnings basis, a discount
28
of 19.0% on a price-to-book basis and a discount of 20.0% on a price-to-tangible
book value basis. The estimated appraised value and the resulting discounts took
into consideration the potential financial impact of the stock offering.
Pro Forma Pro Forma
Price to Price to Pro Forma Price
Earnings Book to Tangible Book
Multiple(1) Value Ratio Value
--------------- --------------- -----------------
Atlantic Coast Federal Corporation (fully converted basis) as of
March 5, 2004
15% above maximum........................................... 40.73x 89.10% 90.45%
Maximum..................................................... 34.81 85.97 87.42
Midpoint.................................................... 27.83 92.63 84.18
Minimum..................................................... 24.98 78.51 80.15
All Full-Converted Thrifts Publicly Traded on the NYSE, NASDAQ &
AMEX as of March 5, 2004
Averages.................................................... 18.08x 167.69% 180.29%
Medians..................................................... 17.05 156.46 167.01
Valuation of Peer Group Institutions (fully converted basis)
as of March 5, 2004
Averages.................................................... 33.53x 102.33% 105.86%
Medians..................................................... 34.88 102.67 107.22
- --------------
(1) Reflects earnings for the most recent trailing twelve month period for
which data is publicly available.
RP FINANCIAL'S VALUATION IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING THESE SHARES.
RP FINANCIAL DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION PROVIDED BY ATLANTIC COAST FEDERAL CORPORATION OR ATLANTIC
COAST FEDERAL, NOR DID RP FINANCIAL VALUE INDEPENDENTLY THE ASSETS OR
LIABILITIES OF ATLANTIC COAST FEDERAL CORPORATION OR ATLANTIC COAST FEDERAL. THE
VALUATION CONSIDERS ATLANTIC COAST FEDERAL AS A GOING CONCERN AND SHOULD NOT BE
CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF ATLANTIC COAST FEDERAL.
MOREOVER, BECAUSE THIS VALUATION IS NECESSARILY BASED UPON ESTIMATES AND
PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME
TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING COMMON STOCK IN THE
OFFERINGS WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES AT OR ABOVE THE
PURCHASE PRICE OR IN THE RANGE OF THE VALUATION DESCRIBED ABOVE.
Prior to completion of the stock offering, the maximum of the estimated
offering range may be increased up to 15% and the number of shares of common
stock may be increased to 6,348,000 shares to reflect changes in market and
financial conditions or to fill the orders of the employee stock ownership plan
without the resolicitation of subscribers. See "- Limitations on Stock
Purchases" as to the method of distribution and allocation of additional shares
that may be issued in the event of an increase in the estimated offering range
to fill unfilled orders in the subscription offering.
No sale of shares of common stock in the stock offering may be completed
unless prior to such completion RP Financial confirms that nothing of a material
nature has occurred which, taking into account all relevant factors, would cause
it to conclude that the aggregate value of the
29
common stock to be issued is materially incompatible with the estimate of the
aggregate consolidated pro forma market value of Atlantic Coast Federal
Corporation and Atlantic Coast Federal. If this confirmation is not received,
Atlantic Coast Federal Corporation may cancel the stock offering, extend the
offering period and establish a new estimated offering range and/or estimated
price range, extend, reopen or hold a new offering or take any other action the
Office of Thrift Supervision may permit.
Depending upon market or financial conditions following the start of the
subscription offering, the total number of shares of common stock may be
increased or decreased without a resolicitation of subscribers, provided that
the product of the total number of shares times the purchase price is not below
the minimum or more than 15% above the maximum of the estimated offering range.
In the event market or financial conditions change so as to cause the aggregate
purchase price of the shares to be below the minimum of the estimated offering
range or more than 15% above the maximum of such range, purchasers will be
resolicited and be permitted to continue their orders, in which case they will
need to reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded
with interest at Atlantic Coast Federal's current rate of interest on savings
accounts, or be permitted to modify or rescind their subscriptions. Any change
in the estimated offering range must be approved by the Office of Thrift
Supervision.
An increase in the number of shares of common stock as a result of an
increase in the estimated pro forma market value would decrease both a
subscriber's ownership interest and Atlantic Coast Federal Corporation's pro
forma net income and stockholders' equity on a per share basis while increasing
pro forma net income and stockholders' equity on an aggregate basis. A decrease
in the number of shares of common stock would increase both a subscriber's
ownership interest and Atlantic Coast Federal Corporation's pro forma net income
and stockholders' equity on a per share basis while decreasing pro forma net
income and stockholders' equity on an aggregate basis. See "Risk Factors - We
intend to grant stock options and restricted stock to the board and management
following the stock offering which could reduce your ownership interest" and
"Pro Forma Data."
Copies of the appraisal report of RP Financial, including any
amendments, and the detailed report of the appraiser setting forth the method
and assumptions for the appraisal are available for inspection at the main
office of Atlantic Coast Federal and the other locations specified under
"Additional Information."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
Under the plan of stock issuance, rights to subscribe for the purchase
of common stock have been granted to the following persons in the following
order of descending priority:
o depositors of Atlantic Coast Federal with account balances of at
least $50.00 as of the close of business on December 31, 2002
("Eligible Account Holders"),
o tax-qualified employee plans, including the employee stock
ownership plan ("Tax-Qualified Employee Plans"), and
o depositors of Atlantic Coast Federal with account balances of at
least $50.00 as of the close of business on March 31, 2004
("Supplemental Eligible Account Holders").
30
All subscriptions received will be subject to the availability of common stock
after satisfaction of all subscriptions of all persons having prior rights in
the subscription offering and to the maximum and minimum purchase limitations
set forth in the plan of stock issuance and as described below under "-
Limitations on Stock Purchases."
PREFERENCE CATEGORY NO. 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible
Account Holder shall receive, without payment, first priority, nontransferable
subscription rights to subscribe for shares of common stock in an amount equal
to the greater of:
(1) $500,000 or 50,000 shares of common stock;
(2) one-tenth of one percent of the total offering of shares of
common stock; or
(3) 15 times the product, rounded down to the next whole number,
obtained by multiplying the total number of shares of common
stock to be sold by a fraction, of which the numerator is the
amount of the qualifying deposit of the Eligible Account Holder
and the denominator is the total amount of qualifying deposits
of all Eligible Account Holders in Atlantic Coast Federal in
each case as of the close of business on December 31, 2002, the
"Eligibility Record Date," subject to the overall purchase
limitations.
See "- Limitations on Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions, shares first will be allocated among subscribing Eligible Account
Holders so as to permit each such Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his or her total
allocation equal to the lesser of the number of shares subscribed for or 100
shares. Thereafter, any shares remaining will be allocated among the subscribing
Eligible Account Holders whose subscriptions remain unfilled pro rata in the
proportion that the amounts of their respective qualifying deposits bear to the
total amount of qualifying deposits of all subscribing Eligible Account Holders
whose subscriptions remain unfilled. For example, if an Eligible Account Holder
with an unfilled subscription has qualifying deposits totaling $100, and the
total amount of qualifying deposits for Eligible Account Holders with unfilled
subscriptions was $1,000, then the number of shares that may be allocated to
fill this Eligible Account Holder's subscription would be 10% of the shares
remaining available, up to the amount subscribed for. Subscription rights of
Eligible Account Holders will be subordinated to the priority rights of
Tax-Qualified Employee Plans to purchase shares in excess of the maximum of the
estimated offering range.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in fewer shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also directors or officers of Atlantic Coast
Federal or their associates will be subordinated to the subscription rights of
other Eligible Account Holders to the extent attributable to increased deposits
in the year preceding December 31, 2002.
PREFERENCE CATEGORY NO. 2: TAX-QUALIFIED EMPLOYEE PLANS. Each
Tax-Qualified Employee Plan, including the employee stock ownership plan, shall
be entitled to receive, without payment therefore, second priority,
nontransferable subscription rights to purchase up to
31
10.0% of the common stock, provided that individually or in the aggregate such
plans (other than that portion of such plans which is self-directed) shall not
purchase more than 10.0% of the shares of common stock, including any increase
in the number of shares of common stock after the date hereof as a result of an
increase of up to 15% in the maximum of the estimated offering range. The
proposed Atlantic Coast Federal Corporation Employee Stock Ownership Plan
intends to purchase 8.0% of the shares of common stock sold in the stock
offering, or 326,400 shares and 441,600 shares based on the minimum and maximum
of the estimated offering range, respectively. Subscriptions by the
Tax-Qualified Employee Plan will not be aggregated with shares of common stock
purchased directly by or which are otherwise attributable to any other
participants in the subscription and direct community offerings, including
subscriptions of any of Atlantic Coast Federal's directors, officers, employees
or associates thereof. Subscription rights received pursuant to this category
shall be subordinated to all rights received by Eligible Account Holders to
purchase shares pursuant to Preference Category No. 1; provided, however, that
notwithstanding any other provisions of the plan of stock issuance to the
contrary, the Tax-Qualified Employee Plan shall have a first priority
subscription right to the extent that the total number of shares of common stock
sold in the stock offering exceeds the maximum of the estimated offering. In the
event that the total number of shares offered in the stock offering is increased
to an amount greater than then number of shares representing the maximum of the
estimated offering range, each Tax-Qualified Employee Plan will have a priority
right to purchase any such shares exceeding the maximum of the estimated
offering range up to an aggregate of 10.0% of the common stock sold in the stock
offering. See "Management - Benefits - Employee Stock Ownership Plan."
PREFERENCE CATEGORY NO. 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the
extent that there are sufficient shares remaining after satisfaction of
subscriptions by Eligible Account Holders and Tax Qualified Employee Plans, each
Supplemental Eligible Account Holder shall be entitled to receive, without
payment therefor, third priority, nontransferable subscription rights to
subscribe for shares of common stock in an amount equal to the greater of:
(1) $500,000 or 50,000 shares of common stock;
(2) one-tenth of one percent of the total offering of shares of
common stock; or
(3) 15 times the product, rounded down to the next whole number,
obtained by multiplying the total number of shares of common
stock to be issued by a fraction, of which the numerator is the
amount of the qualifying deposit of the Supplemental Eligible
Account Holder and the denominator of which is the total amount
of qualifying deposits of all Supplemental Eligible Account
Holders in Atlantic Coast Federal in each case on the close of
business on March 31, 2004, the "Supplemental Eligibility Record
Date," subject to the overall purchase limitations.
See "- Limitations on Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions of all Supplemental Eligible Account Holders, available shares
first will be allocated among subscribing Supplemental Eligible Account Holders
so as to permit each Supplemental Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his total
allocation, including the number of shares, if any, allocated in accordance with
Preference Category No.1, equal to the lesser of the number of shares subscribed
for or 100 shares.
32
Thereafter, any shares remaining available will be allocated among the
Supplemental Eligible Account Holders whose subscriptions remain unfilled pro
rata in the proportion that the amounts of their respective qualifying deposits
bear to the total amount of qualifying deposits of all subscribing Supplemental
Eligible Account Holders whose subscriptions remain unfilled.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The subscription offering
will expire at 12:00 noon, Eastern Daylight Time, on __________, 2004 (the
"Subscription Expiration Date"), unless extended for up to 45 days or for such
additional periods by Atlantic Coast Federal Corporation and Atlantic Coast
Federal as may be approved by the Office of Thrift Supervision. The subscription
offering may not be extended beyond _________, 2006. Subscription rights which
have not been exercised prior to the subscription expiration date, unless
extended, will become void.
Atlantic Coast Federal Corporation and Atlantic Coast Federal will not
execute orders until at least the minimum number of shares of common stock,
4,080,000 shares, have been subscribed for or otherwise sold. If all shares have
not been subscribed for or sold within 45 days after the Subscription Expiration
Date, unless this period is extended with the consent of the Office of Thrift
Supervision, all funds delivered to Atlantic Coast Federal pursuant to the
subscription offering will be returned promptly to the subscribers with interest
and all withdrawal authorizations will be canceled. If an extension beyond the
45-day period following the Subscription Expiration Date is granted, Atlantic
Coast Federal Corporation and Atlantic Coast Federal will notify subscribers of
the extension of time and of any rights of subscribers to confirm, modify or
rescind their subscriptions.
DIRECT COMMUNITY OFFERING
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of Eligible Account Holders, Tax-Qualified
Employee Plans and Supplemental Eligible Account Holders, we anticipate we will
offer shares pursuant to the plan of stock issuance to members of the general
public who receive a prospectus, with a preference given to natural persons
residing in Atkinson, Bacon, Brantley, Charlton, Church, Coffee, Pierce and Ware
Counties, Georgia and Duval and Nassau Counties, Florida. These natural persons
are referred to as preferred subscribers. No person may subscribe for or
purchase more than $500,000 of common stock in the direct community offering, if
any, subject to the maximum purchase limitations. See "- Limitations on Stock
Purchases." Atlantic Coast Federal Corporation and Atlantic Coast Federal may
limit total subscriptions in the direct community offering so as to assure that
the number of shares available for the syndicated community offering may be up
to a specified percentage of the number of shares of common stock. Orders for
stock received in any community offering must first be filled to a maximum of
two percent of the shares offered in the stock offering and any remaining shares
must be allocated on an equal number of shares per order until all orders have
been filled.
Finally, Atlantic Coast Federal Corporation and Atlantic Coast Federal
may reserve shares offered in the direct community offering for sales to
institutional investors. The opportunity to subscribe for shares of common stock
in any direct community offering will be subject to the right of Atlantic Coast
Federal Corporation and Atlantic Coast Federal, in their sole discretion, to
accept or reject any orders in whole or in part from any person either at the
time of receipt of an order or as soon as practicable following the Subscription
Expiration Date. The direct community offering, if any, shall be for a period of
not more
33
than 45 days unless extended by Atlantic Coast Federal Corporation and Atlantic
Coast Federal, and shall commence concurrently with, during or promptly after
the subscription offering.
SYNDICATED COMMUNITY OFFERING
As a final step in the stock offering, the plan of stock issuance
provides that, if feasible, all shares of common stock not purchased in the
subscription offering and direct community offering may be offered for sale to
selected members of the general public in a syndicated community offering
through a syndicate of registered broker-dealers managed by Friedman Billings
Ramsey as agent for Atlantic Coast Federal Corporation. We call this the
syndicated community offering. We expect that the syndicated community offering
will commence as soon as practicable after termination of the subscription
offering and the direct community offering, if any. We, in our sole discretion,
have the right to reject orders in whole or in part received in the syndicated
community offering. Neither Friedman Billings Ramsey nor any registered
broker-dealer shall have any obligation to take or purchase any shares of common
stock in the syndicated community offering; however, Friedman Billings Ramsey
has agreed to use its best efforts in the sale of shares in the syndicated
community offering. Orders for stock received in any syndicated community
offering must first be filled to a maximum of two percent of the shares offered
in the stock offering and any remaining shares must be allocated on an equal
number of shares per order until all orders have been filled.
The price at which common stock is sold in the syndicated community
offering will be the same price at which shares are offered and sold in the
subscription offering and direct community offering. No person may purchase more
than $500,000 of common stock in the syndicated community offering, subject to
the maximum purchase limitations. See "- Limitations on Stock Purchases."
Friedman Billings Ramsey may enter into agreements with broker-dealers
to assist in the sale of the shares in the syndicated community offering,
although no agreements of this kind exist as of the date of this prospectus. No
orders may be placed or filled by or for a selected dealer during the
subscription offering. After the close of the subscription offering, Friedman
Billings Ramsey will instruct selected dealers as to the number of shares to be
allocated to each selected dealer. Only after the close of the subscription
offering and upon allocation of shares to selected dealers may selected dealers
take orders from their customers.
During the subscription offering and direct community offering, selected
dealers may only solicit indications of interest from their customers to place
orders with Atlantic Coast Federal Corporation as of a certain order date for
the purchase of shares of Atlantic Coast Federal Corporation common stock. If
Friedman Billings Ramsey and Atlantic Coast Federal Corporation believe that not
enough indications of interest and orders have been received in the subscription
offering and direct community offering to complete the stock offering, Friedman
Billings Ramsey will request, as of the order date, selected dealers to submit
orders to purchase shares for which they have previously received indications of
interest from their customers. The selected dealers will send confirmations of
the orders to these customers on the next business day after the order date. The
selected dealers will debit the accounts of their customers on the settlement
date, which date will be three business days from the order date.
34
Customers who authorize selected dealers to debit their brokerage
accounts are required to have the funds for payment in their account on but not
before the settlement date. On the settlement date, the selected dealers will
deposit funds to the account established by Atlantic Coast Federal for each
selected dealer. Each customer's funds forwarded to Atlantic Coast Federal,
along with all other accounts held in the same title, will be insured by the
FDIC up to $100,000 in accordance with applicable FDIC regulations. After
payment has been received by Atlantic Coast Federal from the selected dealers,
funds will earn interest at Atlantic Coast Federal's current rate on savings
accounts until the completion or termination of the stock offering. Funds will
be promptly returned, with interest, in the event the stock offering is not
consummated as described above.
The syndicated community offering will be completed within 90 days after
the termination of the subscription offering, unless extended by Atlantic Coast
Federal Corporation with the approval of the Office of Thrift Supervision, but
in no event later than _______, 2004. The syndicated community offering may not
be extended past ________, 2006. See "- How We Determined Our Price and the
Number of Shares to be Sold in the Stock Offering" above for a discussion of
rights of subscribers, if any, in the event an extension is granted.
PERSONS WHO ARE NOT PERMITTED TO PARTICIPATE IN THE STOCK OFFERING
Atlantic Coast Federal Corporation will make reasonable efforts to
comply with the securities laws of all states in the United States in which
persons entitled to subscribe for stock pursuant to the plan of stock issuance
reside. However, Atlantic Coast Federal Corporation is not required to offer
stock in the subscription offering to any person who resides in a foreign
country or resides in a state of the United States with respect to which:
o the number of persons otherwise eligible to subscribe for shares
under the plan of stock issuance who reside in such jurisdiction
is small;
o the granting of subscription rights or the offer or sale of
shares of common stock to these persons would require any of
Atlantic Coast Federal Corporation and Atlantic Coast Federal or
their officers, directors or employees, under the laws of that
jurisdiction, to register as a broker, dealer, salesman or
selling agent or to register or otherwise qualify its securities
for sale in that jurisdiction or to qualify as a foreign
corporation or file a consent to service of process in that
jurisdiction; or
o the registration, qualification or filing in the judgment of
Atlantic Coast Federal Corporation would be impracticable or
unduly burdensome for reasons of cost or otherwise.
Where the number of persons eligible to subscribe for shares in one state is
small, Atlantic Coast Federal Corporation will base its decision as to whether
or not to offer the common stock in that state on a number of factors, including
but not limited to the size of accounts held by account holders in the state,
the cost of registering or qualifying the shares or the need to register
Atlantic Coast Federal Corporation or Atlantic Coast Federal, its officers,
directors or employees as brokers, dealers or salesmen.
35
LIMITATIONS ON STOCK PURCHASES
The plan of stock issuance includes the following limitations on the
number of shares of Atlantic Coast Federal Corporation common stock which may be
purchased in the stock offering:
(1) No fewer than 25 shares of common stock may be purchased, to the
extent shares are available;
(2) Each Eligible Account Holder may subscribe for and purchase in
the subscription offering up to the greater of:
(a) $500,000 or 50,000 shares of common stock;
(b) one-tenth of one percent of the total offering of shares
of common stock; or
(c) 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of
shares of common stock to be sold by a fraction, of
which the numerator is the amount of the qualifying
deposit of the Eligible Account Holder and the
denominator is the total amount of qualifying deposits
of all Eligible Account Holders in Atlantic Coast
Federal in each case as of the close of business on the
Eligibility Record Date, subject to the overall
limitation in clause (6) below;
(3) The Tax-Qualified Employee Plans, including an employee stock
ownership plan, may purchase in the aggregate up to 10.0% of the
shares of common stock issued in the stock offering, and
including any additional shares sold in the event of an increase
in the estimated offering range; although at this time the
employee stock ownership plan intends to purchase only 8.0% of
the shares sold in the stock offering;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the subscription offering up to the greater of:
(a) $500,000 or 50,000 shares of common stock;
(b) one-tenth of one percent of the total offering of shares
of common stock; or
(c) 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of
shares of common stock to be sold by a fraction, of
which the numerator is the amount of the qualifying
deposit of the Supplemental Eligible Account Holder and
the denominator is the total amount of qualifying
deposits of all Supplemental Eligible Account Holders in
Atlantic Coast Federal in each case as of the close of
business on the Supplemental Eligibility Record Date,
subject to the overall limitation in clause (6) below;
(5) Persons purchasing shares of common stock in the direct
community or syndicated public offering may purchase in the
direct community or syndicated
36
community offering respectively, up to $500,000 or 50,000 shares
of common stock, subject to the overall limitation in clause (6)
below;
(6) Except for the Tax-Qualified Employee Plans, irrespective of the
purchase limitations set forth in clauses 2(c) and 4(c) above,
the maximum number of shares of Atlantic Coast Federal
Corporation common stock subscribed for or purchased in all
categories of the offerings by any person, together with
associates of and groups of persons acting in concert with such
persons, shall not exceed $500,000 or 50,000 shares of the
common stock sold in the stock offering; and
(7) No more than 25% of the total number of shares offered for sale
in the stock offering may be purchased by directors and officers
of Atlantic Coast Federal and their associates in the aggregate,
excluding purchases by Tax-Qualified Employee Plans.
(8) The maximum purchase of common stock in the subscription
offering by a person or group of persons through a single
deposit account is $500,000 or 50,000 shares.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, the boards of directors of Atlantic Coast
Federal Corporation and Atlantic Coast Federal may, in their sole discretion
decrease the maximum purchase limitations and any other purchase limitations, or
increase the individual amount permitted to be subscribed for to a maximum of
9.99% of the number of shares sold in the stock offering, provided that orders
for shares exceeding 5% of the shares being offered in the stock offering shall
not exceed, in the aggregate, 10% of the shares being offered in the stock
offering. Requests to purchase additional shares of common stock will be
allocated by the boards of directors on a pro rata basis giving priority in
accordance with the preference categories set forth in this prospectus.
The term "associate" when used to indicate a relationship with any
person means:
o any corporation or organization (other than Atlantic Coast
Federal, Atlantic Coast Federal Corporation, or a majority-owned
subsidiary of either of them) of which such person is a
director, officer or partner or is directly or indirectly the
beneficial owner of 10% or more of any class of equity
securities;
o any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee
or in a similar fiduciary capacity;
o any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a
director or officer of Atlantic Coast Federal, Atlantic Coast
Federal Corporation or any subsidiary of Atlantic Coast Federal,
or Atlantic Coast Federal Corporation or any affiliate thereof;
and
o any person acting in concert with any of the persons or entities
specified above;
provided, however, that Tax-Qualified or Non-Tax Qualified Employee Plans will
not be deemed to be an associate of any director or officer of Atlantic Coast
Federal Corporation or Atlantic Coast Federal, to the extent provided in the
plan of stock issuance. When used to refer to a
37
person other than an officer or director of Atlantic Coast Federal, the board of
directors of Atlantic Coast Federal or officers delegated by the board of
directors in their sole discretion may determine the persons that are associates
of other persons.
The term "acting in concert" is defined to mean knowing participation in
a joint activity or interdependent conscious parallel action towards a common
goal whether or not pursuant to an express agreement, or a combination or
pooling of voting or other interests in the securities of an issuer for a common
purpose pursuant to any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. A person or company which acts
in concert with another person or company shall also be deemed to be acting in
concert with any person or company who is also acting in concert with that other
party, except that the Tax Qualified Employee Plans will not be deemed to be
acting in concert with their trustees or a person who serves in a similar
capacity solely for the purpose of determining whether stock held by the trustee
and stock held by each plan will each be delegated. The determination of whether
a group is acting in concert shall be made solely by the board of directors of
Atlantic Coast Federal or officers delegated by such board of directors and may
be based on any evidence upon which such board or delegatee chooses to rely.
MARKETING ARRANGEMENTS
We have retained Friedman Billings Ramsey as our financial and marketing
advisor to consult with and to advise Atlantic Coast Federal, and to assist
Atlantic Coast Federal Corporation, on a best efforts basis, in the distribution
of the shares of common stock in the subscription offering and direct community
offering. The services that Friedman Billings Ramsey will provide include, but
are not limited to:
o training the employees of Atlantic Coast Federal who will
perform ministerial functions in the subscription offering and
direct community offering regarding the mechanics and regulatory
requirements of the stock offering process;
o managing the stock information center by assisting interested
stock subscribers and by keeping records of all stock orders;
and
o preparing marketing materials.
For its services, Friedman Billings Ramsey will receive a management fee
of $25,000 and a success fee of 0.90% of the aggregate purchase price of the
shares sold in the stock offering, less any shares of common stock sold to our
directors, officers and employees and the Tax-Qualified Employee Plans. The
success fee paid to Friedman Billings Ramsey will be reduced by the amount of
the management fee. In the event that selected dealers are used to assist in the
sale of shares of Atlantic Coast Federal Corporation common stock in the direct
community offering, these dealers will be paid a fee of up to _._% of the total
purchase price of the shares they sell. Atlantic Coast Federal Corporation and
Atlantic Coast Federal have agreed to indemnify Friedman Billings Ramsey against
claims or liabilities, including liabilities under the Securities Act of 1933,
as amended, and will contribute to payments Friedman Billings Ramsey may be
required to make in connection with any such claims or liabilities.
Sales of shares of Atlantic Coast Federal Corporation common stock will
be made by registered representatives affiliated with Friedman Billings Ramsey
or by the broker-dealers
38
managed by Friedman Billings Ramsey. Friedman Billings Ramsey has undertaken
that the shares of Atlantic Coast Federal Corporation common stock will be sold
in a manner which will ensure that the distribution standards of the Nasdaq
Stock Market will be met. A stock information center will be established at
Atlantic Coast Federal's office located at 505 Haines Avenue, Waycross, Georgia.
Atlantic Coast Federal Corporation will rely on Rule 3a4-1 of the Securities
Exchange Act of 1934 and sales of Atlantic Coast Federal Corporation common
stock will be conducted within the requirements of this rule, so as to permit
officers, directors and employees to participate in the sale of Atlantic Coast
Federal Corporation common stock in those states where the law permits. No
officer, director or employee of Atlantic Coast Federal Corporation or Atlantic
Coast Federal will be compensated directly or indirectly by the payment of
commissions or other remuneration in connection with his or her participation in
the sale of common stock. Friedman Billings Ramsey has not prepared a report or
opinion constituting recommendations or advice to Atlantic Coast Federal or
Atlantic Coast Federal Corporation in connection with the stock offering. In
addition, Friedman Billings Ramsey has expressed no opinion as to the prices at
which Atlantic Coast Federal Corporation common stock to be offered in the stock
offering may trade.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION OFFERING
To ensure that each purchaser receives a prospectus at least 48 hours
before the Subscription Expiration Date, unless extended, in accordance with
Rule 15c2-8 of the Securities Exchange Act of 1934, no prospectus will be mailed
any later than five days prior to that date or hand delivered any later than two
days prior to that date. Execution of the order form will confirm receipt or
delivery in accordance with Rule 15c2-8. Order forms will only be distributed
with a prospectus.
To purchase shares in the subscription offering, an executed order form
with the required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at Atlantic Coast Federal,
which may be given by completing the appropriate blanks in the order form, must
be received by Atlantic Coast Federal by 12:00 Noon, Eastern Daylight Time, on
the Subscription Expiration Date, unless extended. In addition, Atlantic Coast
Federal Corporation and Atlantic Coast Federal will require a prospective
purchaser to execute a certification in the form required by applicable Office
of Thrift Supervision regulations in connection with any sale of common stock.
Order forms which are not received by this time or are executed defectively or
are received without full payment, or appropriate withdrawal instructions, are
not required to be accepted. In addition, Atlantic Coast Federal will not accept
orders submitted on photocopied or facsimiled order forms nor order forms
unaccompanied by an executed certification form. Atlantic Coast Federal has the
right to waive or permit the correction of incomplete or improperly executed
forms, but does not represent that it will do so. Once received, an executed
order form may not be modified, amended or rescinded without the consent of
Atlantic Coast Federal, unless the stock offering has not been completed within
45 days after the end of the subscription offering, or this period has been
extended.
In order to ensure that Eligible Account Holders, Tax-Qualified Employee
Plans and Supplemental Eligible Account Holders are properly identified as to
their stock purchase priority, depositors as of the close of business on the
Eligibility Record Date, December 31, 2002, or the Supplemental Eligibility
Record Date, March 31, 2004, must list all accounts on the stock order form
giving all names in each account and the account numbers.
39
Payment for subscriptions may be made:
o by check or money order, provided that in the case of orders of
$50,000 or more, the check must be certified;
o by authorization of withdrawal from deposit accounts maintained
with Atlantic Coast Federal (including a certificate of
deposit); or
o in cash, if delivered in person at any office of Atlantic Coast
Federal, although we request that you exchange cash for a check
with any of our tellers.
No wire transfers will be accepted. Payments for shares subscribed for,
other than withdrawals from a deposit account at Atlantic Coast Federal, will be
deposited in a segregated deposit account at Atlantic Coast Federal or in a
trust account at _______________________, an FDIC insured financial institution.
Interest will be paid on payments made by cash, check or money order at our
then-current savings account rate from the date payment is received until
completion of the stock offering. If payment is made by authorization of
withdrawal from deposit accounts, the funds authorized to be withdrawn from a
deposit account will continue to accrue interest at the contractual rate, but
may not be used by the subscriber until all of Atlantic Coast Federal
Corporation common stock has been sold or the plan of stock offering is
terminated, whichever is earlier.
If a subscriber authorizes Atlantic Coast Federal to withdraw the amount
of the purchase price from his deposit account, Atlantic Coast Federal will do
so as of the effective date of the completion of the stock offering. Atlantic
Coast Federal will waive any applicable penalties for early withdrawal from
certificate accounts.
In the event of an unfilled amount of any subscription order, Atlantic
Coast Federal will make an appropriate refund or cancel an appropriate portion
of the related withdrawal authorization, after completion of the stock offering.
If for any reason the stock offering is not consummated, purchasers will have
refunded to them all payments made, with interest, and all withdrawal
authorizations will be canceled in the case of subscription payments authorized
from accounts at Atlantic Coast Federal.
If any Tax-Qualified Employee Plans or Non-Tax Qualified Employee Plans
subscribe for shares during the subscription offering, these plans will not be
required to pay for the shares subscribed for at the time they subscribe, but
rather, may pay for shares of common stock subscribed for at the purchase price
upon completion of the subscription offering and direct community offering, if
all shares are sold, or upon completion of the syndicated community offering if
shares remain to be sold in that offering. In the event that, after the
completion of the subscription offering, the amount of shares to be issued is
increased above the maximum of the estimated valuation range included in this
prospectus, the Tax-Qualified and Non-Tax Qualified Employee Plans will be
entitled to increase their subscription by a percentage equal to the percentage
increase in the amount of shares to be issued above the maximum of the estimated
valuation range, provided that such subscription will continue to be subject to
applicable purchase limits and stock allocation procedures.
Owners of self-directed IRA may use the assets of their IRAs to purchase
shares of Atlantic Coast Federal Corporation common stock in the subscription
offering and direct community offering. Federal law requires that officers,
directors and 10% stockholders who use
40
self-directed IRA funds to purchase shares of common stock in the offerings make
the purchases for the exclusive benefit of the IRAs. IRAs maintained at Atlantic
Coast Federal are not self-directed IRAs and any interested parties wishing to
use IRA funds for stock purchases may do so, but are advised to contact the
stock information center at (___) ___-____ for additional information as soon as
possible.
The records of Atlantic Coast Federal will be deemed to control with
respect to all matters related to the existence of subscription rights and one's
ability to purchase shares of common stock in the subscription offering.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Pursuant to rules and regulations of the Office of Thrift Supervision,
no person with subscription rights may transfer or enter into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the plan of stock issuance or the shares of common stock to
be issued upon their exercise. These rights may be exercised only by the person
to whom they are granted and only for that person's account. Each person
exercising subscription rights will be required to certify that the person is
purchasing shares solely for the person's own account and that the person has no
agreement or understanding regarding the sale or transfer of the shares.
Regulations also prohibit any person from offering or making an announcement of
an offer or intent to make an offer to purchase such subscription rights or
shares of common stock prior to the completion of the stock offering.
We will refer to the Office of Thrift Supervision any situations that we
believe may involve a transfer of subscription rights and will not honor orders
believed by us to involve the transfer of these rights.
DELIVERY OF CERTIFICATES
Certificates representing common stock issued in the stock offering will
be mailed by Atlantic Coast Federal Corporation's transfer agent to the persons
entitled thereto at the addresses of the persons appearing on the stock order
form as soon as practicable following completion of the stock offering. Any
certificates returned as undeliverable will be held by Atlantic Coast Federal
Corporation until claimed by persons legally entitled to them or otherwise
disposed of in accordance with applicable law. Until certificates for common
stock are available and delivered to subscribers, they may not be able to sell
the shares of common stock for which they have subscribed, even though trading
of the common stock may have commenced.
REQUIRED APPROVALS
Various approvals of the Office of Thrift Supervision are required in
order to consummate the stock offering. The Office of Thrift Supervision has
approved the plan of stock issuance subject to standard conditions.
41
RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER THE STOCK OFFERING
All shares of common stock purchased in connection with the stock
offering by a director or an executive officer of Atlantic Coast Federal
Corporation and Atlantic Coast Federal will be subject to a restriction that the
shares not be sold for a period of one year following the stock offering except
in the event of the death of the director or officer or pursuant to a merger or
similar transaction approved by the Office of Thrift Supervision. Each
certificate for restricted shares will bear a legend giving notice of this
restriction on transfer, and instructions will be issued to the effect that any
transfer within this time period of any certificate or record ownership of the
shares other than as provided above is a violation of the restriction. Any
shares of common stock issued at a later date within this one year period as a
stock dividend, stock split or otherwise with respect to the restricted stock
will be subject to the same restrictions.
Purchases of common stock of Atlantic Coast Federal Corporation by
directors, executive officers and their associates during the three-year period
following completion of the stock offering may be made only through a broker or
dealer registered with the SEC, except with the prior written approval of the
Office of Thrift Supervision. This restriction does not apply, however, to
negotiated transactions involving more than 1% of Atlantic Coast Federal
Corporation's outstanding common stock or to purchases of stock pursuant to an
employee stock benefit plan.
Pursuant to Office of Thrift Supervision regulations, in general
Atlantic Coast Federal Corporation may not repurchase any shares of the common
stock, for a period of one year following the stock offering, other than
pursuant to (a) an offer to all stockholders on a pro rata basis which is
approved by the Office of Thrift Supervision or (b) through open market
purchases of up to 5% of the outstanding stock where extraordinary circumstances
exist.
42
PROPOSED STOCK PURCHASES BY MANAGEMENT
The following table sets forth, for each of Atlantic Coast Federal's
directors and executive officers both individually and as a group, the number of
shares of common stock, they have preliminarily indicated they intend to
purchase assuming sufficient shares are available to satisfy their
subscriptions. The amounts include shares that may be purchased through IRAs and
by associates. These purchases are intended for investment purposes only, and
not for resale. Directors, officers, their associates and employees will pay the
same price as all other purchasers in the stock offering.
At the Minimum of the At the Maximum of the
Estimated Offering Range Estimated Offering Range
As a Percent As a Percent
Number of of Shares Number of of Shares
Name Amount Shares Offered Shares Offered
- ----------------------------------- ------------- ------------- --------------- ------------ ---------------
Directors:
- ----------
John M. Hinson $ 124,000 12,400 0.30% 12,400 0.22%
Robert J. Larison, Jr. 500,000 50,000 1.23 50,000 0.91
Charles E. Martin, Jr. 110,000 11,000 0.26 11,000 0.20
I. J. McGahee 500,000 50,000 1.23 50,000 0.91
Cyril M. Morris 50,000 5,000 0.12 5,000 0.09
Jon C. Parker 400,000 40,000 0.98 40,000 0.73
Robert J. Smith 150,000 15,000 0.37 15,000 0.27
Forrest W. Sweat, Jr. 350,000 35,000 0.86 35,000 0.63
H. Dennis Woods 125,000 12,500 0.31 12,500 0.23
Executive Officers:
- -------------------
Marsha A. Boyette 150,000 15,000 0.37 15,000 0.27
Joanne Q. Heinrich 90,000 9,000 0.22 9,000 0.16
Phillip Scott Hubacher 400,000 40,000 0.98 40,000 0.07
Herman L. Klinger 250,000 25,000 0.61 25,000 0.73
Diane S. Wade 220,000 22,000 0.54 22,000 0.39
----------- --------- ---- --------- ----
All directors and executive
officers as a group (14 persons) $ 3,341,900 341,900 8.38% $ 341,900 6.19%
=========== ========= ======== =========== =========
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this filing and in future filings by Atlantic Coast Federal
Corporation with the Securities and Exchange Commission, in Atlantic Coast
Federal Corporation's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases, "anticipate," "would be," "will allow,"
"intends to," "will likely result," "are expected to," will continue," "is
anticipated," "estimated," "projected," or similar expressions are intended to
identify, "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to risks
and uncertainties, including but not limited to changes in economic conditions
in Atlantic Coast Federal Corporation's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in
Atlantic Coast Federal Corporation's market area, changes in the position of
banking regulators on the adequacy of our allowance for loan losses, and
competition, all or some of which could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected.
Atlantic Coast Federal Corporation wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and advise readers that various factors, including regional
and national economic conditions, substantial changes in levels of market
interest rates, credit and other risks of lending and investing activities, and
competitive and regulatory factors, could affect Atlantic Coast Federal
Corporation's financial performance and could cause Atlantic Coast Federal
Corporation's actual results for future periods to differ materially from those
anticipated or projected.
Atlantic Coast Federal Corporation does not undertake, and specifically
disclaims any obligation, to update any forward-looking statements to reflect
occurrences or unanticipated events or circumstances after the date of such
statements.
GENERAL
On November 1, 2000, Atlantic Coast Federal converted its charter from a
federally-chartered credit union to a federally-chartered thrift. On that date
the name was changed from Atlantic Coast Federal Credit Union to Atlantic Coast
Federal, and we became a taxable organization.
On May 30, 2002, Atlantic Coast Federal adopted a plan of mutual holding
company reorganization to reorganize into a three-tier mutual holding company.
The Reorganization became effective on January 1, 2003. Following the
reorganization, Atlantic Coast Federal became a wholly-owned subsidiary of
Atlantic Coast Federal Corporation, which became a wholly-owned subsidiary of
Atlantic Coast Federal, MHC. The transaction was accounted for at historical
cost.
Our principal business has historically consisted of attracting deposits
from the general public and the business community and making loans secured by
various types of collateral, including real estate and general business assets.
Atlantic Coast Federal Corporation is significantly affected by prevailing
economic conditions as well as government policies and regulations concerning,
among other things, monetary and fiscal
44
affairs, housing and financial institutions. Deposit flows are influenced by a
number of factors, including interest rates paid on competing investments,
account maturities, fee structures, and level of personal income and savings.
Lending activities are influenced by the demand for funds, the number and
quality of lenders, and regional economic cycles. Sources of funds for lending
activities of Atlantic Coast Federal Corporation include deposits, borrowings,
payments on loans, maturities of securities and income provided from operations.
Atlantic Coast Federal Corporation's earnings are primarily dependent upon
Atlantic Coast Federal Corporation's net interest income, the difference between
interest income and interest expense.
Interest income is a function of the balances of loans and investments
outstanding during a given period and the yield earned on such loans and
investments. Interest expense is a function of the amount of deposits and
borrowings outstanding during the same period and interest rates paid on such
deposits and borrowings. Atlantic Coast Federal Corporation's earnings are also
affected by Atlantic Coast Federal Corporation's provisions for loan losses,
service charges, gains from sales of loans, commission income, interchange fees,
other income, operating expenses and income taxes.
CRITICAL ACCOUNTING POLICIES
Certain of our accounting policies are important to the portrayal of our
financial condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain. Estimates associated with these policies are susceptible to material
changes as a result of changes in facts and circumstances. Facts and
circumstances which could effect these judgments include, but without
limitation, changes in interest rates, in the performance of the economy or in
the financial condition of borrowers. Management believes that its critical
accounting policies include determining the allowance for loan losses,
determining the fair value of securities, accounting for deferred income taxes,
and the valuation of intangible assets including goodwill. Atlantic Coast
Federal Corporation's accounting policies are discussed in detail in Note 1 of
the Notes to the Consolidated Financial Statements.
We believe that the allowance for loan losses and related provision
expense are particularly susceptible to material change in the near term. The
allowance for loan losses was $6.6 million, $4.7 million and $3.8 million as of
December 31, 2003, 2002 and 2001, respectively. The allowance for loan losses as
a percentage of total loans was 1.49%, 1.22% and 1.11% as of December 31, 2003,
2002 and 2001, respectively. Provision for loan losses totaled $4.2 million,
$3.7 million and $2.1 million for the years ending December 31, 2003, 2002 and
2001, respectively. This data demonstrates the manner in which the allowance for
loan losses and related provision expense can change over long term and short
term periods. Changes in economic conditions, the nature and size of the loan
portfolio and individual borrower conditions can dramatically impact our
required level of allowance for loan losses in relatively short periods of time.
The amount of allowance for loan losses allocated to individually evaluated loan
relationships increased by $2.4 million during the year ending December 31,
2003, and management anticipates that large individual specific reserve
allocations may be required in future periods as changes in borrower conditions
can change in relatively short time periods.
Securities available for sale are carried at fair value, with unrealized
holding gains and losses reported separately in accumulated other comprehensive
income, net of tax. As a result of changes in the fair market value of Atlantic
Coast Federal Corporation's available for sale
45
securities portfolio, other comprehensive income/(loss) totaled $(73,000),
$44,000 and $118,000 for 2003, 2002, and 2001, respectively. Additionally,
securities available for sale and held to maturity are required to be written
down to fair value when a decline in fair value is not temporary; therefore,
future changes in the fair value of securities could have a significant impact
on Atlantic Coast Federal Corporation's operating results.
Atlantic Coast Federal Corporation assesses the carrying value of
intangible assets including goodwill annually in order to determine if such
intangible assets are impaired. Any impairment would be required to be recorded
during the period identified. Atlantic Coast Federal Corporation's goodwill
totaled $2.7 million as of December 31, 2003; therefore, if Atlantic Coast
Federal Corporation's goodwill was determined to be impaired, Atlantic Coast
Federal Corporation's financial results could be materially impacted.
After converting to a federally-chartered savings association, Atlantic
Coast Federal became a taxable organization. The Internal Revenue Code and
applicable regulations are subject to interpretation with respect to the
determination of the tax basis of assets and liabilities for credit unions that
convert charters and become a taxable organization. Since Atlantic Coast
Federal's transition to a federally-chartered thrift, Atlantic Coast Federal
Corporation has recorded income tax expense based upon management's
interpretation of the applicable tax regulations. Positions taken by Atlantic
Coast Federal Corporation in preparing our federal and state tax returns are
subject to the review of taxing authorities, and the review of the positions we
have taken by taxing authorities could result in a material adjustment to our
financial statements.
BUSINESS STRATEGY
We have concentrated our lending efforts on the origination of
one-to-four family mortgage loans along with various consumer loans and other
secured commercial loans (including commercial real estate and construction
lending) for portfolio retention. Our business strategy emphasizes retail
deposits along with Federal Home Loan Bank (FHLB) advances as its principal
sources of funds.
Our primary objective is to remain an independent, community oriented
financial institution serving customers in its primary market area. The board of
directors has sought to accomplish this objective through the adoption of a
strategy designed to maintain profitability, a strong capital position and high
asset quality. This strategy primarily involves (i) emphasizing the origination
of one- to four-family residential mortgage loans, multi-family loans,
commercial real estate loans and commercial construction loans, (ii) maintaining
a portfolio of securities with various types of investments, (iii) controlling
operating expenses while providing high quality customer service, (iv)
purchasing residential mortgage loans for the purpose of interest rate risk
management, and (v) increasing non-interest income through revisions to our
service fee structure.
On May 29, 2003, the board of directors adopted a resolution addressing
certain areas of operation of Atlantic Coast Federal Corporation in response to
examination findings by the Office of Thrift Supervision. The resolution
addressed limiting the total assets of Atlantic Coast Federal to no more than
$510 million at December 31, 2003. In addition, the board of directors agreed to
discontinue certain lending activities until adequate staffing, underwriting
policies and procedures, and loan review programs were established and reviewed
by the Office of Thrift Supervision. These lending activities consisted of
non-residential construction, non-
46
residential real estate, multi-family real estate, land acquisition and land
development, and non-mortgage commercial loans. As of October 2003, we believe
we had addressed all matters related to the resolution and began to originate
such loans other than commercial business and commercial construction loans. Our
ability to originate commercial business loans and commercial construction
loans, which makes up less than 4.0% of our loan portfolio, was also reinitiated
in _________________ after a review by the Office of Thrift Supervision during
our examination in early _________________.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2003 AND DECEMBER 31, 2002.
GENERAL. Total assets increased by $51.3 million, or 11.5%, to $499.0
million at December 31, 2003 from $447.7 million at December 31, 2002. The
increase is primarily a result of an increase in net loans of $55.8 million and
an increase in investments in life insurance totaling $3.2 million partially
offset by decreases in cash and cash equivalents and securities available for
sale. The increase in total assets was funded by an increase in customer
deposits of $31.4 million and an increase in Federal Home Loan Bank advances of
$15.5 million during 2003.
During 2003, Atlantic Coast Federal purchased two branch office
facilities and assumed related deposits from another financial institution.
Approximately $16.2 million of deposits were assumed, $1.5 million in fixed
assets acquired, $4.0 million in loans acquired, $44,000 in other liabilities
were assumed and $9.1 million of cash was received. The transaction resulted in
both amortizable intangibles and non-amortizable goodwill, totaling $1.6
million. The core deposit intangible (approximately $380,000) is being amortized
to expense over 10 years using an accelerated method. Atlantic Coast Federal
acquired the branch at this premium to expand its customer base to enhance
deposit fee income, provide an opportunity to market additional products and
services to new customers, and improve customer convenience by adding new
locations.
ASSETS. Our loan portfolio increased from $384.7 million to $441.7
million from December 31, 2002 to December 31, 2003. Atlantic Coast Federal
Corporation's lending strategy has changed significantly during the past few
years emphasizing the origination of residential mortgage loans and decreasing
originations of other consumer loans such as credit card and automobile loans.
In addition, our lending strategy has focused on commercial lending, primarily
related to commercial real estate lending and construction loans. Accordingly,
management determined that it was appropriate to sell the credit card portfolio
in 2003 in order to capitalize on its considerable value and utilize the
proceeds to fund other lending activities. We do not anticipate significant
future originations of credit card loans. During 2003, we purchased
approximately $34.7 million of short term and adjustable rate loans originated
by other financial institutions for interest rate risk management. These
purchases supplemented Atlantic Coast Federal Corporation's internal loan
origination efforts during 2003. We also sold approximately $9.7 million of
residential mortgage loans, and we expect that we will continue to sell certain
long term fixed rate mortgages in future periods as a part of our overall
asset/liability management strategy. Our loan portfolio was also significantly
impacted
47
by the noted sale of $13.0 million of Atlantic Coast Federal Corporation's
credit card portfolio during 2003 resulting in a gain of $2.6 million.
Our allowance for loan losses at December 31, 2003 was $6.6 million of
1.49% of loans, compared to the $4.7 million or 1.22% of loans at the end of
December 31, 2002. The allowance for loan losses consists of general reserve
allocations made for pools of homogeneous loans and specific reserves on
individual loans for which management has significant concerns regarding the
borrowers' ability to repay the loans in accordance with the terms of the loans.
Nonperforming loans totaled approximately $7.6 million and $2.9 million at
December 31, 2003 and 2002, and total impaired loans were approximately $11.4
million and $1.7 million at December 31, 2003 and 2002. The increase in
nonperforming loans and impaired loans was primarily due to two commercial real
estate loans made to affiliated companies for which management has identified
significant concerns about the borrowers' ability to repay the loans in
accordance with the original terms of the loans. In determining the amount of
allowance for loan loss allocations needed for impaired and nonperforming loans,
management has considered expected future borrower cash flows and the estimated
realizable value of underlying collateral, and management believes that
allocations made for such loans at December 31, 2003 are adequate. Accordingly,
the amount of allowance for loan losses allocated to individual loan
relationships increased significantly during 2003 from $1.6 million at December
31, 2002 to $4.0 million at December 31, 2003. See "Business of Atlantic Coast
Federal - Asset Quality."
Approximately $2.8 million or 43.0% of the allowance for loan losses
balance has been allocated to an individual problem loan relationship as of
December 31, 2003. The outstanding loan balance for this loan relationship was
approximately $4.8 million as of December 31, 2003. This loan was made to
finance the acquisition of land and the construction of a water treatment plant
for commercial and industrial customers. There is a facility in each of
Waycross, Georgia and Jacksonville, Florida. A related company, also in the
waste water treatment business, provided a guarantee for the debt. As a result
of environmental contamination on the Jacksonville property, the borrower has
been delayed in getting construction permits to build the facility. The borrower
has filed suit against the seller of the property seeking damages in excess of
$2.5 million alleging fraud, among other things. We have taken an assignment of
any judgment proceeds as additional collateral. We have identified significant
concerns about the borrower's ability to pay according to the original loan
terms as a result of poor operating results and insufficient cash flows. As a
result of the borrower's loan repayment ability, we agreed to defer the payment
of any interest during the last three months of 2003 and the first three months
of 2004. The borrower has continued, however, to make principal payments.
Management has considered future expected cash flows and estimated discounted
collateral values in determining the amount of allowance for loan losses that
should be allocated for this loan relationship; however, Atlantic Coast Federal
Corporation's actual loss from this loan relationship could differ significantly
from the current allowance for loan losses allocation should the borrower be
unable to achieve currently projected financial results or should the borrower's
financial performance and condition improve in future periods.
The $2.4 million increase in specific reserve allocations during 2003
was partially offset by a decrease of $520,000 in general reserves allocated for
pools of homogeneous loans. The decrease in general reserve allocations is
primarily the result of the decrease in levels of net-charge-offs during 2003
and lower reserve allocations resulting from the sale of a significant portion
of our credit card portfolio. Our credit card portfolio has historically
48
experienced higher levels of charge-offs than other loan categories; therefore,
the credit card portfolio has received a higher level of general reserve
allocations in establishing our overall allowance for loan losses balance.
Similarly, automobile loans which carry a higher degree of risk than other
portions of our loan portfolio have declined during the past several years
reducing the general reserve allocations made for automobile loans.
In August 2001, we entered into a sale and servicing agreement whereby a
pool of leases totaling $2,011,000 was purchased. The leases are collateralized
by small equipment and automobiles. In addition, each lease was backed by a
surety bond. At December 31, 2001, the remaining balance on the pool of leases
was $1,924,000. Scheduled payments have not been received since December 2001.
We have filed claims with the surety on the surety bonds for past due payments.
At December 31, 2001, management had not made any provision for loan losses with
respect to these leases.
During 2002, the surety did not perform on the claims. Therefore, in
early 2002, we placed the leases on nonaccrual status. The surety has alleged
that most, if not all, of the leases sold by the seller were fraudulent or
fictitious. The surety has filed a suit against the seller of the leases.
Subsequent to the suit against the seller, the surety later named Atlantic Coast
Federal Corporation as a defendant. The seller of the leases has since filed
bankruptcy and we do not expect recovery from the seller. We have filed a suit
against the surety, asserting, among other things, breach of contract and bad
faith. In 2002, we were informed by, among other things the bankruptcy trustee
that certain leases included in the lease pool purchased by Atlantic Coast
Federal Corporation were fictitious. As a result, we charged-off approximately
$260,000 during 2002. As of December 31, 2002, the remaining balance on these
leases was approximately $1,664,000 and were classified as impaired. At December
31, 2002, management had allocated approximately $667,000 of the allowance for
loan losses with respect to these leases.
During 2003, management has continued to pursue collection on the surety
bonds. During December 2003, we charged-off an additional $664,000 of the
leases. At December 31, 2003, the remaining balance on these leases is
approximately $1,000,000, and management has allocated approximately $150,000 of
the allowance for loan losses with respect to these leases. Legal costs incurred
on this matter were $500,000 and $447,000 for 2003 and 2002. Management
continues to vigorously pursue collection on the surety bonds. There can be no
assurance, however, that we will recover the balance of the lease payments due
as of December 2001.
DEPOSITS. Total deposits increased by $31.4 million, or 8.7%, to $392.3
million at December 31, 2003 from $360.9 million at December 31, 2002. Time
deposits increased $3.4 million, demand deposits increased $5.3 million and
savings and money market accounts increased $22.6 million during 2003. The
increase in deposits was a result of our efforts to expand our customer base in
existing markets through the expansion of our branch structure, and we assumed
deposits totaling $16.2 million in connection with the purchase of two branches
as discussed previously.
BORROWINGS. Federal Home Loan Bank advances increased $15.5 million, or
34.2% to $61.0 million at December 31, 2003 from $45.4 million at December 31,
2002. Management expects that FHLB advances will continue to provide Atlantic
Coast Federal Corporation with a significant additional funding source to meet
the needs of its lending activities.
49
EQUITY. Total equity increased $4.3 million, or 11.0%, to $43.2 million
at December 31, 2003 from $38.9 million at December 31, 2002. The increase in
equity is primarily due to Atlantic Coast Federal Corporation's net income of
$4.4 million offset by dividends declared and a reduction in accumulated other
comprehensive income resulting from a decline in the market value of Atlantic
Coast Federal Corporation's available for sale securities.
COMPARISON OF RESULTS OF OPERATION FOR THE YEARS ENDED DECEMBER 31, 2003 AND
2002
GENERAL. Net income for the year ended December 31, 2003 was $4.4
million, an increase of $1.2 million, or 38.6%, from $3.2 million for the year
ended December 31, 2002. The increase in net income resulted primarily from the
gain on the noted credit card portfolio sale and from an increase in net
interest income and noninterest income, partially offset by an increase in
noninterest expense, provision for loan losses and income tax expense.
INTEREST INCOME. Interest income increased by $400,000 to $31.2 million
for 2003 from $30.8 million for the year ended December 31, 2002. The primary
reason for the increase in interest income was an increase in the average
balance of loans receivable of $45.8 million. The increase in interest income
related to the increase in the loan portfolio was significantly offset by lower
rates earned on loans and other interest earning assets as a result of the
historically low interest rate environment that continued through December 31,
2003. The weighted average yield on loans decreased from 8.21% for the year
ended December 31, 2002 to 7.44% for the year ended December 31, 2003. This
decrease was due to market rates and to a lesser extent the sale of the credit
card portfolio The weighted average yield on securities decreased from 3.71% for
fiscal 2002 to 2.12% for fiscal 2003, and the weighted average yield on other
interest earning assets decreased from 2.11% for 2002 to 1.77% for fiscal 2003.
Total average interest earning assets increased $52.4 million from December 31,
2002 to December 31, 2003, and the weighted average yield on interest earning
assets declined 81 basis points from 7.72% to 6.91%. As we increase our emphasis
on residential mortgage lending this trend may continue
INTEREST EXPENSE. Interest expense decreased $1.2 million to $11.8
million for fiscal 2003 from $13.0 million for fiscal 2002. The decrease in
interest expense was primarily due to a decrease in Atlantic Coast Federal
Corporation's cost of funds during fiscal 2003 resulting from the continued low
interest rate environment and the repricing of deposit accounts to lower
interest rates. Atlantic Coast Federal Corporation's cost of funds was a
weighted average of 2.95% for fiscal 2003 compared to 3.78% for fiscal 2002.
Interest expense on deposits decreased $1.4 million to $9.5 million for fiscal
2003 from $10.9 million for fiscal 2002. The decrease in interest expense
attributable to declines in interest rates paid on deposit accounts was
partially offset by additional interest expense incurred due to the increase in
average interest bearing deposits of $48.8 million for the year ended December
31, 2003 compared to the year ended December 31, 2002.
Interest expense on Federal Home Loan Bank advances increased $170,000
to $2.3 million for the year ended December 31, 2003 from $2.1 million for the
year ended December 31, 2002. The increase resulted from an increase in average
Federal Home Loan Bank advances of $5.9 million to $47.1 million for the year
ended December 31, 2003 from $41.2 million for the year ended December 31, 2002.
This increase was partially offset by a 27 basis point decrease in the cost of
Federal Home Loan Bank advances, from 5.07% for 2002 to a weighted average of
4.80% for 2003.
50
NET INTEREST INCOME. Net interest income increased $1.6 million to $19.4
million during the year ended December 31, 2003 from $17.8 million for the year
ended December 31, 2002. The increase in net interest income is primarily the
result of overall growth in our balance sheet and the lower cost of funds
resulting from the continued low interest rate environment as discussed above.
Our net interest margin was 4.30% for the year ended December 31, 2003 compared
to 4.45% for the year ended December 31, 2002.
PROVISION FOR LOAN LOSSES. We establish provisions for loan losses,
which are charged to operations, at a level required to reflect probable
incurred credit losses in the loan portfolio. In evaluating the level of the
allowance for loan losses, management considers historical loss experience, the
types of loans and the amount of loans in the loan portfolio, adverse situations
that may affect borrowers' ability to repay, estimated value of any underlying
collateral, and prevailing economic conditions. Large groups of smaller balance
homogenous loans, such as residential real estate, small commercial real estate,
home equity and consumer loans, are evaluated in the aggregate using historical
loss factors adjusted for current economic conditions and other relevant data.
Larger non-homogeneous loans such as commercial loans for which management has
concerns about the borrowers' ability to repay are evaluated individually, and
specific reserves are provided for such loans when necessary.
Based on management's evaluation of these factors, provisions of $4.2
million and $3.7 million were made during the year ended December 31, 2003 and
the year ended December 31, 2002. The increase in provision for loan losses is
primarily attributable to increased levels of specific reserves allocated to
individual problem loans as previously discussed. The amount of general reserve
allocations made for smaller balance homogeneous loans decreased during the year
ended December 31, 2003 primarily resulting from the sale of a significant
portion of our credit card portfolio and the continued decline in the amount of
automobile loans in our loan portfolio.
Management assesses the allowance for loan losses on a quarterly basis
and makes provisions for loan losses as necessary in order to maintain the
allowance for loan losses at an adequate level. While management uses available
information to recognize losses on loans, future loan loss provisions may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses and may require us to
recognize additional provisions based on their judgment of information available
to them at the time of their examination. The allowance for loan losses as of
December 31, 2003 is maintained at a level that represents management's best
estimate of probable incurred losses in the loan portfolio.
NONINTEREST INCOME. Noninterest income increased $2.1 million to $7.5
million for the year ended December 31, 2003 from $5.4 million for the year
ended December 31, 2002. The overall increase in noninterest income is primarily
due to an increase in gain on sales of loans of $2.6 million primarily due to
the previously discussed sale of a significant portion of our credit card
portfolio. The increase in gain on sales of loans was partially offset by losses
on the sale of foreclosed assets of $93,000 resulting in a decrease in
noninterest income of $727,000 when considering the prior year gains totaling
$634,000. Gains from sales of foreclosed assets of $634,000 for the year ending
December 31, 2002 were primarily the result of the sale of property acquired in
the settlement of a legal action we had been pursuing for several years,
resulting in a gain of $612,000. As discussed below, we incurred approximately
$251,000 of legal expenses during 2002 in connection with the resolution of this
matter.
51
Commission income increased by $118,000 to $406,000 for the year ended
December 31, 2003 compared to $288,000 for the year ended December 31, 2002. The
increase in commission income during the year ended December 31, 2003 was
primarily due to increased sales and commissions received by our wholly owned
subsidiary, First Community Financial Services, for insurance sales prior to its
ceasing operations when its activities were consolidated into Atlantic Coast
Federal.
NONINTEREST EXPENSE. Noninterest expense increased $1.2 million to $15.9
million for the year ended December 31,2003 compared to $14.7 million for the
year ended December 31, 2002. The increase in noninterest expense is primarily
due to an increase of $554,000 in compensation and benefits, an increase of
$218,000 in occupancy and equipment expenses, an increase in data processing
expense of $206,000, and an increase in other expenses of $284,000. These
increases are primarily related to our overall growth and expansion including
the acquisition of new branches and expenses associated with additional
personnel needed to operate the new branches. These increases in noninterest
expense were partially offset by declines in outside professional services
expense and interchange charges of $124,000 and $195,000 when comparing 2003 to
2002. The decline in interchange charges is due to the decline in Atlantic Coast
Federal Corporation's credit card portfolio and related decline in credit card
transactions primarily related to the credit card loan sale previously
discussed. We expect that interchange charges will continue to decrease during
future periods as our credit card portfolio declines.
Total outside professional service expenses totaled approximately $1.6
million for the year ending December 31, 2003. As previously discussed, we
incurred approximately $500,000 of legal expenses in connection with collection
efforts being pursued relative to the fraudulent pools of leases purchased
during 2001. The slight decline in professional service expenses during 2003
compared to fiscal 2002 is partially due to legal expenses totaling $251,000
incurred during fiscal 2002 in connection with acquisition of the foreclosed
asset discussed above.
INCOME TAX EXPENSE. Income tax expense increased to $2.4 million during
2003 from $1.6 million for 2002. The increase was primarily a result of an
increase in income before income taxes. Atlantic Coast Federal Corporation's
effective tax rate was 35.2% and 33.2% for 2003 and 2002. The increase in
Atlantic Coast Federal Corporation's effective tax rate during 2003 was
primarily due to a non-taxable gain on the sale of a foreclosed asset that
occurred in 2002 and such a non-taxable event did not occur in 2003.
COMPARISON OF RESULTS OF OPERATION FOR THE YEARS ENDED DECEMBER 31, 2002 AND
2001
GENERAL. Net income for the year ended December 31, 2002 was $3.2
million, an increase of $991,000, or 45.1%, from $2.2 million for the year ended
December 31, 2001. The increase in net income was primarily due to increases in
net interest income and noninterest income, partially offset by increases in
noninterest expense, provision for loan losses and income tax expense.
INTEREST INCOME. Interest income increased by $1.7 million to $30.8
million for the year ended December 31, 2002 from $29.1 million for the year
ended December 31, 2001. The primary reason for the increase in interest income
was an increase in the average balance of loans receivable of $60.3 million. The
increase in interest income related to the increase in the loan portfolio was
significantly offset by lower rates earned on loans and other interest earning
assets
52
as a result of the significant decrease in interest rates experienced during the
year ended December 31, 2002. The yield on loans decreased from 9.01% for fiscal
2001 to 8.21% for fiscal 2002. The yield on securities decreased from 4.80% for
the year ended December 31, 2001 to 3.71% for 2002, and the yield on other
interest earning assets decreased from 4.60% for the year ended December 31,
2001 to 2.11% for 2002. Total average interest earning assets increased $55.8
million from 2001 to 2002, and the yield on interest earning assets declined 77
basis points from 8.49% to 7.72%.
INTEREST EXPENSE. Interest expense decreased $2.2 million to $13.0
million for the year ended December 31, 2002 from $15.2 million for the year
ended December 31, 2001. The decrease in interest expense was primarily due to a
decrease in Atlantic Coast Federal Corporation's cost of funds during 2002
resulting from the significant decreases in interest rates during the year ended
December 31, 2002 and the repricing of deposit accounts to lower interest rates.
Atlantic Coast Federal Corporation's cost of funds was 3.78% for 2002 compared
to 5.11% for 2001. Interest expense on deposits decreased $2.4 million to $10.9
million for 2002 from $13.3 million for the year ended December 31, 2001. The
decrease in interest expense attributable to declines in interest rates paid on
deposit accounts was partially offset by additional interest expense incurred
due to the increase in average interest bearing deposits of $38.7 million for
the year ended December 31, 2002 compared to the year ended December 31, 2001.
Interest expense on Federal Home Loan Bank advances increased $200,000
to $2.1 million for the year ended December 31, 2002 from $1.9 million for the
year ended December 31, 2001. The increase resulted from an increase in average
Federal Home Loan Bank advances of $8.3 million to $41.2 million for the year
ended December 31, 2002 from $32.9 million for 2001. This increase was partially
offset by a 67 basis point decrease in the cost of Federal Home Loan Bank
advances, from 5.74% for 2001 to 5.07% for 2002.
NET INTEREST INCOME. Net interest income increased $3.9 million to $17.8
million during 2002 from $13.9 million for the year ended December 31, 2001. The
increase in net interest income is primarily the result of overall growth in
Atlantic Coast Federal Corporation's balance sheet and the lower cost of funds
resulting from the significant decreases in interest rates occurring in the year
ended December 31, 2002. Atlantic Coast Federal Corporation's net interest
margin was 4.45% for fiscal 2002 compared to 4.05% for the year ended December
31, 2001.
PROVISION FOR LOAN LOSSES. Based upon management's analysis of the
allowance for loan losses, provisions of $3.7 million and $2.1 million were made
during the year ended December 31, 2002 and the year ended December 31, 2001.
The increase in provision for loan losses is primarily attributable to increased
levels of specific reserves allocated to individual problem loans and increased
levels of net charge-offs when comparing fiscal 2002 and fiscal 2001. Net
charge-offs totaled approximately $2.8 million and $2.0 million for the years
ended December 31, 2002 and 2001, respectively. Specific reserve allocations
increased from $721,000 at December 31, 2001 to $1.6 million at December 31,
2002. The increase in specific reserve allocations is primarily related to a
specific reserve allocation of $667,000 made during 2002 for the pools of
purchased leases previously discussed. General reserve allocations for
homogeneous pools of loans did not change significantly from December 31, 2001
to December 31, 2002.
NONINTEREST INCOME. Noninterest income increased $1.4 million to $5.4
million for the year ended December 31, 2002 from $4.0 million for the year
ended December 31, 2001,
53
primarily as a result of an increase in service charges and fees of $866,000 and
gains from the sale of foreclosed assets totaling $634,000 for the year ended
December 31, 2002. As discussed above, gains from sales of foreclosed assets
were primarily due to the sale of property acquired in the settlement of a legal
action that Atlantic Coast Federal Corporation had been pursuing for several
years resulting in a gain of $612,000. The growth in service charges and fees is
primarily due to an increase in loan and deposit accounts and the introduction
of new deposit products.
NONINTEREST EXPENSE. Noninterest expense increased $2.4 million to $14.7
million for the year ended December 31, 2002 from $12.3 million for the year
ended December 31, 2001. This increase was primarily the result of a $1.2
million increase in salaries and employee benefits and a $964,000 increase in
outside professional service expenses. The increase in compensation and benefits
and other noninterest expenses are primarily related to the overall growth and
expansion of Atlantic Coast Federal Corporation including the acquisition of a
new branch and expenses associated with additional personnel needed to operate
the new branch. Atlantic Coast Federal Corporation also implemented a director
retirement plan in 2001 and a supplemental retirement plan for certain officers
in 2002, and the expense associated with the plans totaled $412,000 during the
year ended December 31, 2002 compared to $70,000 during the year ended December
31, 2001. Atlantic Coast Federal Corporation implemented these plans in order to
attract and retain individuals that can positively impact the direction of our
company.
Total outside professional service expenses totaled approximately $1.7
million for the year ending December 31, 2002. During 2002, Atlantic Coast
Federal Corporation incurred significant expenses totaling $209,000 in
connection with its reorganization into a three-tier mutual holding company. As
previously discussed, Atlantic Coast Federal Corporation also incurred
approximately $447,000 of legal expenses in connection with collection efforts
being pursued relative to the fraudulent pools of leases purchased during 2001.
The increase in professional service expenses during 2002 was also due to legal
expenses totaling $251,000 incurred in connection with the acquisition of the
foreclosed asset discussed previously.
INCOME TAX EXPENSE. Income tax expense increased to $1.6 million for the
year ended December 31, 2002 from $1.3 million for the year ended December 31,
2001, respectively. The increase was primarily a result of an increase in income
before income taxes. The effective tax rate was 33.2% and 37.0% for the year
ended December 31, 2002 and 2001, respectively. The decrease in Atlantic Coast
Federal Corporation's effective tax rate during 2002 was primarily due to a
non-taxable gain on the sale of a foreclosed asset.
LIQUIDITY
Management maintains a liquidity position that it believes will
adequately provide funding for loan demand and deposit run-off that may occur in
the normal course of business. Atlantic Coast Federal Corporation relies on a
number of different sources in order to meet its potential liquidity demands.
The primary sources are increases in deposit accounts and cash flows from loan
payments and the securities portfolio.
In addition to these primary sources of funds, management has several
secondary sources available to meet potential funding requirements. As of
December 31, 2003, Atlantic Coast Federal Corporation had additional borrowing
capacity of $88 million with the Federal Home Loan Bank of Atlanta.
Additionally, Atlantic Coast Federal Corporation has existing lines of credit
available in excess of $20 million with other financial institutions. Atlantic
Coast Federal Corporation has classified its entire securities portfolio as
available for sale, providing an
54
additional source of liquidity. Management believes that Atlantic Coast Federal
Corporation's security portfolio is of high quality and the securities would
therefore be marketable. In addition, Atlantic Coast Federal Corporation has
historically sold mortgage loans in the secondary market to reduce interest rate
risk and to create an additional source of liquidity.
During 2003, cash and cash equivalents decreased $5.0 million from $14.0
million as of December 31, 2002 to $9.0 million as of December 31, 2003. Cash
from operating activities of $11.1 million and cash from financing activities of
$30.6 million were more than offset by cash used for investing activities of
$46.6 million for the year ending December 31, 2003. Primary sources of cash for
2003 included net income from operations of $4.4 million, proceeds from sales of
loans of $25.2 million, proceeds from sales and maturities of available for sale
securities totaling $33.8 million, increases in deposits of $15.1 million,
increases in FHLB borrowings of $58.8 million and cash received for net
liabilities assumed in branch acquisitions of $9.1 million. Primary uses of cash
included net originations of portfolio loans and originations of loans held for
sale totaling $42.5 million, purchases of loans from other financial
institutions totaling $34.9 million, purchases of securities available for sale
of $31.5 million, repayment of FHLB advances of $43.3 million and purchases of
bank owned life insurance of $2.9 million.
55
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table presents Atlantic Coast Federal Corporation's longer
term, non-deposit related, contractual obligations and commitments to extend
credit to our borrowers, in aggregate and by payment due dates.
December 31, 2003
Less Than One Through Four Through After Five
One Year Three Years Five Years Years Total
----------- ------------ ------------ ----------- ----------
(In Thousands)
Federal Home Loan Bank advances $ 657 $ 11,314 $ 5,000 $44,000 $ 60,971
Operating leases (premises) 67 9 -- -- 76
Borrowings and operating leases 724 11,323 5,000 44,000 61,047
----------- ------------ ------------ ----------- ----------
Undisbursed portion of loans closed -- -- -- -- 28,759
Unused lines of credit -- -- -- -- 17,497
----------- ------------ ------------ ----------- ----------
Total loan commitments -- -- -- -- 46,256
----------- ------------ ------------ ----------- ----------
Total contractual obligations
and loan commitments $ -- $ -- $ -- $ -- $107,303
=========== ============ ============ =========== ==========
CAPITAL RESOURCES
At December 31, 2003, equity totaled $43.2 million. Management monitors
the capital levels of Atlantic Coast Federal to provide for current and future
business opportunities and to meet regulatory guidelines for "well capitalized"
institutions.
56
Atlantic Coast Federal is required by the Office of Thrift Supervision
to meet minimum capital adequacy requirements. Atlantic Coast Federal's actual
and required levels of capital as reported to the Office of Thrift Supervision
at December 31, 2003 are as follows:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
As of December 31, 2003
- -----------------------
Total capital (to risk weighted assets) $ 44.3 12.9% $ 27.5 8.0% $ 34.4 10.0%
Tier 1 (core) capital (to risk weighted
assets) 40.0 11.6% 13.7 4.0% 20.6 6.0%
Tier 1 (core) capital (to adjusted total
assets) 40.0 8.1% 19.8 4.0% 24.7 5.0%
At December 31, 2003, Atlantic Coast Federal exceeded all regulatory
minimum capital requirements and are considered to be "well capitalized." In
addition, as of December 31, 2003 we were not aware of any recommendation by a
regulatory authority which if it were implemented would have a material effect
on our liquidity, capital resources or operations.
Under regulations of the Office of Thrift Supervision, limitations have
been imposed on all "capital distributions" by savings institutions, including
cash dividends. The regulation establishes a three-tiered system of
restrictions, with the greatest flexibility afforded to savings associations
which are both well-capitalized and given favorable qualitative examination
ratings by the Office of Thrift Supervision. For example, a savings association
which is given one of the two highest examination ratings and has "capital"
equal to its fully phased-in regulatory capital requirements (a tier 1
institution) could make capital distributions in any year of 100% of its
retained net income for the calendar year-to-date period plus net income for the
previous two calendar years (less any dividends previously paid) as long as the
savings associations would remain "well capitalized," following the proposed
distribution. Other savings associations would be subject to more stringent
procedural and substantive requirements, the most restrictive being prior Office
of Thrift Supervision approval of any capital distribution. At January 1, 2004,
$7.4 million of Atlantic Coast Federal's retained earnings were available for
distribution to Atlantic Coast Federal Corporation, without obtaining prior
regulatory approval.
INFLATION
The effects of price changes and inflation can vary substantially for
most financial institutions. While management believes that inflation affects
the growth of total assets, it believes that it is difficult to assess the
overall impact. Management believes this to be the case due to the fact that
generally neither the timing nor the magnitude of the inflationary changes in
the consumer price index ("CPI") coincides with changes in interest rates. The
price of one or more of the components of the CPI may fluctuate considerably and
thereby influence the overall CPI without having a corresponding affect on
interest rates or upon the cost of those goods and services normally purchased
by Atlantic Coast Federal Corporation. In years of high inflation and high
interest rates, intermediate and long-term interest rates tend to increase,
thereby
57
adversely impacting the market values of investment securities, mortgage loans
and other long-term fixed rate loans. In addition, higher short-term interest
rates caused by inflation tend to increase the cost of funds. In other years,
the opposite may occur.
ASSET/LIABILITY MANAGEMENT
The Company is subject to interest rate risk to the extent that its
interest-bearing liabilities, primarily deposits and FHLB advances, reprice more
rapidly or at different rates than its interest-earning assets.
In order to minimize the potential for adverse effects of material
prolonged increases or decreases in interest rates on our results of operations,
we have adopted an asset and liability management policy. The Board of Directors
sets the asset and liability policy for the Company, which is implemented by the
Asset/Liability Committee.
The purpose of this Committee is to communicate, coordinate and control
asset/liability management consistent with our business plan and board approved
policies. The committee establishes and monitors the volume and mix of assets
and funding sources taking into account relative costs and spreads, interest
rate sensitivity and liquidity needs. The objectives are to manage assets and
funding sources to produce results that are consistent with liquidity, capital
adequacy, growth, risk and profitability goals.
The Committee generally meets on a quarterly basis to review, among
other things, economic conditions and interest rate outlook, current and
projected liquidity needs and capital position, anticipated changes in the
volume and mix of assets and liabilities and interest rate exposure limits
versus current projections pursuant to market value of portfolio equity analysis
and income simulations. The Committee recommends appropriate strategy changes
based on this review. The Committee is responsible for reviewing and reporting
the effects of the policy implementations and strategies to the Board of
Directors at least quarterly.
A key element of Atlantic Coast Federal Corporation's asset/liability
plan is to protect net earnings by managing the maturity or repricing mismatch
between its interest-earning assets and rate-sensitive liabilities.
Historically, the Company has sought to reduce exposure to its earnings through
the use of adjustable rate loans and through the sale of certain fixed rate
loans in the secondary market, and by extending funding maturities through the
use of FHLB advances.
As part of its efforts to monitor and manage interest rate risk, the
Company uses a Market Value of Portfolio Equity ("MVPE") methodology which is
similar to the Net Portfolio Value ("NPV") methodology adopted by the Office of
Thrift Supervision as part of its capital regulations. In essence, this approach
calculates the difference between the present value of expected cash flows from
assets and the present value of expected cash flows from liabilities. Management
and the Board of Directors review measurements MVPE on a quarterly basis to
determine whether the Atlantic Coast Federal Corporation's interest rate
exposure is within the limits established by the Board of Directors in the
Atlantic Coast Federal Corporation's interest rate risk policy.
Atlantic Coast Federal Corporation's asset/liability management strategy
dictates acceptable limits on the amounts of change in given certain changes in
interest rates. For decreases in interest rates, in 100 basis point increments,
58
Atlantic Coast Federal Corporation policy requires the MVPE ratio to be at least
8.0%. For interest rate increases of 100, 200 and 300 basis points, our policy
dictates that our MVPE ratio should not fall below 7.0%, 6.0% and 5.0%,
respectively. As illustrated by the table below, we are in compliance with this
aspect of our asset/liability management policy.
Our policy also dictates that for interest rate increases or decreases
of 100, 200 or 300 basis points the percentage change in our MVPE ratio should
not decrease by more than 7.5%, 15.0% and 25.0%, respectively. As illustrated by
the table below, we are in compliance with this aspect of our asset/liability
management policy as well.
The table presented below, as of December 31, 2003, is an analysis of
the Atlantic Coast Federal Corporation interest rate risk as measured by changes
in MVPE for instantaneous and sustained parallel shifts in the yield curve, in
100 basis point increments, up and down 300 basis points.
As illustrated in the table below, the Atlantic Coast Federal
Corporation's MVPE would benefit from a decrease in interest rates of 100 basis
points. The Atlantic Coast Federal Corporation's MVPE would be negatively
impacted by decreases in interest rates of 200 and 300 basis points as the
current interest rate environment limits the Atlantic Coast Federal
Corporation's ability to significantly reduce interest rates on many of the
Atlantic Coast Federal Corporation's deposit products. Additionally, an increase
in rates would negatively impact the Atlantic Coast Federal Corporation's MVPE
as a result of deposit accounts and FHLB borrowings repricing more rapidly than
loans and securities due to the fixed rate nature of a large portion of the
Atlantic Coast Federal Corporation's loan and security portfolios. As rates
rise, the market value of fixed rate assets decline due to both the rate
increases and slowing prepayments.
December 31, 2003
-----------------
MVPE as % of Portfolio
Change in Market Value of Portfolio Equity Value of Assets
Interest Rates --------------------------------- -----------------------
In Basis
Points MVPE
(Rate Shock) (1) $ Amount $ Change % Change Ratio Change (1)
- --------------- ---------- ---------- --------- --------- ------------
(Dollars in Thousands)
+300 $ 67,462 $ (8,180) (10.81)% 13.81% (81) bp
+200 70,138 (5,504) (7.28) 14.09 (53) bp
+100 72,335 (3,307) (4.37) 14.27 (35) bp
0 75,642 -- -- 14.62 --
(100) 76,710 1,068 1.41 14.59 +3 bp
(200) 73,914 (1,728) (2.28) 13.94 (68) bp
(300) 70,350 (5,292) (7.00) 13.16 (146) bp
(1) Expressed in basis points.
59
Specifically, the table above indicates that the Atlantic Coast Federal
Corporation's MVPE was $75.6 million or 14.62% of the market value of portfolio
assets as of December 31, 2003. Based upon the assumptions utilized, an
immediate 200 basis point increase in market interest rates would result in a
$5.5 million decrease in the Atlantic Coast Federal Corporation's MVPE and would
result in a 53 basis point decrease in the Atlantic Coast Federal Corporation's
MVPE ratio to 14.09%. An immediate 200 basis point decrease in market interest
rates would result in a $1.7 million decrease in the Atlantic Coast Federal
Corporation's MVPE and a 68 basis point decrease in the Atlantic Coast Federal
Corporation's MVPE ratio to 13.94%.
In addition to monitoring selected measures of MVPE, management also
monitors effects on net interest income resulting from increases or decreases in
rates. This process is used in conjunction with MVPE measures to identify
excessive interest rate risk. In managing its asset/liability mix, the Company,
depending on the relationship between long and short term interest rates, market
conditions and consumer preference, may place somewhat greater emphasis on
maximizing its net interest margin than on strictly matching the interest rate
sensitivity of its assets and liabilities. Management believes that the
increased net income which may result from an acceptable mismatch in the actual
maturity or repricing of its asset and liability portfolios can, during periods
of declining or stable interest rates, provide sufficient returns to justify the
increased exposure to sudden and unexpected increases in interest rates which
may result from such a mismatch. Management believes that the Atlantic Coast
Federal Corporation's level of interest rate risk is acceptable under this
approach.
In evaluating the Atlantic Coast Federal Corporation's exposure to
interest rate movements, certain shortcomings inherent in the method of analysis
presented in the foregoing table must be considered. For example, although
certain assets and liabilities may have similar maturities or repricing periods,
they may react in different degrees to changes in market interest rates. Also,
the interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in interest rates. Additionally, certain assets, such as
adjustable rate mortgages (ARM's), have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further, in
the event of a significant change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed above.
Finally, the ability of many borrowers to service their debt may decrease in the
event of an interest rate increase. Atlantic Coast Federal Corporation considers
all of these factors in monitoring its exposure to interest rate risk.
The Board of Directors and management of Atlantic Coast Federal
Corporation believe that certain factors afford Atlantic Coast Federal
Corporation the ability to operate successfully despite its exposure to interest
rate risk. Atlantic Coast Federal manages its interest rate risk by originating
and retaining adjustable rate loans in its portfolio and by normally selling
currently originated fixed rate one-to-four family real estate loans.
60
Atlantic Coast Federal Corporation's investment strategy is to maintain
a diversified portfolio of high quality investments that balances the goals of
minimizing interest rate and credit risks while striving to maximize investment
return and provide liquidity necessary to meet funding needs.
RECENT ACCOUNTING PRONOUNCEMENTS
During 2003, Atlantic Coast Federal Corporation adopted FASB Statement
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, FASB Statement 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equities, FASB Statement 132
(revised 2003), Employers' Disclosures about Pensions and Other Postretirement
Benefits, FASB Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, FASB Interpretation 46, Consolidation of Variable
Interest Entities, and Emerging Issues Task Force Issue 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments.
Adoption of the new standards did not materially affect Atlantic Coast Federal
Corporation's operating results or financial condition.
FUTURE ACCOUNTING PRONOUNCEMENTS
The FASB has ongoing projects relative to accounting for purchased
loans, stock-based compensation, fixed assets, impairment of securities,
mortgage loan commitments and instruments with characteristics of both
liabilities and equity. Atlantic Coast Federal Corporation currently does not
anticipate that new accounting guidance resulting from these projects will
materially impact the operating results or financial condition of Atlantic Coast
Federal Corporation.
61
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following tables sets forth certain information for the years ended December 31, 2003, 2002 and 2001, respectively. The
average yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively,
for the periods presented. Daily average balances were used for the years ended December 31, 2003 and 2002. For the year ended
December 31, 2001, average balances are derived primarily from month-end balances. Management does not believe that the use of
month-end balances rather than daily average balances has caused any material differences in the information presented.
---------------------------------------------------------------------------------
For the Year ended December 31,
---------------------------------------------------------------------------------
2003 2002
------------------------------------- -------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- ---------- ----------- --------- ---------- -----------
INTEREST-EARNING ASSETS (Dollars in Thousands)
- -----------------------
Loans receivable(1)............................. $408,064 $30,340 7.44% $362,301 $29,756 $8.21%
Securities(2)................................... 29,319 623 2.12% 17,490 649 3.71%
Other interest-earning assets(3) ............... 14,152 250 1.77% 19,353 408 2.11%
--------- ---------- ----------- --------- ---------- -----------
Total interest-earning assets................... 451,535 31,213 6.91% 399,144 30,813 7.72%
---------- ----------- ---------- -----------
Non-interest earning assets..................... 33,051 21,133
--------- ---------
Total assets.................................... $484,586 $420,277
========= =========
INTEREST-BEARING LIABILITIES
- ----------------------------
Savings deposits................................ $76,226 $ 940 1.23% $ 77,271 $1,620 2.10%
Money market accounts........................... 55,187 856 1.55% 42,797 991 2.32%
Time deposits................................... 221,014 7,725 3.50% 183,527 8,334 4.54%
FHLB advances and other borrowings.............. 47,102 2,260 4.80% 41,199 2,090 5.07%
--------- ---------- ----------- --------- ---------- -----------
Total interest-bearing liabilities.............. 399,529 11,781 2.95% 344,794 13,035 3.78%
---------- ----------- ---------- -----------
Non-interest bearing liabilities................ 44,054 37,938
--------- ---------
Total liabilities............................... 443,583 382,732
Stockholders' equity............................ 41,003 37,545
--------- ---------
Total liabilities and stockholders' equity...... $484,586 $420,277
========= =========
Net interest income............................. $19,432 $17,778
========== ==========
Net interest rate spread........................ 3.96% 3.94%
=========== ===========
Net earning assets.............................. $52,006 $ 54,350
========= =========
Net interest margin(4).......................... 4.30% 4.45%
=========== ===========
Average interest-earning assets to average
interest-bearing liabilities.................... 113.02% 115.76%
========== ==========
(CONTINUED)
-------------------------------------
For the Year ended December 31,
-------------------------------------
2001
-------------------------------------
Average
Average Yield/
Balance Interest Cost
--------- ---------- -----------
INTEREST-EARNING ASSETS (Dollars in Thousands)
- -----------------------
Loans receivable(1)............................. $301,987 $27,215 9.01%
Securities(2)................................... 9,206 442 4.80%
Other interest-earning assets(3) ............... 32,119 1,479 4.60%
--------- ---------- -----------
Total interest-earning assets................... 343,312 29,136 8.49%
---------- -----------
Non-interest earning assets..................... 16,741
---------
Total assets.................................... $360,053
=========
INTEREST-BEARING LIABILITIES
- ----------------------------
Savings deposits................................ $68,686 $1,919 2.79%
Money market accounts........................... 36,849 1,395 3.79%
Time deposits................................... 159,332 10,017 6.29%
FHLB advances and other borrowings.............. 32,918 1,890 5.74%
--------- ---------- -----------
Total interest-bearing liabilities.............. 297,785 15,221 5.11%
---------- -----------
Non-interest bearing liabilities................ 27,839
---------
Total liabilities............................... 325,624
Stockholders' equity............................ 34,429
---------
Total liabilities and stockholders' equity...... $360,053
=========
Net interest income............................. $13,915
=========
Net interest rate spread........................ 3.38%
===========
Net earning assets.............................. $ 45,527
=========
Net interest margin(4).......................... 4.05%
===========
Average interest-earning assets to average
interest-bearing liabilities.................... 115.29%
=========
- ---------------------------------------------------------------------------------------------
(1) Calculated net of deferred fees and loss reserves. Nonaccrual loans included as loans carrying a zero yield.
(2) Calculated based on carrying value. Not full tax equivalents, as the numbers would not change materially from those presented
in the table.
(3) Includes Federal Home Loan Bank stock at cost and term deposits with other financial institutions.
(4) Net interest income divided by average interest-earning assets.
62
RATE/VOLUME ANALYSIS
The following table presents the dollar amount of changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in volume multiplied by the
old rate; and (2) changes in rate, which are changes in rate multiplied by the old volume; and (3) changes not solely attributable
to rate or volume have been allocated proportionately to the change due to volume and the change due to rate.
Years Ended December 31,
2003 vs. 2002 2003 vs. 2002
--------------------------------------------- ---------------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Total Due to Total
--------------------------- Increase ---------------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------------ ----------- -------------- ------------- ----------- -------------
INTEREST-EARNING ASSETS
- -----------------------
Loans receivable...................... $3,555 $(2,971) $584 $5,102 $(2,561) $2,541
Securities............................ 324 (350) (26) 326 (119) 207
Other interest-earning assets (99) (59) (158) (453) (618) (1,071)
------------ ----------- -------------- ------------- ----------- -------------
Total interest-earning assets 3,780 (3,380) 400 4,975 (3,298) 1,677
------------ ----------- -------------- ------------- ----------- -------------
INTEREST-BEARING LIABILITIES:
- -----------------------------
Savings deposits...................... (22) (658) (680) 220 (519) (299)
Money market accounts................. 243 (378) (135) 199 (603) (404)
Time deposits......................... 1,518 (2,127) (609) 1,372 (3,055) (1,683)
FHLB advances......................... 288 (118) 170 438 (238) 200
------------ ----------- -------------- ------------- ----------- -------------
Total interest-bearing liabilities.... 2,027 (3,281) (1,254) 2,229 (4,415) (2,186)
------------ ----------- -------------- ------------- ----------- -------------
Net interest income.................. $1,753 $ (99) $1,654 $2,746 $1,117 $3,863
============ =========== ============== ============= =========== =============
63
BUSINESS OF ATLANTIC COAST FEDERAL, MHC
Atlantic Coast Federal, MHC is a federally-chartered mutual holding
company and is subject to regulation by the Office of Thrift Supervision.
Atlantic Coast Federal, MHC currently owns 100% of the outstanding common stock
of Atlantic Coast Federal Corporation. So long as Atlantic Coast Federal, MHC is
in existence, it will at all times own at least a majority of the outstanding
common stock of Atlantic Coast Federal Corporation.
It is currently anticipated that the only business activity of Atlantic
Coast Federal, MHC going forward will be to own a majority of Atlantic Coast
Federal Corporation's common stock. Atlantic Coast Federal, MHC, however, will
be authorized to engage in any other business activities that are permissible
for mutual holding companies under federal law, including investing in loans and
securities. Atlantic Coast Federal, MHC does not maintain offices separate from
those of Atlantic Coast Federal Corporation or utilize any persons other than
certain of Atlantic Coast Federal Corporation's officers. Directors and officers
of Atlantic Coast Federal, MHC are not separately compensated for their service.
BUSINESS OF ATLANTIC COAST FEDERAL CORPORATION
Atlantic Coast Federal Corporation is a federally-chartered stock
holding company subsidiary and is subject to regulation by the Office of Thrift
Supervision. It was organized for the purpose of acquiring all of the capital
stock that Atlantic Coast Federal issued upon its mutual holding company
reorganization from the mutual to stock form of ownership in January 2003.
Atlantic Coast Federal Corporation has not engaged in any significant
business to date. Its primary activity is holding all of the stock of Atlantic
Coast Federal. Atlantic Coast Federal Corporation will invest the proceeds of
the offering as discussed under "How We Intend to Use the Proceeds" in this
prospectus. In the future, it may pursue other business activities, including
mergers and acquisitions, investment alternatives and diversification of
operations. There are, however, no current understandings or agreements for
these activities. Atlantic Coast Federal Corporation does not maintain offices
separate from those of Atlantic Coast Federal or utilize persons other than
certain of Atlantic Coast Federal's officers. Directors and officers of Atlantic
Coast Federal Corporation are not separately compensated for their service.
BUSINESS OF ATLANTIC COAST FEDERAL
General
Atlantic Coast Federal was originally established in 1939 to serve the
employees of the Atlantic Coast Line Railroad. At the time of the conversion
from a federal credit union to a federal mutual savings association our field of
membership consisted of about 125 various employee groups, residents of
Atkinson, Bacon, Brantley, Charlton, Clinch, Coffee, Pierce and Ware counties in
Georgia, and employees of CSX Transportation Inc. ("CSX"), which is
headquartered in Jackson, Florida. However, as a credit union, we were legally
restricted to serve only individuals who shared a "common bond" such as a common
employer.
64
After receiving the necessary regulatory and membership approvals, on
November 1, 2000, Atlantic Coast Federal Credit Union converted to a federal
mutual savings association known as Atlantic Coast Federal which serves the
general public.
Our principal business consists of attracting retail deposits from the
general public and investing those funds primarily in permanent loans secured by
first mortgages on owner-occupied, one- to four-family residences and to a
lesser extent, automobile and consumer loans, home equity loans and commercial
real estate loans. We also originate multi-family residential loans, commercial
business loans and commercial construction and residential construction loans.
We obtain loans through our staff, through brokers as well as through
advertising in various publications.
Our revenues are derived principally from interest on loans and
investment securities. We also generate revenue from service charges and other
income.
We offer a variety of deposit accounts having a wide range of interest
rates and terms, which generally include savings accounts, money market
accounts, demand deposit accounts and time deposit accounts with varied terms
ranging from 90 days to five years. We solicit deposits in our primary market
area of southeastern Georgia and the Jacksonville metropolitan area.
MARKET AREA
We intend to continue to be a community oriented financial institution
offering a variety of financial services to meet the needs of the communities we
serve. We are headquartered in Waycross, Georgia, and have branches in Waycross,
Douglas and Garden City, Georgia, as well as Jacksonville, Orange Park, Atlantic
Beach, Fernandina Beach and Lake City, Florida. Waycross is located in Ware
County Georgia and the dominant employer in town is CSX Transportation, Inc.
which operates a major railroad facility there. The market area of southeastern
Georgia is marked by limited growth trends and is a largely agricultural based
economy. Approximately one third of Atlantic Coast Federal's deposits are based
in Ware County, Georgia where it has a market share of 25.0%. Atlantic Coast
Federal has a 2.8% market share of the deposits in Coffee County, Georgia and
less than 1.0% share in all other counties in Georgia as well as the three
counties in which it has offices in Florida. The Jacksonville market area has
been historically tied to the military and defense industries, but has
diversified and is a regional financial center in the southeastern United
States. It also has a healthy tourism industry and is home to the 14th largest
port in the United States.
LENDING ACTIVITIES
GENERAL. We originate one- to four-family residential loans and to a
lesser extent we originate home equity loans, automobile and other consumer
loans and commercial real estate loans. We also originate residential,
multi-family and commercial construction loans. Our loans carry either a fixed
or an adjustable rate of interest. Consumer loans are generally short term and
65
amortize monthly or have interest payable monthly. Mortgage loans generally have
a longer term amortization, with maturities up to 30 years, depending upon the
type of property, with principal and interest due each month. At December 31,
2003, our net loan portfolio totaled $435.6 million, which constituted 87.3% of
our total assets.
At December 31, 2003, the maximum amount which we could have loaned to
any one borrower and the borrower's related entities under applicable
regulations was approximately $6.6 million. At December 31, 2003, we had no
loans or group of loans to related borrowers with outstanding balances in excess
of this amount. Our five largest lending relationships at December 31, 2003 were
as follows: (1) a $ 4.8 million loan relationship to two affiliated companies to
finance the construction of a waste water treatment facility, (2) a $3.9 million
loan to provide permanent financing for a retail shopping center, (3) a $4.0
million loan commitment to finance the purchase and improvement of a 200 unit
apartment complex, of which $1.5 million was outstanding, (4) a $2.3 million
loan to finance the construction of a mini-storage facility, and (5) a $1.5
million loan to finance the construction of a 12 unit condominium project. The
waste water treatment plan loan and the condominium project loan are both
currently classified as substandard. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation" and "--Classified Assets."
66
The following table presents information concerning the composition of Atlantic Coast Federal's loan portfolio in dollar
amounts and in percentages as of the dates indicated.
At December 31,
-------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------ ------------------ ------------------ ----------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
REAL ESTATE LOANS:
- ------------------
One- to four-family............... $237,946 53.90% $178,092 46.30% $150,636 44.62% $122,456 41.98% $100,417 37.06%
Multi-family...................... 7,839 1.77 8,727 2.27 4,137 1.23 -- -- -- --
Commercial........................ 56,173 12.71 36,752 9.55 14,558 4.31 1,270 0.44 -- --
Construction-one-to four-family... 11,913 2.69 7,552 1.96 10,457 3.10 -- -- -- --
Construction-multi-family......... 3,802 0.86 3,078 0.80 3,600 1.07 -- -- -- --
Construction-commercial........... 14,861 3.36 19,897 5.17 3,932 1.16 343 0.12 -- --
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
Total real estate loans......... 332,534 75.22 254,098 66.05 187,320 55.49 124,069 42.54 100,417 37.06
OTHER LOANS:
- ------------
Consumer.......................... 67,728 15.34 92,634 24.08 118,328 35.03 139,475 47.81 145,298 53.63
Home equity....................... 38,782 8.78 32,722 8.51 30,793 9.13 27,092 9.29 25,188 9.30
Commercial........................ 2,609 0.59 5,247 1.36 1,185 0.35 1,036 0.36 38 0.01
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
Total other loans............... 109,119 24.71 130,603 33.95 150,306 44.51 167,603 57.46 170,524 62.94
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
Total loans..................... 441,653 100.00% 384,701 100.00% 337,626 100.00% 291,672 100.00% 270,941 100.00%
========= ========= ========= ========= =========
LESS:
- -----
Net deferred loan originations
fees (costs).................... 554 (231) (204) (123) (226)
Allowance for loan losses......... (6,593) (4,692) (3,766) (3,642) (4,306)
-------- -------- -------- -------- --------
Total loans, net................ $435,614 $379,778 $333,656 $287,907 $266,409
======== ======== ======== ======== --------
67
The following table shows the composition of Atlantic Coast Federal loan portfolio by fixed- and adjustable-rate at the
dates indicated.
At December 31,
-------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------ ------------------ ------------------ ----------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
FIXED-RATE LOANS
REAL ESTATE LOANS:
- ------------------
One- to four-family............... $136,596 30.90% $120,719 31.39% $118,003 34.95% $100,787 34.55% $89,444 33.01%
Multi-family...................... 7,839 1.78 8,727 2.27 4,137 1.23 -- -- -- --
Commercial........................ 29,607 6.71 36,752 9.55 14,558 4.31 1,270 0.44 -- --
Construction-one-to four-family... 4,327 0.98 7,552 1.96 10,457 3.10 343 0.12 -- --
Construction-multi-family......... 2,573 0.59 3,078 0.80 3,600 1.07 -- -- -- --
Construction-commercial........... 9,148 2.08 19,897 5.17 3,932 1.16 -- -- -- --
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
Total real estate loans......... 190,090 43.04 196,725 51.13 154,687 45.82 102,400 35.11 89,444 33.01
OTHER LOANS:
- ------------
Consumer.......................... 67,728 15.34 92,634 118,328 35.05 139,475 47.81 145,298 53.63
Home equity....................... 7,794 1.76 11,287 2.94 12,039 3.57 9,869 3.38 9,455 3.49
Commercial........................ 2,609 0.59 5,247 1.36 1,185 0.35 1,036 0.36 38 0.01
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
Total other loans............... 78,131 17.69 109,168 28.38 131,552 38.97 150,380 51.55 154,791 57.13
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
Total fixed-rate loans.......... 268,221 60.73 305,893 79.52 286,239 84.79 252,780 86.66 244,235 90.14
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
ADJUSTABLE-RATE
REAL ESTATE LOANS:
- ------------------
One- to four-family............... 101,350 22.95 57,373 14.91 32,633 9.65 21,669 7.43 10,973 4.05
Multi-family...................... -- -- -- -- -- -- -- -- -- --
Commercial........................ 26,566 6.02 -- -- -- -- -- -- -- --
Construction-one-to four-family... 7,586 1.72 -- -- -- -- -- -- -- --
Construction-multi-family......... 1,229 0.28 -- -- -- -- -- -- -- --
Construction-commercial........... 5,713 1.29 -- -- -- -- -- -- -- --
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
Total real estate loans......... 142,444 32.26 57,373 14.91 32,633 9.65 21,669 7.43 10,973 4.05
Other Loans:
Consumer.......................... -- -- -- -- - -- -- -- -- -- --
Home equity....................... 30,988 7.01 21,435 5.57 18,754 5.56 17,223 5.91 15,733 5.81
Commercial........................ -- -- -- -- -- -- -- -- -- --
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
Total other loans............... 30,988 7.01 21,435 5.57 18,754 5.56 17,223 5.91 15,733 5.81
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
Total adjustable loans.......... 173,432 39.27 78,808 20.48 51,387 15.21 38,892 13.34 26,706 9.86
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
Total loans 441,653 100.00% 384,701 100.00% 337,626 100.00% 291,672 100.00% 270,941 100.00%
========= ========= ========= ========= =========
LESS:
- -----
Net deferred loan origination
fees............................ 554 (231) (204) (123) (226)
Allowance for loan losses......... (6,593) (4,692) 3,766) (3,642) (4,306)
-------- -------- -------- -------- --------
Total loans, net................ $435,614 $379,778 $333,656 $287,907 $266,409
======== ======== ======== ======== ========
68
Loan Maturity and Repricing. The following table sets forth certain information at December 31, 2003 regarding the dollar
amount of loans maturing in Atlantic Coast Federal's portfolio based on their contractual terms to maturity, but does not include
scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity are
reported as due in one year or less. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income and
allowance for loan losses.
Real Estate
------------------------------------------------------------------------------------------------
Construction-One-to-
One to Four Family Multi-Family Commercial four-family(1)
--------------------- --------------------- --------------------- ---------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
-------- -------- -------- -------- -------- -------- -------- --------
At (Dollars in Thousands)
December 31, 2003
- -----------------------------
1 year or less .............. $ 69 7.64% $ 2,000 6.00% $ 3,043 6.54% $ 7,802 5.37%
Greater than 1 to 3 years.... 229 7.73 -- -- 12,631 7.31 -- --
Greater than 3 to 5 years.... 2,152 4.69 -- -- 9,621 6.76 20 5.29
Greater than 5 to 10 years... 9,379 5.44 -- -- 21,849 7.03 232 5.00
Greater than 10 to 20
years...................... 48,109 5.67 5,839 7.05 6,642 6.93 2,069 6.11
More than 20 years........... 178,008 5.93 -- -- 2,387 6.69 1,790 4.75
-------- -------- -------- --------
Total........................ $237,946 $ 7,839 $ 56,173 $ 11,913
======== ======== ======== ========
(CONTINUED)
Real Estate
---------------------------------------------
Construction-Multi- Construction-
family Commercial
--------------------- ---------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- -------- -------- --------
(Dollars in Thousands)
At
December 31, 2003
- ----------------------------
1 year or less .............. $ 1,359 6.50% $ 9,061 5.61%
Greater than 1 to 3 years.... -- -- 2,267 6.62
Greater than 3 to 5 years.... -- -- -- --
Greater than 5 to 10 years... 2,443 7.13 2,082 6.39
Greater than 10 to 20
years...................... -- -- 1,451 5.00
More than 20 years........... -- -- -- --
-------- --------
Total........................ $ 3,802 $ 14,861
======== ========
Consumer Home Equity Commercial Total
--------------------- --------------------- --------------------- ---------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
-------- -------- -------- -------- -------- -------- -------- --------
At (Dollars in Thousands)
December 31, 2003
- -----------------------------
1 year or less .............. $ 2,219 6.30% $ -- --% $ 1,119 6.83% $ 26,672 5.88%
Greater than 1 to 3 years.... 7,154 9.87 37 7.59 51 7.87 22,369 8.06
Greater than 3 to 5 years.... 26,791 8.92 180 6.58 1,232 7.06 39,996 8.10
Greater than 5 to 10 years... 9,011 11.42 3,190 6.82 207 7.75 48,393 7.42
Greater than 10 to 20
years...................... 22,437 11.75 26,330 6.35 -- -- 112,877 7.18
More than 20 years........... 116 10.00 9,045 5.99 -- -- 191,346 5.94
-------- -------- -------- --------
Total.................... $ 67,728 $38,782 $ 2,609 $441,653
======== ======== ======== ========
69
(1) Construction loans include notes that cover both the construction period
and the end permanent financing, and therefore, the schedule shows maturities
for periods greater than one year.
70
The following schedule illustrates the interest rate sensitivity of
Atlantic Coast Federal's loan portfolio at December 31, 2003. Loans which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the loan reprices. The schedule does not include scheduled payments
or potential prepayments.
Real Estate
----------------------------------------------------------------------------------------------
Construction
One-to -Four Multi- One-to-four Construction Construction
At Family Family Commerical Family Multi-family Commerical
December 31, 2003 Amount Amount Amount Amount Amount Amount
- ----------------------------- ------------ ----------- ------------ -------------- ------------ -------------
1 year or less(1)........... $ 9,665 $2,000 $ 13,373 $ 6,825 $1,359 $1,453
Greater than 1 to 3 years... 32,871 2,650 16,633 -- 2,443 3,267
Greater than 3 to 5 years... 59,906 -- 15,123 -- -- 2,243
Greater than 5 to 10 years.. 30,469 856 8,552 3,482 -- 492
Greater than 10 to 20 years. 56,848 2,333 1,948 143 -- 2,211
More than 20 years.......... 48,187 -- 544 1,463 -- 5,195
------------ ----------- ------------ -------------- ------------ -------------
Total....................... $237,946 $7,839 $56,173 $11,913 $3,802 $14,861
============ =========== ============ ============== ============ =============
71
(Continued)
Home Equtiy Consumer Commerical Total
Amount Amount Amount Amount
----------- ----------- ------------ ------------
1 year or less(1)........... $ 20,016 $3,293 $1,217 $ 59,201
Greater than 1 to 3 years... 10,750 9,756 -- 78,370
Greater than 3 to 5 years... 194 20,366 1,392 99,224
Greater than 5 to 10 years.. 686 10,913 -- 55,450
Greater than 10 to 20 years. 4,709 23,285 -- 91,477
More than 20 years.......... 2,427 115 -- 57,931
----------- ----------- ------------ ------------
Total....................... $38,782 $67,728 $2,609 $441,653
=========== =========== ============ ============
- ----------------------------
(1) Construction loans include notes that cover both the construction period and
the end permanent financing, and therefore, the schedule shows repricing dates
greater than one year.
72
Of the $441.7 million in total loans at December 31, 2003, approximately
$268.2 million have fixed rates of interest and approximately $173.4 million
have adjustable rates of interest.
ONE- TO FOUR-FAMILY RESIDENTIAL LENDING. At December 31, 2003, one- to
four-family residential mortgage loans totaled $237.9 million, or 53.9%, of our
gross loan portfolio. We generally underwrite our one- to four-family loans
based on the applicant's employment and credit history and the appraised value
of the subject property. Presently, we generally lend up to 80% of the lesser of
the appraised value or purchase price for one- to four-family residential loans.
Should we grant a loan with a loan-to-value ratio in excess of 80%, we require
private mortgage insurance in order to reduce our exposure below 80%. Properties
securing our one- to four-family loans are generally appraised by independent
fee appraisers approved by the board of directors. We require our borrowers to
obtain title and hazard insurance, and flood insurance, if necessary, in an
amount not less than the value of the property improvements.
We currently originate one- to four-family mortgage loans on a
fixed-rate and adjustable-rate basis. Our pricing strategy for mortgage loans
includes setting interest rates that are competitive with other local financial
institutions and consistent with our internal needs. Adjustable-rate loans are
tied to a variety of indices including a rate based on U. S. Treasury securities
adjusted to a constant maturity of one year. A majority of our adjustable rate
loans carry an initial fixed rate of interest for either three or five years
which then converts to an interest rate that is adjusted annually based upon the
applicable index. Our home mortgages are structured with a five to thirty year
maturity, with amortizations up to a 30 year period. Substantially all of our
one- to-four family loans originated or purchased are secured by properties
located in southeastern Georgia and the Jacksonville metropolitan area.
We also originate residential construction loans as part of our
residential loan programs. These loans are generally made for the construction
of pre-sold builder homes as well as to individual borrowers. Loans made to
builders are usually limited to approximately five homes at any one time. We
generally limit construction loans to no more than an 80% loan to value ratio
upon completion. At December 31, 2003, we had $11.9 million in residential
construction loans.
All our real estate loans contain a "due on sale" clause allowing us to
declare the unpaid principal balance due and payable upon the sale of the
security property. The loans originated or purchased by us are underwritten and
documented pursuant to Freddie Mac or Fannie Mae guidelines. See "-
Originations, Purchases, Sales and Repayments." See "- Asset Quality -
Non-Performing Assets" and "- Classified Assets."
MULTI-FAMILY RESIDENTIAL LENDING. We also offer multi-family residential
loans. These loans are secured by real estate located in our primary market
area. At December 31, 2003, multi-family residential loans totaled $7.8 million,
or 1.8%, of our gross loan portfolio.
Our multi-family residential loans are originated with adjustable
interest rates only. We use a number of indices to set the interest rate,
including a rate based on the constant maturity of one year U.S. Treasury
securities. A majority of our adjustable rate loans carry an initial fixed rate
of interest for either three or five years which then converts to an interest
rate that is adjusted annually based upon the applicable index. Loan-to-value
ratios on our multi-family residential
73
loans do not exceed 75% of the appraised value of the property securing the
loan. These loans require monthly payments, amortize over a period of up to 30
years. These loans are secured by properties located in southeastern Georgia and
the Jacksonville metropolitan area . We use mortgage bankers and brokers to
originate these loans as well as through our staff. We retain some of the
multi-family loans we originate, while selling participations in others to
manage our exposure to any one borrower. We also finance the construction of
multi-family residences using similar underwriting standards.
Loans secured by multi-family residential real estate are underwritten
based on the income producing potential of the property and the financial
strength of the borrower. The net operating income, which is the income derived
from the operation of the property less all operating expenses, must be
sufficient to cover the payments related to the outstanding debt. We may require
an assignment of rents or leases in order to be assured that the cash flow from
the project will be used to repay the debt. Appraisals on properties securing
multi-family residential loans are performed by independent state licensed fee
appraisers approved by the board of directors. See "- Loan Originations,
Purchases, Sales and Repayments."
We also make multi-family construction loans. At December 31, 2003 $3.8
million of our multi-family loan portfolio consisted of construction loans.
These loans are made under the same general guidelines as permanent multi-family
loans.
Loans secured by multi-family residential properties are generally
larger and involve a greater degree of credit risk than one- to four-family
residential mortgage loans. Because payments on loans secured by multi-family
residential properties are often dependent on the successful operation or
management of the properties, repayment of such loans may be subject to adverse
conditions in the real estate market or the economy. If the cash flow from the
project is reduced, or if leases are not obtained or renewed, the borrower's
ability to repay the loan may be impaired. See "- Asset Quality - Non-Performing
Assets."
HOME-EQUITY LENDING. We currently originate both fixed amount and home
equity lines of credit. At December 31, 2003, our portfolio totaled $38.8
million or 8.8%, of our gross loan portfolio. We generally underwrite our one-
to four-family home equity loans based on the applicant's employment and credit
history and the appraised value of the subject property. Presently, we lend up
to 80% of the lesser of the appraised value less any prior liens. Properties
securing our one- to four-family loans are generally appraised by independent
fee appraisers approved by the board of directors. We require our borrowers to
obtain title and hazard insurance, and flood insurance, if necessary, in an
amount not less than the value of the property improvements.
Our home equity lines of credit carry an adjustable interest rate based
upon the prime rate of interest. All home equity loans have a maximum draw
period of 10 years with a repayment period of 10 years following such draw
period. We currently retain these loans in our portfolio.
74
See "- Originations, Purchases, Sales and Repayments." See "- Asset
Quality - Non-Performing Assets" and "- Classified Assets."
COMMERCIAL REAL ESTATE LENDING. We offer commercial real estate loans
for both permanent financing and construction. These loans are typically secured
primarily by small retail establishments, rental properties, storage facilities
and small office buildings located in our primary market area. At December 31,
2003, permanent commercial real estate loans totaled $56.2 million, or 12.7%, of
our gross loan portfolio and commercial construction loans totaled $14.9 million
or 3.4% of our gross loan portfolio. We generally originate commercial
construction loans to finance the construction of retail stores, fast food
outlets and small office buildings. Our largest commercial real estate loan at
December 31, 2003, was a $4.8 million loan secured by the real estate.
We originate both fixed rate and adjustable-rate commercial real estate
loans. The interest rate on adjustable rate loans is tied to a variety of
indices, including a rate based on the constant maturity of one year U.S.
Treasury securities. A majority of our adjustable-rate loans carry an initial
fixed rate of interest for either three or five years which then converts an
interest rate that is adjusted annually based upon the index. Loan-to-value
ratios on our commercial real estate loans do not exceed 75% of the appraised
value of the property securing the loan. These loans require monthly payments,
amortize up to 30 years, have maturities of up to 10 years and carry pre-payment
penalties.
Loans secured by commercial real estate are underwritten based on the
income producing potential of the property, the financial strength of the
borrower and any guarantors. The net operating income, which is the income
derived from the operation of the property less all operating expenses, must be
sufficient to cover the payments related to the outstanding debt. We may require
an assignment of rents or leases in order to be assured that the cash flow from
the project will be used to repay the debt. Appraisals on properties securing
commercial real estate loans are performed by independent state licensed fee
appraisers approved by the board of directors. All the properties securing our
commercial real estate loans are located in our market area. See "- Loan
Originations, Purchases, Sales and Repayments."
Loans secured by commercial real estate properties are generally larger
and involve a greater degree of credit risk than one- to four-family residential
mortgage loans. Because payments on loans secured by commercial real estate
properties are often dependent on the successful operation or management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or the economy. If the cash flow from the project is reduced,
or if leases are not obtained or renewed, the borrower's ability to repay the
loan may be impaired. See "- Asset Quality - Non-Performing Loans."
CONSUMER LOANS. We currently offer a variety of consumer loans. Consumer
loans generally have shorter terms to maturity, which reduces our exposure to
changes in interest rates, and carry higher rates of interest than do one- to
four-family residential mortgage loans. At December 31, 2003, our consumer loan
portfolio, exclusive of automobile loans, totaled $31.2
75
million, or 7.1%, of our gross loan portfolio. In recent years, our consumer
loans, as a percentage of our loan portfolio, has continued to decrease as we
have emphasized our real estate loan products.
The most significant component of our consumer lending is automobile
loans. We originate automobile loans only on a direct basis with the borrower.
Loans secured by automobiles totaled $36.6 million at December 31, 2003, or
8.3%, of our gross loan portfolio at December 31, 2003. Automobile loans may be
written for up to seven years for new automobiles and a maximum of five years
for used automobiles and have fixed rates of interest. Loan to value ratios for
automobile loans are up to 100% of the sales price for new automobiles and up to
100% of value on used cars, based on valuation from official used car guides.
Consumer loans may entail greater risk than do one- to four-family
residential mortgage loans, particularly in the case of consumer loans which are
secured by rapidly depreciable assets, such as automobiles. In these cases, any
repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance. As a result, consumer loan
collections are dependent on the borrower's continuing financial stability and,
thus, are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. See "Risk Factors - Our loan portfolio possesses increased
risk due to our substantial number of multi-family, commercial real estate and
consumer loans, which could increase the level of our provision for loan
losses."
LOAN ORIGINATIONS, PURCHASES, SALES AND REPAYMENTS
We originate loans through our branch network, the internet and our call
center. Referrals from our current customer base, advertisements, real estate
brokers, mortgage loan brokers and builders are also important sources of loan
originations. While we originate both adjustable-rate and fixed-rate loans, our
ability to originate loans is dependent upon customer demand for loans in our
market area. Demand is affected by local competition and the interest rate
environment. We also purchase real estate whole loans as well as participation
interests in real estate loans for interest rate risk management and portfolio
diversification. In addition, we sell participation interests in some of our
larger real estate loans.
76
The following table shows the loan origination, purchase, sale and repayment
activities of Atlantic Coast Federal for the periods indicated, and includes
loans originated for both our own portfolio and for sale of participating
interests. The noted activity includes loans held for sale and loans receivable,
net.
Year Ended December 31,
-------------------------------------------
2003 2002 2001
------------ ----------- -------------
(In Thousands)
ORIGINATIONS BY TYPE:
Fixed rate:
Real estate - one- to four-family................... $63,726 $35,336 $14,802
- multi-family.......................... 2,165 -- --
- commercial............................ 25,850 -- 307
- construction (one-to four-family)..... 16,712 6,481 228
- construction (multi-family)........... -- -- --
- construction (commercial)............. 10,827 -- --
Other - consumer 23,380 26,604 26,888
- home equity 2,799 6,830 4,169
- commercial 2,563 2,303 16,093
------------ ----------- -------------
Total fixed-rate 148,022 77,554 62,487
Adjustable-rate:
Real estate - one- to four-family 47,923 24,837 28,885
- multi-family........................ -- 9,144 932
- commercial.......................... 903 13,322 1,256
- construction (one-to four-family)... -- -- --
- construction (multi-family)......... -- 12,385 --
- construction (commercial)........... -- 10,045 --
Other - consumer 5,025 1,171 145
- home equity 15,689 1,879 5,956
- commercial 183 4,059 870
------------ ----------- -------------
Total adjustable-rate 69,723 76,842 38,044
------------ ----------- -------------
Total loans originated 217,745 154,396 100,531
PURCHASES:
Real estate - one- to four-family 34,680 14,121 12,685
- multi-family.......................... -- -- 987
- commercial............................ -- -- --
- construction (one-to four-family)..... -- -- --
- construction (multi-family)........... -- -- --
- construction (commercial)............. -- -- 14,156
Other - consumer -- -- 8,849
- home equity -- 1,702 --
- commercial -- -- --
------------ ----------- -------------
Total loans purchased 34,680 15,823 36,677
SALES AND REPAYMENTS:
Sales and loan participations sold 32,086 12,904 4,529
Principal repayments 165,347 109,236 85,282
------------ ----------- -------------
Total reductions 197,433 122,140 89,811
Increase (decrease) in other items, net -- -- --
------------ ----------- -------------
Net increase (decrease) $54,992 $48,079 $47,397
============ =========== =============
77
ASSET QUALITY
When a borrower fails to make a timely payment on a loan, a contract by
telephone is made, in an attempt to cure the delinquency. When the loan is 10
days past due in the case of a commercial or consumer loan, or 15 days for other
loans past due, we mail a subsequent delinquency notice to the borrower. Once a
loan is 30 days past due, our staff contacts the borrower by telephone to
determine the reason for delinquency and to request payment of the delinquent
amount in full or the establishment of an acceptable repayment plan to bring the
loan current. If the borrower is unable to make or keep payment arrangements,
additional collection action is taken in the form of repossession of collateral
for secured loans and small claims or legal action for unsecured loans.
If an acceptable repayment plan has not been agreed upon, loan personnel
will generally prepare a notice of intent to foreclose. The notice of intent to
foreclose allows the borrower up to 10 days to bring the account current. Once
the loan becomes 60 days delinquent, and an acceptable repayment plan has not
been agreed upon, the servicing officer will turn over the account to the deed
of trust trustee with instructions to initiate foreclosure action.
Real estate loans serviced by a third party are subject to the servicing
institution's collection policies. However, we track each purchased loan
individually to ensure full payments are received as scheduled. Each month,
third party servicers are required to provide delinquent loan status reports to
our servicing officer, which are included in the month-end delinquent real
estate report to management. Contractually, third party servicers are required
to adhere to collection policies no less stringent than our policies.
DELINQUENT LOANS. The following table sets forth our loans delinquent 60
to 89 days and over 89 days past due by type, number, amount and percentage of
type at December 31, 2003.
Loans Delinquent For:
--------------------------------------------------------- Total
60-89 Days 90 Days or More Delinquent Loans
------------------------- ---------------------------- -------------------------
Principal Principal Principal
Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
One- to four-family.............. 7 $593 7 $ 465 14 $1,058
Multi-family..................... -- -- -- -- -- --
Commercial....................... -- -- -- -- -- --
Construction-one-to four-family.. -- -- -- -- -- --
Construction-multi-family........ -- -- -- -- -- --
Construction-commercial.......... -- -- -- -- -- --
Other:
Consumer......................... 52 296 51 1,266 103 1,562
Home equity...................... -- -- -- -- -- --
Commercial....................... -- -- 90 1,348 90 1,348
-------- -------- -------- -------- -------- --------
Total............................ 59 $889 148 $3,079 207 $3,968
======== ======== ======== ======== ======== ========
Delinquent loans to
total gross loans.............. 0.20% -- 0.70% 0.90%
78
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of non-performing assets in our loan portfolio. Non-performing assets
consist of non-accrual loans, accruing loans past due 90 days and more and
foreclosed assets. Loans to a customer whose financial condition has
deteriorated are considered for non-accrual status whether or not the loan is 90
days and over past due. Generally, all loans past due 90 days and over are
classified as non-accrual. On non-accrual loans, interest income is not
recognized until actually collected. At the time the loan is placed on
non-accrual status, interest previously accrued but not collected is reversed
and charged against current income. At December 31, 2003 we had no loans
delinquent more than 90 days that were accruing interest.
Foreclosed assets consist of real estate and other assets which have
been acquired through foreclosure on loans. At the time of foreclosure, assets
are recorded at the lower of their estimated fair value less selling costs or
the loan balance, with any write-down charged against the allowance for loan
losses. At all dates presented, we had no troubled debt restructurings which
involve forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates.
------------------------------------------------------------------
At December 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999
(Dollars in Thousands)
NONACCRUAL LOANS:
One- to four-family real estate..................... $ 465 $ 365 $ 54 $ 133 $ 232
Multi-family real estate............................ -- -- -- -- --
Commercial real estate.............................. 5,670 -- -- -- --
Construction-one-to four-family..................... -- -- 153 -- --
Construction-multi-family........................... -- -- -- -- --
Construction-commercial............................. -- -- -- -- --
Consumer ........................................... 1,267 2,532 984 796 1,105
Home equity......................................... -- -- 5 -- 51
Commercial.......................................... 165 -- -- -- --
----------- ---------- --------- ----------- ---------
Total............................................... 7,567 2,897 1,196 929 1,388
79
------------------------------------------------------------------
At December 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999
(Dollars in Thousands)
Accruing delinquent more than 90 days:
One- to four-family real estate..................... -- -- -- -- --
Multi-family real estate............................ -- -- -- -- --
Commercial real estate.............................. -- -- -- -- --
Construction-one-to four-family..................... -- -- -- -- --
Construction-multi-family........................... -- -- -- -- --
Construction-commercial............................. -- -- -- -- --
Consumer ........................................... -- -- -- -- --
Home equity......................................... -- -- -- -- --
Commercial.......................................... -- -- -- -- --
----------- ---------- --------- ----------- ---------
Total............................................... -- -- -- -- --
Total non-performing loans.......................... 7,567 2,897 1,196 929 1,388
Foreclosed assets................................... 1,079 1,141 475 211 239
----------- ---------- --------- ----------- ---------
Total non-performing assets......................... $8,646 $4,038 $1,671 $1,140 $1,627
=========== ========== ========= =========== =========
Non-performing loans to total loans................. 1.71% 0.75% 0.35% 0.32% 0.51%
Non-performing assets to total assets............... 1.73% 0.90% 0.44% 0.34% 0.52%
CLASSIFIED ASSETS. Regulations provide for the classification of loans
and other assets, such as debt and equity securities considered by regulators to
be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management and approved by the board of directors.
General allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. When an insured institution classifies problem assets as "loss," it is
required either to establish a specific allowance for losses equal to 100% of
that portion of the asset so classified or to charge off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the Office of Thrift
Supervision and the FDIC, which may order the establishment of additional
general or specific loss allowances.
In connection with the filing of our periodic reports with the Office of
Thrift Supervision and in accordance with our classification of assets policy,
we regularly review the problem assets in our portfolio to determine whether any
assets require classification in accordance with applicable regulations. The
total amount of classified assets represented 46.1% of our equity capital and
4.0% of our total assets at December 31, 2003.
80
The aggregate amount of our classified loans at the dates indicated
were as follows:
At December 31,
-------------------------------------------
2003 2002
------------------- --------------------
(In Thousands)
Loss $ -- $ --
Doubtful................ 403 1,822
Substandard............. 13,884 830
Special Mention ........ 5,656 --
------------------- --------------------
Total................... $19,943 $2,652
=================== ====================
At year end $11.4 million of our classified loans were impaired loans.
As defined in Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan."
ALLOWANCE FOR LOAN LOSSES. We maintain an allowance for loan losses to
reflect probable incurred losses in the loan portfolio. The allowance is based
on ongoing, quarterly assessments of the estimated losses inherent in the loan
portfolio. Our methodology for assessing the appropriateness of the allowance
consists of several key elements, which include loss ratio analysis by type of
loan and specific allowances for identified problem loans. The allowance
incorporates the results of measuring impaired loans as provided in Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures." These accounting standards
prescribe the measurement methods, income recognition and disclosures related to
impaired loans.
The formula allowance is calculated by applying loss factors to
outstanding loans based on the internal risk evaluation of the loans or pools of
loans. Changes in risk evaluations of both performing and nonperforming loans
affect the amount of the formula allowance. Loss factors are based both on our
historical loss experience as well as on significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date.
The appropriateness of the allowance is reviewed and established by
management based upon its evaluation of then-existing economic and business
conditions affecting our key lending areas and other conditions, such as credit
quality trends (including trends in nonperforming loans expected to result from
existing conditions), collateral values, loan volumes and concentrations,
specific industry conditions within portfolio segments and recent loss
experience in particular segments of the portfolio that existed as of the
balance sheet date and the impact that such conditions were believed to have had
on the collectibility of the loan. Senior management reviews these conditions
quarterly in discussions with our senior credit officers. To the extent that any
of these conditions is evidenced by a specifically identifiable problem credit
or portfolio segment as of the evaluation date, management's estimate of the
effect of such condition may be reflected as a specific allowance applicable to
such credit or portfolio segment. Where any of these conditions is not evidenced
by a specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's evaluation of the loss related to this condition
is reflected in the general allowance.
Management also evaluates the allowance for loan losses based on a
review of individual loans, historical loan loss experience, the value and
adequacy of collateral,
81
and economic conditions in our market area. This evaluation is inherently
subjective as it requires material estimates, including the amounts and timing
of future cash flows expected to be received on impaired loans that may be
susceptible to significant change. For all specifically reviewed loans for which
it is probable that Atlantic Coast Federal will be unable to collect all amounts
due according to the terms of the loan agreement, Atlantic Coast Federal
determines impairment by computing a fair value either based on discounted cash
flows using the loan's initial interest rate or the fair value of the collateral
if the loan is collateral dependent. Large groups of smaller balance homogenous
loans that are collectively evaluated for impairment and are excluded from
specific impairment evaluation, and their allowance for loan losses is
calculated in accordance with the allowance for loan losses policy described
above.
Because the allowance for loan losses is based on estimates of probable
incurred losses in the loan portfolio, actual losses can vary significantly from
the estimated amounts. Our methodology as described permits adjustments to any
loss factor used in the computation of the formula allowance in the event that,
in management's judgment, significant factors which affect the collectibility of
the portfolio as of the evaluation date are not reflected in the loss factors.
By assessing the estimated losses in the loan portfolio on a quarterly basis, we
are able to adjust specific and general loss estimates based upon any more
recent information that has become available. In addition, management's
determination as to the amount of our allowance for loan losses is subject to
review by the Office of Thrift Supervision and the FDIC, which may require the
establishment of additional general or specific allowances based upon their
judgment of the information available to them at the time of their examination
of Atlantic Coast Federal.
At December 31, 2003, our allowance for loan losses was $6.6 million or
1.5% of the total loan portfolio and 87.1% of total non-performing loans.
Assessing the adequacy of the allowance for loan losses is inherently subjective
as it requires making material estimates, including the amount and timing of
future cash flows expected to be received on impaired loans, that may be
susceptible to significant change. In the opinion of management, the allowance,
when taken as a whole, is adequate to absorb probable incurred loan losses in
our loan portfolios.
82
The following table sets forth an analysis of our allowance for loan losses.
Year Ended December 31
-----------------------------------------------------------------------------
2003 2002 2001 2000 1999
-----------------------------------------------------------------------------
(Dollars in Thousands)
Balance at beginning of period................. $4,692 $3,766 $3,642 $4,306 $3,660
CHARGE-OFFS:
One-to four-family......................... 300 500 38 28 14
Multi-family............................... -- -- -- -- --
Construction-commercial.................... -- -- -- -- --
Construction-one-to-four-family............ -- -- -- -- --
Construction multi-family.................. -- -- -- -- --
Construction-commercial.................... -- -- -- -- --
Consumer .................................. 2,923 3,003 2,772 2,965 2,916
Home Equity................................ 25 -- -- -- --
Commercial................................. -- -- -- -- --
------- ------ ----- ----- ------
Total charge-offs....................... 3,248 3,503 2,810 2,993 2,930
Recoveries:
One-to four-family......................... 86 1 3 13 18
Multi-family............................... -- -- -- - -
Construction-commercial.................... -- -- -- - -
Construction-one-to-four-family............ -- -- -- -- --
Construction multi-family.................. -- -- -- -- --
Construction-commercial.................... -- -- -- -- --
Consumer................................... 823 745 850 616 595
Home Equity................................ 2 -- -- --
Commercial................................. -- -- -- -- --
------- ------- ------ ------ --------
Total recoveries..................... 911 746 853 629 613
Net charge-offs................................ 2,337 2,757 1,957 2,364 2,317
Provision for loan losses..................... 4,238 4,682 2,081 1,700 2,963
-------- -------- ---------- ---------- ----- -----
Balance at end of period....................... $6,593 $3,683 $3,766 $ 3,642 $4,306
====== ====== ====== ========= ======
Net charge-offs to average loans during
this period (1) (2)........................... 0.57% 0.76% 0.65% 0.84% 0.90%
Net charge-offs to average non-
performing loans during this period(2)....... 30.88% 95.17% 163.63% 254.47% 166.93%
Allowance for loan losses to non-
performing loans............................. 87.13% 161.96% 314.88% 392.03% 310.23%
Allowance as a % of total loans
(end of period)(1)........................... 1.49% 1.22% 1.12% 1.25% 1.59%
- ------------------------------------------------------------------
(1) Total loans are net of deferred fees and costs
83
84
The distribution of the allowance for loan losses on loans at the dates indicated is
summarized as follows.
-----------------------------------------------------------------------------
2003 2002
-----------------------------------------------------------------------------
Loan Percent of Loan Percent of
Amounts of Amount Loans in Each Amounts of Amount Loans in Each
Loan Loss by Category to Loan Loss by Category to
Allowance Category Total loans Allowance Category Total loans
------------ ---------- ------------- ------------ ---------- ---------------
One-to four-family..... $ 281 $237,946 53.90% $ 55 $178,092 46.30%
Multi-family........... 26 7,839 1.77 15 8,727 2.27
Commercial ............ 3,622 56,173 12.71 389 36,752 9.55
Construction-one-to-
four-family............ -- 11,913 2.69 -- 7,552 1.96
Construction-
multi-family............ 250 3,802 0.86 53 3,078 0.80
Construction-commercial. 799 14,861 3.36 198 19,897 5.17
Consumer................ 1,478 67,728 15.34 3,309 92,634 24.08
Home equity............. 45 38,782 8.78 512 32,722 8.51
Commercial.............. 9090 2,609 0.59 161 5,247 1.36
Unallocated............. 2 -- -- -- -- --
------------ ---------- ------------- ------------ ---------- ---------------
Total................... $6,593 $441,653 100.00% $4,692 $384,701 100.00%
====== ======== ====== ====== ======== ======
(Continued)
-----------------------------------------------------------------------------
2001 2000
-----------------------------------------------------------------------------
Loan Percent of Loan Percent of
Amounts of Amount Loans in Each Amounts of Amount Loans in Each
Loan Loss by Category to Loan Loss by Category to
Allowance Category Total loans Allowance Category Total loans
------------ ---------- ------------- ------------ ---------- ---------------
One-to four-family..... $ 35 $150,636 44.65% $ 77 $122,456 41.97%
Multi-family........... 21 4,137 1.22 -- -- --
Commercial ............ 135 14,558 4.31 5 1,270 0.44
Construction-one-to-
four-family............ -- 10,457 3.09 -- -- --
Construction-
multi-family............ 171 3,600 1.06 -- -- --
Construction-commercial. 39 3,932 1.16 -- 343 0.12
Consumer................ 3,220 118,328 35.04 3,524 139,475 47.82
Home equity............. 21 30,793 9.12 16 27,092 9.29
Commercial.............. 39 1,185 0.35 20 1,036 0.36
Unallocated............. 85 -- -- -- -- 38
------------ ---------- ------------- ------------ ---------- ---------------
Total................... $3,766 $337,626 100.00% $3,642 291,672 100.00%
====== ======== ====== ====== ======= ======
(Continued)
-------------------------------------
1999
-------------------------------------
Loan Percent of
Amounts of Amount Loans in Each
Loan Loss by Category to
Allowance Category Total loans
------------ ---------- -------------
One-to four-family..... $ 13 $100,417 37.06%
Multi-family........... -- -- --
Commercial ............ -- --
Construction-one-to-
four-family............ -- -- --
Construction-
multi-family............ -- -- --
Construction-commercial. -- -- --
Consumer................ 4,271 145,298 $ 53.63
Home equity............. 12 25,188 9.30
Commercial.............. 10 38 0.01
Unallocated............. -- -- --
------------ ---------- -------------
Total................... $4,306 $270,941 100.00%
====== ======== ======
85
INVESTMENT ACTIVITIES
GENERAL. We are required by federal regulations to maintain an amount of
liquid assets, such as cash and short-term securities, for the purposes of
meeting our operational needs. We are also permitted to make certain other
securities investments. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Commitments." Cash flow
projections are regularly reviewed and updated to assure that adequate liquidity
is provided.
We are authorized to invest in various types of liquid assets, including
U.S. Treasury obligations, securities of various federal agencies, certain
certificates of deposit of insured banks and savings institutions, certain
bankers' acceptances, repurchase agreements and federal funds. Subject to
various restrictions, federal savings associations may also invest their assets
in investment grade commercial paper and corporate debt securities and mutual
funds whose assets conform to the investments that a federally chartered savings
association is otherwise authorized to make directly. See "How We Are Regulated
- - Atlantic Coast Federal" for a discussion of additional restrictions on our
investment activities.
Under the direction and guidance of the Investment/Asset and Liability
Management Committee and board policy, our president has the basic
responsibility for the management of our investment portfolio. Various factors
are considered when making decisions, including the marketability, maturity and
tax consequences of the proposed investment. The maturity structure of
investments will be affected by various market conditions, including the current
and anticipated short and long term interest rates, the level of interest rates,
the trend of new deposit inflows, and the anticipated demand for funds via
deposit withdrawals and loan originations and purchases.
The current structure of our investment portfolio provides liquidity
when loan demand is high, assists in maintaining earnings when loan demand is
low and maximizes earnings while satisfactorily managing risk, including credit
risk, reinvestment risk, liquidity risk and interest rate risk. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset and Liability Management and Market Risk."
INVESTMENT SECURITIES. We invest in investment securities , for example
United States government and agency securities and state and municipal
obligations, as part of our asset liability management strategy. All such
securities are classified as available for sale.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments be categorized as "held to maturity,"
"trading securities" or "available
86
for sale," based on management's intent as to the ultimate disposition of each
security. SFAS No. 115 allows debt securities to be classified as "held to
maturity" and reported in financial statements at amortized cost only if the
reporting entity has the positive intent and ability to hold those securities to
maturity.
87
The following table sets forth the composition of our securities portfolio at the dates indicated.
At December 31,
------------------------------------------------------------------------------------
2003 2002 2001
-------------------------- -------------------------- --------------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
------------- ----------- ------------- ----------- ------------- -----------
(Dollars in Thousands)
SECURITIES AVAILABLE FOR SALE:
U.S. government and federal agencies.... $7,473 28.70% $7,968 27.86% $5,008 36.64%
State and municipal..................... 15,201 58.38 5,139 17.97 1,750 12.80
Mortgage-backed securities.............. 1,312 5.04 2,486 8.69 3,913 28.62
Mutual funds............................ 2,053 7.88 13,006 45.48 2,999 21.94
------------- ----------- ------------- ----------- ------------- -----------
Total................................. $26,039 100.00% $28,599 100.00% $13,670 100.00%
============= =========== ============= =========== ============= ===========
OTHER EARNING ASSETS:
Interest-earning deposits with banks.... $2,304 39.15 $7,240 67.79 $3,388 56.88
Federal funds sold...................... -- -- -- -- -- --
Federal Home Loan Bank stock............ 3,082 52.36 2,305 21.58 1,729 29.02
Other investments....................... 500 8.49 1,135 10.63 840 14.10
------------- ----------- ------------- ----------- ------------- -----------
Total................................. $5,886 100.00% $10,680 100.00% $5,957 100.00%
============= =========== ============= =========== ============= ===========
88
The composition and maturities of the debt securities portfolio, as of December 31, 2003, are as follows:
AT DECEMBER 31, 2003
------------------------------------------------------------------------------------------
LESS THAN 1 1 TO 5 5 TO 10 OVER 10
YEAR YEARS YEARS YEARS TOTAL SECURITIES
----------- ----------- ----------- ----------- --------------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR VALUE
COST COST COST COST COST
------------------------------------------------------------------------------------------
(Dollars in Thousands)
U.S. Government and agency $ -- $7,500 $ -- $ -- $ 7,500 $ 7,473
State and municipal 2,052 13,094 -- -- 15,146 15,201
Mortgage-backed securities 82 -- -- 1,233 1,315 1,312
----------- ----------- ----------- ----------- ---------- ----------
Total investment securities $ 2,134 $20,594 -- $1,233 $23,961 $23,986
=========== =========== =========== =========== ========== ==========
Weighted average yield.... 4.38% 2.26% --% 3.89% 2.53% 2.53%
89
SOURCES OF FUNDS
GENERAL. Our sources of funds are deposits, payment of principal and
interest on loans, interest earned on or maturation of other investment
securities, borrowings, and funds provided from operations.
DEPOSITS. We offer a variety of deposit accounts to consumers with a
wide range of interest rates and terms. Our deposits consist of time deposit
accounts, savings, money market and demand deposit accounts. We have
historically paid attractive rates on our deposit accounts. We primarily rely on
premium pricing policies, marketing and customer service to attract and retain
these deposits.
The variety of deposit accounts we offer has allowed us to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. We have become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. We try to
manage the pricing of our deposits in keeping with our asset/liability
management, liquidity and profitability objectives, subject to competitive
factors. Based on our experience, we believe that our deposits are relatively
stable sources of funds. Despite this stability, our ability to attract and
maintain these deposits and the rates paid on them has been and will continue to
be significantly affected by market conditions.
90
The following table sets forth our deposit flows during the periods indicated.
Years Ended December 31,
----------------------------------------------------------
2003 2002 2001
--------------- ------------------ ---------------
(Dollars in Thousands)
Opening balance................... $ 360,880 $ 305,541 $ 274,513
Deposits(1)....................... 1,478,061 1,554,338 992,572
Withdrawals....................... 1,456,205 1,509,943 974,875
Interest credited................. 9,520 10,944 13,331
--------------- ------------------ ---------------
Ending balance.................... 392,256 360,880 305,541
=============== ================== ===============
Net increase...................... $ 31,376 $ 55,339 $ 31,028
=============== ================== ===============
Percent increase ................... 8.69% 18.11% 11.30%
=============== ================== ===============
(1) Net increase in deposits includes deposits acquired in branch acquisitions of $16.2 million in
2003 and $20.1 million in 2002.
The following table sets forth the dollar amount of deposits by types of products we offered at the dates indicated.
At December 31,
---------------------------------------------------------------------------------------
2003 2002 2001
---------------------------- -------------------------- --------------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
TRANSACTION AND SAVINGS DEPOSITS:
Demand accounts $ 42,135 10.74% $ 36,792 10.20% $ 28,750 9.41%
Savings accounts 77,358 19.72 75,422 20.90 69,259 22.66
Money market accounts 60,275 15.37 39,559 10.96 42,054 13.76
------------ ------------ ----------- ----------- ----------- -----------
Total non-certificates 179,768 45.83 151,773 42.06 140,063 45.83
------------ ------------ ----------- ----------- ----------- -----------
CERTIFICATES
0.00% - 1.99% 45,894 11.70 3,695 1.02 - -
2.00% - 2.99% 58,646 14.95 28,165 7.80 2,841 0.93
3.00% - 3.99% 60,143 15.33 110,147 30.52 17,066 5.59
4.00% - 4.99% 32,357 8.25 31,761 8.80 26,615 8.71
5.00% - 5.99% 3,763 0.96 7,384 2.05 24,409 7.99
6.00% - 6.99% 8,614 2.20 18,149 5.03 42,339 13.86
7.00% - + 3,071 0.78 9,806 2.72 52,208 17.09
------------ ------------ ----------- ----------- ----------- -----------
Total certificates 212,488 54.17 209,107 57.94 165,478 54.17
------------ ------------ ----------- ----------- ----------- -----------
Total deposits $392,256 100.00% $360,880 100.00% $305,541 100.00%
============ ============ =========== =========== =========== ===========
91
The following table indicates the amount of Atlantic Coast Federal's certificates of deposit by time remaining until
maturity as of December 31, 2003.
Less than 1
Year 1 to 2 Years 2 to 3 Years 3 to 4 Years 4 to 6 years Thereafter Total
-------------- --------------- ------------- ------------- ------------ ---------- -----------
(In Thousands)
0.00% - 1.99%......... $ 44,981 $ 435 $ 8 $ 245 $ 225 $ -- $ 45,894
2.00% - 2.99%......... 45,180 11,046 2,420 -- -- -- 58,646
3.00% - 3.99%......... 31,620 12,236 10,007 851 5,429 -- 60,143
4.00% - 4.99%......... 16,959 6,554 1,647 5,414 1,783 -- 32,357
5.00% - 5.99%......... 2,624 322 415 402 -- -- 3,763
6.00% - 6.99%......... 3,645 3,020 1,947 2 -- -- 8,614
7.00% +............... 2,237 825 -- 9 -- -- 3,071
-------------- --------------- ------------- ------------- ------------ ---------- -----------
Total................. $147,246 $34,438 $16,444 $6,923 $7,437 $ -- $212,488
============== =============== ============= ============= ============ ========== ===========
$100,000 and over..... $ 36,918 $11,460 $ 4,089 $1,627 $2,394 $ -- $56,488
Below $100,000........ 110,328 22,978 12,355 5,296 5,043 -- 156,000
-------------- --------------- ------------- ------------- ------------ ---------- -----------
Total................. $147,246 $34,438 $16,444 $6,923 $7,437 $ -- $212,488
============== =============== ============= ============= ============ ========== ===========
BORROWINGS. Although deposits are our primary source of funds, we may
utilize borrowings when they are a less costly source of funds, and can be
invested at a positive interest rate spread, when we desire additional capacity
to purchase loans or to fund loan demand or when they meet our asset/liability
management goals. Our borrowings historically have consisted of advances from
the Federal Home Loan Bank of Atlanta. See Note 8 of the Notes to Consolidated
Financial Statements.
We may obtain advances from the Federal Home Loan Bank of Atlanta upon
the security of our mortgage loans and mortgage-backed securities. These
advances may be made pursuant to several different credit programs, each of
which has its own interest rate, range of maturities and call features. At
December 31, 2003, we had $61.0 million in Federal Home Loan Bank advances
outstanding.
92
The following table sets forth information as to our Federal Home Loan
Bank advances for the periods indicated.
Years Ended December 31,
---------------------------------------------
2003 2002 2001
----------- -------------- -------------
(In Thousands)
---------------------------------------------
Average balance outstanding................................ $47,102 $41,199 $32,918
Maximum month-end balance.................................. $61,629 $46,100 $34,271
Balance at end of period................................... $60,971 $45,443 $32,757
Weighted average interest rate during the period........... 4.80% 5.07% 5.74%
Weighted average interest rate at end of period 4.27% 4.91% 5.63%
SUBSIDIARY AND OTHER ACTIVITIES
At December 31, 2003 Atlantic Coast Federal Corporation did not have any
subsidiaries other than Atlantic Coast Federal and First Community Financial
Services, Inc., an inactive wholly-owned subsidiary of Atlantic Coast Federal.
The activities of First Community Financial Services were consolidated into
Atlantic Coast Federal in the fourth quarter of 2003.
COMPETITION
We face strong competition in originating real estate and other loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from other savings institutions, commercial banks, credit unions and
mortgage bankers. Other savings institutions, commercial banks, credit unions
and finance companies provide vigorous competition in consumer lending. We also
face competition from other lenders and investors with respect to loans that we
purchase.
We attract all of our deposits through our branch and ATM network.
Competition for those deposits is principally from other savings institutions,
commercial banks and credit unions, as well as mutual funds and other
alternative investments. We compete for these deposits by offering superior
service and a variety of deposit accounts at competitive rates. As of December
31, 2003, we believe that we hold less than 1% of the deposits in our primary
market areas.
EMPLOYEES
At December 31, 2003, we had a total of 175 employees, including 16
part-time employees. Our employees are not represented by any collective
bargaining group.
PROPERTIES
At December 31, 2003, we had 12 full service offices and one drive-up
facility. We both own and lease the space in which our home office, executive
offices and branch offices are located. The net book value of our investment in
premises, equipment and fixtures, excluding computer equipment, was
approximately $9.7 million at December 31, 2003.
93
The following table provides a list of our main and branch offices.
Owned or Lease Expiration Net Book Value
Location Leased Date December 31, 2003
- ---------------------- ----------------------- ------------------------- -----------------
(In Thousands)
HOME AND EXECUTIVE OFFICE Owned -- $790.1
505 Haines Avenue
Waycross, GA 31501
BRANCH OFFICES: Owned -- 114.0
400 Haines Avenue
Waycross, GA 31501
2110 Memorial Drive Owned -- 486.0
Waycross, GA 31501
1390 South Gaskin Avenue Owned -- 536.6
Douglas, GA 31533
213 Hwy 80 West Owned -- 286.8
Garden City, GA 31408
10328 Deerwood Park Blvd. Owned -- 967.4
Jacksonville, FL 32256
8048 Normandy Blvd. Owned -- 1,143.4
Jacksonville, FL 32221
1970 Solomon Street Owned -- 172.7
Orange Park, FL 32073
463 West Duval Street Owned -- 133.9
Lake City, FL 32055
930 University Avenue, North Owned -- 756.5
Jacksonville, FL 32211
1700 South Third Street Owned -- 1,510.3
Jacksonville Beach, FL 32200
363-6 Atlantic Blvd. Leased June 2004 --
Atlantic Beach, FL 32233
715 Centre Street Owned -- 1,135.5
Fernandina Beach, FL 32034
We believe that our current facilities are adequate to meet the present
and immediately foreseeable needs of Atlantic Coast Federal and Atlantic Coast
Federal Corporation.
We use an in-house system with support provided by a third-party vendor
to maintain our data base of depositor and borrower customer information. The
net book value of our data processing and computer equipment at December 31,
2003 was approximately $877,000.
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LEGAL PROCEEDINGS
From time to time, we are involved as plaintiff or defendant in various
legal actions arising in the normal course of business. We do not anticipate
incurring any material liability as a result of this litigation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MANAGEMENT
MANAGEMENT OF ATLANTIC COAST FEDERAL CORPORATION
The board of directors of Atlantic Coast Federal Corporation consists of
the nine individuals who currently serve as directors of Atlantic Coast Federal.
The board of directors of Atlantic Coast Federal Corporation is divided into
three classes, as nearly equal as possible, with approximately one third of the
directors elected each year. The directors are elected by the stockholders of
Atlantic Coast Federal Corporation for three year terms, or until their
successors are elected and have qualified. The terms of the directors of each of
Atlantic Coast Federal Corporation and Atlantic Coast Federal are identical. As
the sole stockholder of Atlantic Coast Federal Corporation, Atlantic Coast
Federal, MHC elects the directors of Atlantic Coast Federal Corporation.
Following completion of the stock offering, the directors will be elected by
Atlantic Coast Federal, MHC and the holders of the common stock of Atlantic
Coast Federal Corporation not held by Atlantic Coast Federal, MHC. The current
board of directors has adopted an initiative to add new members to the board of
directors from the Jacksonville, Florida market in order to reflect the
geographic diversity of Atlantic Coast Federal Corporation's operations.
The following individuals are the executive officers of Atlantic Coast
Federal Corporation and hold the office set forth below opposite their name.
Executive Position Held
- --------- -------------
Robert J. Larison, Jr. President and Chief Executive Officer
Jon C. Parker, Sr. Vice President and Chief Financial Officer
Executive officers of Atlantic Coast Federal Corporation are elected
annually and hold office until their respective successors have been elected or
until death, resignation or removal by the board of directors.
Information concerning the principal occupations, employment and
compensation of the directors and executive officers of Atlantic Coast Federal
Corporation is set forth under "- Management of Atlantic Coast Federal."
Directors of Atlantic Coast Federal Corporation initially will not be
compensated by Atlantic Coast Federal Corporation but will serve and be
compensated by Atlantic Coast Federal. It is not anticipated that separate
compensation will be paid to directors of Atlantic Coast Federal Corporation
until such time as these persons devote significant time to the separate
management of Atlantic Coast Federal Corporation affairs, which is not expected
to occur until Atlantic Coast Federal Corporation becomes actively engaged in
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additional businesses other than holding the stock of Atlantic Coast Federal.
Atlantic Coast Federal Corporation may determine that such compensation is
appropriate in the future.
MANAGEMENT OF ATLANTIC COAST FEDERAL
Upon completion of the stock offering, the directors of Atlantic Coast
Federal immediately prior to the stock offering will continue to serve as
directors of Atlantic Coast Federal. The board of directors of Atlantic Coast
Federal consists of nine directors divided into three classes, with
approximately one-third of the directors elected at each annual stockholder
meeting. Because Atlantic Coast Federal Corporation will continue to own all the
issued and outstanding capital stock of Atlantic Coast Federal following the
stock offering, the board of directors of Atlantic Coast Federal Corporation
will elect the directors of Atlantic Coast Federal.
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The following table sets forth information regarding the board of
directors of Atlantic Coast Federal as of December 31, 2003.
Term of
Positions Held With Director Office
Name Age(1) Atlantic Coast Federal Since(2) Expires
------------------------------- --------- ---------------------------------------------- ------------ ------------
Charles E. Martin, Jr. 57 Director and Chairman of the 1982 2007
Board
Forrest W. Sweat, Jr. 46 Director 2001 2007
I. J. McGahee 79 Director 1969 2007
H. Dennis Woods 58 Director 1987 2006
Cyril M. Morris 80 Director 1988 2006
Robert J. Larison, Jr. 47 Director, President and CEO 2003 2006
John M. Hinson 71 Director 1990 2005
Jon C. Parker, Sr. 33 Director and Chief Financial Officer 2003 2005
Robert J. Smith 43 Director 2003 2005
- -------------------
(1) As of December 31, 2003.
(2) Includes service as a director of Atlantic Coast Federal Credit Union
with the exception of Directors Larison, Parker, Sweat and Smith.
The business experience of each director for at least the past five
years is set forth below.
CHARLES E. MARTIN, JR. Mr. Martin is a retired employee of CSX
Transportation, Inc., Waycross, Georgia where he worked as a machinist for over
20 years.
FORREST W. SWEAT, JR. Mr. Sweat is a partner in the law firm of Walker &
Sweat, Waycross, Georgia. He has practiced law since 1982.
I. J. MCGAHEE. Mr. McGahee is currently retired. He served as an
electrician with CSX Transportation, Inc., Waycross, Georgia, for over 20 years.
H. DENNIS WOODS. Mr. Woods has been employed by CSX Transportation,
Inc., Waycross, Georgia since 1964. He currently serves as the business manager
of the company's warehouse in Waycross.
CYRIL M. MORRIS. . Mr. Morris is currently retired. He worked for CSX
Transportation, Inc. in Waycross, Georgia for over 40 years.
ROBERT J. LARISON, JR. Mr. Larison has served as president and chief
executive officer of Atlantic Coast Federal and Atlantic Coast Federal Credit
Union since 1983.
JOHN M. HINSON. Mr. Hinson is currently retired. He served as an
employee of CSX Transportation, Inc. in Waycross, Georgia from 1951 to 1991.
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JON C. PARKER, JR. Mr. Parker has served as senior vice president and
chief financial officer of Atlantic Coast Federal and Atlantic Coast Federal
Credit Union since September 1999. Prior to such time he served as controller.
ROBERT J. SMITH. Mr. Smith is a mortgage banking executive with Cendant
Mortgage in Jacksonville, Florida where he has worked since April 2002. Prior to
such time, he was employed by Merrill Lynch Credit Corporation in Jacksonville,
Florida for over 10 years.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The business experience for at least the past five years for each of
five executive officers of Atlantic Coast Federal, who do not serve as
directors, is set forth below. Their service includes time with Atlantic Coast
Federal Credit Union.
DIANE S. WADE. Ms. Wade has served as senior vice president of sales and
service since July 2000. From 1998 until such time she served as vice president
for business development. She has served in various capacities with Atlantic
Coast Federal since 1978.
MARSHA A. BOYETTE. Ms. Boyette has served as senior vice president for
administration since July 2000. From 1997 until such time she served as vice
president of member services.
HERMAN T. KLINGER. Mr. Klinger has served as senior vice president for
central operations since 2000. Prior to such time he was in charge of
information technology starting in 1996.
JOANNE Q. HEINRICH. Ms. Heinrich joined Atlantic Coast Federal in
January 2003 as senior vice president of lending. From 1993 until 2001 she
served as a mortgage banking officer with Merrill Lynch Credit Corporation and
First National Bank of Nassau County, Jacksonville, Florida.
PHILLIP S. HUBACHER. Mr. Hubacher has served as treasurer of Atlantic
Coast Federal since 1988. He is a lieutenant colonel in the United States Air
Force Reserve.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors meets monthly. During the fiscal year ended
December 31, 2003, the board of directors held 12 meetings. No director attended
fewer than 75% of the total meetings of the board of directors and committees on
which the board member served during this period. Prior to our 2004 annual
meeting of shareholders we will review and alter as necessary the composition of
our board and committees thereof to assure compliance with the requirements of
the Sarbanes-Oxley Act of 2002 and the Nasdaq National Market listing
requirement.
We currently have standing Executive, Audit, Asset/Liability Management,
Nominating, Loan, Benefits, Information Systems and Compliance Committees.
The Audit Committee is comprised of Messrs. Smith, Morris and Hinson.
Mr. Smith serves as chairman. The Audit Committee meets quarterly or more
frequently as needed. The committee recommends the independent auditors and
reviews the audit report prepared by the
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independent auditors. This committee met 12 times in fiscal 2003 and oversees
the audit activities of Atlantic Coast Federal.
The Asset/Liability Management Committee is chaired by Mr. Martin and
Directors Larison and Parker serve as members. The committee meets quarterly or
more frequently as needed. The committee oversees Atlantic Coast Federal's asset
liability management. The committee reviews and monitors Atlantic Coast
Federal's investment portfolio, liquidity position and interest rate risk. This
Committee met four times in fiscal 2003.
The Loan Review Committee oversees all loan activities. The committee
approves all loans that exceed management's loan authority, periodically reviews
loans within the loan officer's loan authority and reviews all past due loans on
a monthly basis. This committee meets monthly or more frequently as needed. The
committee is comprised of Directors Sweat, McGahee, Larison and Parker with Mr.
Sweat serving as chairperson. This committee met __ times in fiscal 2003.
The Executive Committee is comprised of Directors Woods, Martin, and
Sweat with Mr. Martin serving as chairman. The committee meets equently as
needed. The committee is generally authorized to act on behalf of the full board
of directors when certain business matters require prompt action. The committee
met four times in fiscal 2003.
The Compliance Committee is comprised of Directors Smith, Morris and
Hinson, with Mr. Smith serving as chairman. The Compliance Committee oversees
Atlantic Coast Federal's compliance with state and federal laws. The committee
meets monthly or more frequently as needed.
The Benefits Committee is comprised of Directors Woods, Martin and
Sweat. This committee meets quarterly or more frequently as needed. Mr. Woods
serves as chairman. This committee oversees personnel policies, compensation
standards and employee benefits. The committee met four times in fiscal 2003.
DIRECTORS' COMPENSATION
Members of Atlantic Coast Federal's board of directors receive a fee of
$1,300 per meeting attended. Employee members do not receive board fees. The
Chairman of the Board receives a stipend of $1,500 per meeting. The directors
received a bonus of $9,600 each for fiscal 2003. Atlantic Coast Federal
established a Deferred Director Fee Plan that permits a board member to defer
some or all of his board fees. At December 31, 2003, Atlantic Coast Federal had
accrued a liability of $32,400 for this plan. The Committee members are not
separately compensated for their service.
Atlantic Coast Federal also maintains a Director Retirement Plan
providing for an annual payment of $10,000 for ten years upon retirement.
Directors are fully vested after 10 years of service with credit for previous
service at the time the plan was adopted in 2002. At December 31, 2003, Atlantic
Coast Federal had accrued a liability of $489,000 for this plan. Reduced
benefits are paid for early retirement and reduced levels of service.
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EXECUTIVE COMPENSATION
The following table sets forth a summary of information concerning the
compensation paid by Atlantic Coast Federal Corporation, including amounts
deferred to future periods by the officers, for services rendered in all
capacities during the year ended December 31, 2003 to the president and chief
executive officer of Atlantic Coast Federal. No other officer received
compensation in excess of $100,000 for the fiscal year ended December 31, 2003.
Long Term
Annual Compensation Compensation Awards
Other Restricted
Annual Stock All Other
Fiscal Compensation Award Compensation
Name and Principal Position Year Salary Bonus ($)(1) ($)(2) Options(#)(2)
--------------------------- ---- ------ ----- ------------ ---------- ------------- -------------
Robert J. Larison, Jr. 2003 $169,350 $15,000 -- -- -- $17,307
President and Chief
Executive Officer
- -------------
(1) This amount does not include personal benefits or perquisites which did
not exceed the lesser of $50,000 or 10% of the named individual's salary
and bonus.
(2) Atlantic Coast Federal does not have any stock option or restricted
stock plans. Atlantic Coast Federal Corporation does, however, intend to
adopt such plans no earlier than six months following the stock
offering. See "- Benefits - Stock Benefit Plan."
(3) Amount represents matching contribution under Atlantic Coast Federal's
401(k) Plan in the amount of $9,807, life insurance premiums in the
amount of $4,000, country club dues in the amount of $3,000 and premiums
for an annuity in the amount of $1,500.
EMPLOYMENT AGREEMENT. Atlantic Coast Federal currently has an employment
agreement with Mr. Larison with a term of two years from January 1, 2004. The
agreement provides for a base salary of $160,000 and provides for certain other
benefits in the form of life insurance and disability insurance. In the event
that Mr. Larison is terminated without cause he is entitled to a lump sum
payment equal to twice his then current annual salary. If the employment of Mr.
Larison had been terminated under the circumstances entitling him to severance
pay, he would have been entitled to receive a lump sum payment of $320,000 plus
a continuation of benefits for a period of one year following the date of
termination.
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT. Atlantic Coast Federal has
entered into a non-qualified Supplemental Executive Retirement Agreement with
President Larison that provides for the payment of a monthly supplemental
retirement benefit equal to up to 60% of his average annual compensation during
the three annual period in the 10 year period prior to retirement. Such benefit
shall be payable upon normal retirement age of 55 or, under certain
circumstances, prior to age 55. At December 31, 2003, Atlantic Coast Federal
Corporation had accrued $218,000 for this benefit.
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BENEFITS
GENERAL. We currently provide health and welfare benefits to our
employees, including hospitalization and comprehensive medical insurance, life
insurance, subject to deductibles and copayments by employees.
ATLANTIC COAST FEDERAL EXECUTIVE NON-QUALIFIED RETIREMENT PLAN. We also
maintain an executive supplemental retirement plan for certain senior executives
that have been designated to participate in the program. The program provides
for annual payments of $20,000 for 20 years following normal retirement at age
65 and with 10 years of service. Reduced benefits are paid for early retirement
and for lesser years of service. At December 31, 2003 Atlantic Coast Federal
Corporation had accrued $100,000 for this benefit.
401(k) Plan. We provide our employees a qualified profit sharing plan
under the applicable provisions of the Internal Revenue Code of 1986.
Employees who are age 21 or older are eligible to begin making salary
deferral contributions beginning in the first calendar quarter on or after they
become an employee. This is their earliest entry date. Employees are eligible to
receive contributions other than salary deferral contributions beginning in the
first calendar quarter on or after they are an employee, are age 21 or older,
and have completed one year of entry service.
Eligible employees may contribute up to 15% of their compensation each
pay period to the 401(k) Plan on a pre-tax basis, not to exceed $13,000 for the
calendar year 2004 plus another $3,000 for employees the age of 50 and over. The
maximum deferral percentage and/or dollar amount may also be limited by IRS
regulations. For eligible employees, we currently match 75% of the compensation
an employee defers each pay period. Participants in the 401(k) Plan may use the
funds to purchase the stock of Atlantic Coast Federal Corporation.
Employees are always 100% vested in the contributions they choose to
defer, whereas vesting in Atlantic Coast Federal contributions is based on years
of vesting service in which an employee works at least 1,500 hours. Vesting in
Atlantic Coast Federal contributions begins after two years of vesting service
and increases for each year of vesting service until an employee becomes fully
vested after six years of vesting service.
Employees may receive money from their vested accounts at retirement
(age 65), early retirement (age 55 and 10 years of vesting service), age 59 1/2
and still working, death, disability, or termination of employment. Employees
may obtain loans from their vested account balances or withdraw all or part of
their vested accounts (not earnings) if they can prove financial hardship and
are unable to meet their financial needs another way.
We may amend the 401(k) Plan at any time, except that no amendment may
be made which would reduce the interest of any participant in or beneficiary of
the 401(k) Plan trust fund or divert any of the assets of the 401(k) Plan trust
fund to purposes other than the benefit of participants or their beneficiaries
unless necessary to comply with any law or regulation issued by any governmental
agency to which the 401(k) Plan is subject.
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EMPLOYEE STOCK OWNERSHIP PLAN. Atlantic Coast Federal Corporation
intends to adopt a new benefit plan which consists of an employee stock
ownership plan for the employees of Atlantic Coast Federal Corporation and any
subsidiary, including Atlantic Coast Federal, to become effective upon the
completion of the stock offering. This plan is hereafter referred to as the
"ESOP." Employees of Atlantic Coast Federal Corporation and Atlantic Coast
Federal who have been credited with at least 1,000 hours of service during a
twelve month period are eligible to participate in the ESOP.
As part of the stock offering, it is anticipated that the ESOP will
borrow funds from Atlantic Coast Federal Corporation. The ESOP will use these
funds to purchase up to 8.0% of the common stock sold in the stock offering. It
is anticipated that this loan will equal 100% of the aggregate purchase price of
the common stock acquired by the ESOP. The loan to the ESOP will be repaid
principally from Atlantic Coast Federal's contributions to the ESOP over a
period of 10 years and the collateral for the loan will be the common stock
purchased by the ESOP. The interest rate for the loan is expected to be the
prime rate of interest. Atlantic Coast Federal Corporation may, in any plan
year, make additional discretionary contributions for the benefit of plan
participants in either cash or shares of common stock, which may be acquired
through the purchase of outstanding shares in the market or from individual
stockholders, upon the original issuance of additional shares by Atlantic Coast
Federal Corporation or upon the sale of treasury shares by Atlantic Coast
Federal Corporation. These purchases, if made, would be funded through
additional borrowings by the ESOP or additional contributions from Atlantic
Coast Federal Corporation. The timing and manner of future contributions to the
ESOP will be subject to laws and regulations and market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held
in a suspense account and released to participants' accounts as debt service
payments are made. Shares released from the ESOP will be allocated to each
eligible participant's ESOP account based on the ratio of each such
participant's compensation to the total compensation of all eligible
participants. Forfeitures will be reallocated among remaining participating
employees and may reduce any amount Atlantic Coast Federal Corporation might
otherwise have contributed to the ESOP. The account balances of participants
within the ESOP will become 100% vested after five years of service. In the case
of a "change in control," as defined in the ESOP, which triggers a termination
of the ESOP, participants will become immediately fully vested in their account
balances. Benefits are payable upon retirement or other separation from service.
Atlantic Coast Federal Corporation's contributions to the ESOP are not fixed, so
benefits payable under the ESOP cannot be estimated.
_______________, will serve as trustee of the ESOP. Under the ESOP, the
trustee must vote all allocated shares held in the ESOP in accordance with the
instructions of the participating employees. Unallocated shares and allocated
shares for which the employee does not provide voting instructions, will be
voted by the trustee as directed by the board of directors of Atlantic Coast
Federal Corporation.
Generally accepted accounting principles requires that any third party
borrowing by the ESOP be reflected as a liability on Atlantic Coast Federal
Corporation's statement of financial condition. Since the ESOP is borrowing from
Atlantic Coast Federal Corporation, such obligations are not treated as a
liability, but will be excluded from stockholders' equity. If the
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ESOP purchases newly issued shares from Atlantic Coast Federal Corporation,
total stockholders' equity would neither increase nor decrease, but per share
stockholders' equity and per share net earnings would decrease as the newly
issued shares are allocated to the ESOP participants.
The ESOP will be subject to the requirements of Employee Retirement and
Income Security Act, and the regulations of the IRS and the Department of Labor
thereunder.
STOCK BENEFIT PLANS. In the future, we intend to adopt a stock option
plan and a restricted stock plan for the benefit of selected directors, officers
and employees. We anticipate that the stock option plan will have reserved a
number of shares equal to not more than 10.0% of the Atlantic Coast Federal
Corporation common stock sold in the stock offering, and the restricted stock
plan will have reserved a number of shares equal to not more than 4.0% of the
Atlantic Coast Federal Corporation common stock sold in the stock offering
subject, if applicable, to regulatory limitations. Grants of stock options will
be made at a price equal to 100% of the market value on the date of grant.
Grants of common stock pursuant to the restricted stock plan will be issued
without cost to the recipient. Once a determination is made to implement a stock
option plan or restricted stock plan, it is anticipated that any such plans will
be submitted to stockholders for their consideration at which time stockholders
would be provided with detailed information regarding such plans. If such plans
are approved, and effected, they may have a dilutive effect on Atlantic Coast
Federal Corporation stockholders as well as affect Atlantic Coast Federal
Corporation's net income and stockholders' equity, although the actual results
cannot be determined until such plans are implemented.
Any such stock option plan or restricted stock plan will not be
submitted to stockholders for approval or implemented less than six months after
the date of the completion of the stock offering, subject to continuing Office
of Thrift Supervision jurisdiction. If either the stock option plan or the
restricted stock plan are implemented within one year of the consummation of the
stock offering, the granting of options and restricted stock will be subject to
regulatory restrictions, including a requirement that the awards vest equally
over a five year period. Under the plan of stock issuance we are authorized to
grant awards under one or more stock benefit plans, including the recognition
and retention plan and stock option plan, in an amount up to 25% of the number
of shares of common stock held by persons other than Atlantic Coast Federal,
MHC. The recognition and retention plan and stock option plan cannot be
implemented until at least six months after the stock offering, and if they are
adopted within twelve months after the stock offering, they will be subject to
certain Office of Thrift Supervision regulations regarding vesting and
allocation of awards. In the event that a portion of the shares used to (i) fund
the recognition and retention plan or (ii) satisfy the exercise of options from
our stock option plan, is obtained from authorized but unissued shares, the
issuance of additional shares will decrease our net income per share and
stockholders' equity per share.
LOANS AND OTHER TRANSACTIONS WITH OFFICERS AND DIRECTORS
We have a policy of granting loans to officers and directors, which
fully complies with all applicable federal regulations. Loans to directors and
executive officers are made in the ordinary course of business and on the same
terms and conditions as those of comparable transactions with unaffiliated third
parties prevailing at the time, in accordance with our underwriting
103
guidelines, and do not involve more than the normal risk of collectibility or
present other unfavorable features. In addition, all loans to directors and
executive officers are approved by at least a majority of the independent,
disinterested members of the board.
All loans we make to our directors and executive officers are subject to
regulations restricting loans and other transactions with affiliated persons of
Atlantic Coast Federal. Loans to all directors and executive officers and their
associates totaled approximately $1.3 million at December 31, 2003, which was
3.0% of our stockholders' equity at that date. All loans to directors and
executive officers were performing in accordance with their terms at December
31, 2003.
HOW WE ARE REGULATED
Set forth below is a brief description of certain laws and regulations
which are applicable to Atlantic Coast Federal Corporation and Atlantic Coast
Federal. The description of these laws and regulations, as well as descriptions
of laws and regulations contained elsewhere herein, does not purport to be
complete and is qualified in its entirety by reference to the applicable laws
and regulations. We believe, however, that we have included all descriptions of
laws and regulations applicable to Atlantic Coast Federal Corporation and
Atlantic Coast Federal that an investor needs to consider in making an
investment decision.
Legislation is introduced from time to time in the United States
Congress that may affect the operations of Atlantic Coast Federal Corporation
and Atlantic Coast Federal. In addition, the regulations governing Atlantic
Coast Federal Corporation and Atlantic Coast Federal may be amended from time to
time by the Office of Thrift Supervision. Any such legislation or regulatory
changes in the future could adversely affect Atlantic Coast Federal Corporation
or Atlantic Coast Federal. No assurance can be given as to whether or in what
form any such changes may occur.
GENERAL
Atlantic Coast Federal, as a federally-chartered savings institution, is
subject to federal regulation and oversight by the Office of Thrift Supervision
extending to all aspects of its operations. Atlantic Coast Federal also is
subject to regulation by the FDIC, which insures the deposits of Atlantic Coast
Federal to the maximum extent permitted by law, and requirements established by
the Federal Reserve Board. Federally chartered savings institutions are required
to file periodic reports with the Office of Thrift Supervision and are subject
to periodic examinations by the Office of Thrift Supervision and the FDIC. The
investment and lending authority of savings institutions are prescribed by
federal laws and regulations, and such institutions are prohibited from engaging
in any activities not permitted by such laws and regulations. Such regulation
and supervision primarily is intended for the protection of depositors and not
for the purpose of protecting stockholders. This regulatory oversight will
continue to apply to Atlantic Coast Federal following the completion of the
stock offering.
The Office of Thrift Supervision regularly examines Atlantic Coast
Federal and prepares reports for the consideration of Atlantic Coast Federal's
board of directors on any deficiencies that it may find in Atlantic Coast
Federal's operations. Atlantic Coast Federal's relationship
104
with its depositors and borrowers also is regulated to a great extent by both
federal and state laws, especially in such matters as the ownership of savings
accounts and the form and content of Atlantic Coast Federal's mortgage
requirements. Any change in such regulations, whether by the FDIC, the Office of
Thrift Supervision or Congress, could have a material adverse impact on Atlantic
Coast Federal Corporation and Atlantic Coast Federal and their operations.
ATLANTIC COAST FEDERAL CORPORATION
GENERAL. Atlantic Coast Federal Corporation is a federal mutual holding
company subsidiary within the meaning of Section 10(o) of the Home Owners' Loan
Act. It is required to file reports with the Office of Thrift Supervision and is
subject to regulation and examination by the Office of Thrift Supervision. In
addition, the Office of Thrift Supervision has enforcement authority over
Atlantic Coast Federal Corporation and any non-savings institution subsidiaries.
This permits the Office of Thrift Supervision to restrict or prohibit activities
that it determines to be a serious risk to Atlantic Coast Federal. This
regulation is intended primarily for the protection of the depositors and not
for the benefit of stockholders of Atlantic Coast Federal Corporation.
ACTIVITIES RESTRICTIONS. Atlantic Coast Federal Corporation and its
non-savings institution subsidiaries are subject to statutory and regulatory
restrictions on their business activities specified by federal regulations,
which include performing services and holding properties used by a savings
institution subsidiary, activities authorized for savings and loan holding
companies as of March 5, 1987, and non-banking activities permissible for bank
holding companies pursuant to the Bank Holding Company Act of 1956 or authorized
for financial holding companies pursuant to the Gramm-Leach-Bliley Act.
If Atlantic Coast Federal fails the qualified thrift lender test,
Atlantic Coast Federal Corporation must, within one year of that failure,
register as, and will become subject to, the restrictions applicable to bank
holding companies. See "- Qualified Thrift Lender Test."
MERGERS AND ACQUISITIONS. Atlantic Coast Federal Corporation must obtain
approval from the Office of Thrift Supervision before acquiring more than 5% of
the voting stock of another savings institution or savings and loan holding
company or acquiring such an institution or holding company by merger,
consolidation or purchase of its assets. In evaluating an application for
Atlantic Coast Federal Corporation to acquire control of a savings institution,
the Office of Thrift Supervision would consider the financial and managerial
resources and future prospects of Atlantic Coast Federal Corporation and the
target institution, the effect of the acquisition on the risk to the insurance
funds, the convenience and the needs of the community and competitive factors.
WAIVERS OF DIVIDENDS BY ATLANTIC COAST FEDERAL CORPORATION. Office of
Thrift Supervision regulations require Atlantic Coast Federal, MHC to notify the
Office of Thrift Supervision of any proposed waiver of its receipt of dividends
from Atlantic Coast Federal Corporation. The Office of Thrift Supervision
reviews dividend waiver notices on a case-by-case basis, and, in general, does
not object to any such waiver if: (i) the mutual holding company's board of
directors determines that such waiver is consistent with such directors'
fiduciary duties to the mutual holding company's members; (ii) for as long as
the savings
105
association subsidiary is controlled by the mutual holding company, the dollar
amount of dividends waived by the mutual holding company are considered as a
restriction on the retained earnings of the savings association, which
restriction, if material, is disclosed in the public financial statements of the
savings association and its stock holding company; (iii) the amount of any
dividend waived by the mutual holding company is available for declaration as a
dividend solely to the mutual holding company, in accordance with SFAS No. 5,
where the savings association determines that the payment of such dividend to
the mutual holding company is probable, an appropriate dollar amount is recorded
as a liability; and (iv) the amount of any waived dividend is considered as
having been paid by the savings association in evaluating any proposed dividend
under Office of Thrift Supervision capital distribution regulations.
We anticipate that Atlantic Coast Federal, MHC will waive dividends paid
by Atlantic Coast Federal Corporation, if any. Under Office of Thrift
Supervision regulations, our public stockholders would not be diluted because of
any dividends waived by Atlantic Coast Federal, MHC (and waived dividends would
not be considered in determining an appropriate exchange ratio) in the event
Atlantic Coast Federal, MHC converts to stock form.
CONVERSION OF ATLANTIC COAST FEDERAL, MHC TO STOCK FORM. The Office of
Thrift Supervision regulations permit Atlantic Coast Federal, MHC to convert
from the mutual form of organization to the capital stock form of organization
(a "Conversion Transaction"). There can be no assurance when, if ever, a
Conversion Transaction will occur, and the board of directors has no current
intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction a new holding company would be formed as the successor to Atlantic
Coast Federal Corporation (the "New Holding Company"), Atlantic Coast Federal,
MHC's corporate existence would end, and certain depositors of Atlantic Coast
Federal would receive the right to subscribe for additional shares of the New
Holding Company. In a Conversion Transaction, each share of common stock held by
stockholders other than Atlantic Coast Federal, MHC ("Minority Stockholders")
would be automatically converted into a number of shares of common stock in the
New Holding Company determined pursuant to an exchange ratio that ensures that
the Minority Stockholders own the same percentage of common stock in the New
Holding Company as they owned in Atlantic Coast Federal Corporation immediately
prior to the Conversation Transaction. Under OTS regulations, Minority
Stockholders would not be diluted because of any dividends waived by Atlantic
Coast Federal, MHC (and waived dividends would not be considered in determining
an appropriate exchange ratio), if Atlantic Coast Federal, MHC converts to stock
form. The total number of shares held by Minority Stockholders after a
Conversion Transaction also would be increased by any purchases by Minority
Stockholders in the stock offering conducted as part of the Conversion
Transaction.
A Conversion Transaction requires the approval of the Office of Thrift
Supervision as well as a majority of the votes eligible to be cast by the
members of Atlantic Coast Federal Corporation and a majority of the votes
eligible to be cast by the stockholders of Atlantic Coast Federal Corporation
other than Atlantic Coast Federal Corporation.
ATLANTIC COAST FEDERAL
The Office of Thrift Supervision has extensive authority over the
operations of savings institutions. As part of this authority, Atlantic Coast
Federal is required to file periodic reports
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with the Office of Thrift Supervision and is subject to periodic examinations by
the Office of Thrift Supervision and the FDIC. When these examinations are
conducted by the Office of Thrift Supervision and the FDIC, the examiners may
require Atlantic Coast Federal to provide for higher general or specific loan
loss reserves. All savings institutions are subject to a semi-annual assessment,
based upon the savings institution's total assets, to fund the operations of the
Office of Thrift Supervision.
The Office of Thrift Supervision also has extensive enforcement
authority over all savings institutions and their holding companies, including
Atlantic Coast Federal and Atlantic Coast Federal Corporation. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the Office of Thrift Supervision.
Except under certain circumstances, public disclosure of final enforcement
actions by the Office of Thrift Supervision is required.
In addition, the investment, lending and branching authority of Atlantic
Coast Federal is prescribed by federal laws and it is prohibited from engaging
in any activities not permitted by such laws. For instance, no savings
institution may invest in non-investment grade corporate debt securities. In
addition, the permissible level of investment by federal institutions in loans
secured by non-residential real property may not exceed 400% of total capital,
except with approval of the Office of Thrift Supervision. Federal savings
institutions are also generally authorized to branch nationwide. Atlantic Coast
Federal is in compliance with the noted restrictions.
Atlantic Coast Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At December 31, 2003, Atlantic Coast Federal's
lending limit under this restriction was $6.6 million. Atlantic Coast Federal is
in compliance with the loans-to-one-borrower limitation.
The Office of Thrift Supervision, as well as the other federal banking
agencies, has adopted guidelines establishing safety and soundness standards on
such matters as loan underwriting and documentation, asset quality, earnings
standards, internal controls and audit systems, interest rate risk exposure and
compensation and other employee benefits. Any institution which fails to comply
with these standards must submit a compliance plan.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
Atlantic Coast Federal is a member of the Savings Association Insurance
Fund, which is administered by the FDIC. Deposits are insured up to the
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk
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to the Savings Association Insurance Fund. The FDIC also has the authority to
initiate enforcement actions against savings institutions, after giving the
Office of Thrift Supervision an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the Savings Association
Insurance Fund will be less than the designated reserve ratio of 1.25% of
Savings Association Insurance Fund insured deposits. In setting these increased
assessments, the FDIC must seek to restore the reserve ratio to that designated
reserve level, or such higher reserve ratio as established by the FDIC. The FDIC
may also impose special assessments on Savings Association Insurance Fund
members to repay amounts borrowed from the United States Treasury or for any
other reason deemed necessary by the FDIC.
Since January 1, 1997, the premium schedule for Bank Insurance Fund and
Savings Association Insurance Fund insured institutions has ranged from 0 to 27
basis points. However, Savings Association Insurance Fund and Bank Insurance
Fund insured institutions are required to pay a Financing Corporation
assessment, in order to fund the interest on bonds issued to resolve thrift
failures in the 1980s, equal to approximately 1.5 basis points for each $100 in
domestic deposits annually. These assessments, which may be revised based upon
the level of Bank Insurance Fund and Savings Association Insurance Fund
deposits, will continue until the bonds mature in the year 2017.
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings institutions, such as Atlantic Coast Federal,
are required to maintain a minimum level of regulatory capital. The Office of
Thrift Supervision has established capital standards, including a tangible
capital requirement, a leverage ratio or core capital requirement and a
risk-based capital requirement applicable to such savings institutions. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The Office of Thrift Supervision is also
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets, as defined by regulation. Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In
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addition, all intangible assets, other than a limited amount of purchased
mortgage servicing rights, must be deducted from tangible capital for
calculating compliance with the requirement. At December 31, 2003, Atlantic
Coast Federal had $3.1 million of intangible assets.
At December 31, 2003, Atlantic Coast Federal had tangible capital of
$40.0 million, or 8.1% of adjusted total assets, which is approximately $32.6
million above the minimum requirement of 1.5% of adjusted total assets in effect
on that date.
The capital standards also require core capital equal to at least 4.0%
of adjusted total assets unless its supervisory condition is such to allow it to
maintain a 3.0% ratio. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. At December 31, 2003, Atlantic Coast Federal had $3.1 million of
intangibles which were subject to these tests. At December 31, 2003, Atlantic
Coast Federal had core capital equal to $40.0 million, or 8.1% of adjusted total
assets, which is $20.2 million above the minimum requirement of 4.0% in effect
on that date.
The Office of Thrift Supervision also requires savings institutions to
have core capital equal to 4% of risk-weighted assets ("Tier 1 Risk-Based"). At
December 31, 2003, Atlantic Coast Federal had Tier 1 risk-based capital of $40.0
or 11.7% of risk-weighted assets, which is approximately $26.4 million above the
minimum on such date. The Office of Thrift Supervision also requires savings
institutions to have total capital of at least 8.0% of risk-weighted assets.
Total capital consists of core capital, as defined above, and supplementary
capital. Supplementary capital consists of certain permanent and maturing
capital instruments that do not qualify as core capital and general valuation
loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital. The Office of Thrift Supervision is also authorized
to require a savings institution to maintain an additional amount of total
capital to account for concentration of credit risk and the risk of
non-traditional activities.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the Office of Thrift Supervision has assigned a risk weight of 50% for prudently
underwritten permanent one- to four-family first lien mortgage loans not more
than 90 days delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by Fannie Mae or
Freddie Mac.
On December 31, 2003, Atlantic Coast Federal had total risk-based
capital of $44.4 million and risk-weighted assets of $343.5 million; or total
capital of 12.9% of risk-weighted assets. This amount was $16.9 million above
the 8.0% requirement in effect on that date.
The Office of Thrift Supervision and the FDIC are authorized and, under
certain circumstances, required to take certain actions against savings
institutions that fail to meet their capital requirements. The Office of Thrift
Supervision is generally required to take action to restrict the activities of
an "undercapitalized institution," which is an institution with less than either
a 4.0% core capital ratio, a 4.0% Tier 1 risked-based capital ratio or an 8.0%
risk-based capital ratio. Any such institution must submit a capital restoration
plan and until the plan is
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approved by the Office of Thrift Supervision, may not increase its assets,
acquire another institution, establish a branch or engage in any new activities,
and generally may not make capital distributions. The Office of Thrift
Supervision is authorized to impose the additional restrictions that are
applicable to significantly undercapitalized institutions.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized institution must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings institution that fails to comply with its capital plan or
has Tier 1 risk-based or core capital ratios of less than 3.0% or a risk-based
capital ratio of less than 6.0% and is considered "significantly
undercapitalized" will be made subject to one or more additional specified
actions and operating restrictions which may cover all aspects of its operations
and may include a forced merger or acquisition of the institution. An
institution that becomes "critically undercapitalized" because it has a tangible
capital ratio of 2.0% or less is subject to further mandatory restrictions on
its activities in addition to those applicable to significantly undercapitalized
institutions. In addition, the Office of Thrift Supervision must appoint a
receiver, or conservator with the concurrence of the FDIC, for a savings
institution, with certain limited exceptions, within 90 days after it becomes
critically undercapitalized. Any undercapitalized institution is also subject to
the general enforcement authority of the Office of Thrift Supervision and the
FDIC, including the appointment of a conservator or a receiver.
The Office of Thrift Supervision is also generally authorized to
reclassify an institution into a lower capital category and impose the
restrictions applicable to such category if the institution is engaged in unsafe
or unsound practices or is in an unsafe or unsound condition.
The imposition by the Office of Thrift Supervision or the FDIC of any of
these measures on Atlantic Coast Federal may have a substantial adverse effect
on its operations and profitability.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
Office of Thrift Supervision regulations impose various restrictions on
savings institutions with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital account.
Generally, savings institutions, such as Atlantic Coast Federal, that
before and after the proposed distribution are well-capitalized, may make
capital distributions during any calendar year equal to 100% of net income for
the year-to-date plus retained net income for the two preceding years. However,
an institution deemed to be in need of more than normal supervision by the
Office of Thrift Supervision may have its dividend authority restricted by the
Office of Thrift Supervision. Atlantic Coast Federal may pay dividends to
Atlantic Coast Federal Corporation in accordance with this general authority.
Savings institutions proposing to make any capital distribution need not
submit written notice to the Office of Thrift Supervision prior to such
distribution unless they are a subsidiary of a holding company or would not
remain well-capitalized following the distribution. Savings
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institutions that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution or propose to exceed
these net income limitations, must obtain Office of Thrift Supervision approval
prior to making such distribution. The Office of Thrift Supervision may object
to the distribution during that 30-day period based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
LIQUIDITY
All savings institutions, including Atlantic Coast Federal, are required
to maintain sufficient liquidity to ensure a safe and sound operation.
QUALIFIED THRIFT LENDER TEST
All savings institutions, including Atlantic Coast Federal, are required
to meet a qualified thrift lender test to avoid certain restrictions on their
operations. This test requires a savings institution to have at least 65% of its
portfolio assets, as defined by regulation, in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings institution may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At December 31, 2003, Atlantic Coast Federal was in compliance
with the test.
Any savings institution that fails to meet the qualified thrift lender
test must convert to a national bank charter, unless it requalifies as a
qualified thrift lender within one year of failure and thereafter remains a
qualified thrift lender. If such an institution has not yet requalified or
converted to a national bank, its new investments and activities are limited to
those permissible for both a savings institution and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
institution is immediately ineligible to receive any new Federal Home Loan Bank
borrowings and is subject to national bank limits for payment of dividends. If
such an institution has not requalified or converted to a national bank within
three years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. If any institution that fails
the qualified thrift lender test is controlled by a holding company, then within
one year after the failure, the holding company must register as a bank holding
company and become subject to all restrictions on bank holding companies.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act, every FDIC-insured institution
has a continuing and affirmative obligation consistent with safe and sound
banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The Community Reinvestment Act
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the Community Reinvestment Act. The Community
Reinvestment Act requires the Office of Thrift Supervision, in connection with
the examination of Atlantic Coast Federal, to assess the institution's record of
meeting the credit needs of its community and
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to take such record into account in its evaluation of certain applications, such
as a merger or the establishment of a branch, by Atlantic Coast Federal. An
unsatisfactory rating may be used as the basis for the denial of an application
by the Office of Thrift Supervision. Due to the heightened attention being given
to the Community Reinvestment Act in the past few years, Atlantic Coast Federal
may be required to devote additional funds for investment and lending in its
local community. Atlantic Coast Federal was examined for Community Reinvestment
Act compliance and received a rating of satisfactory in its latest examination.
TRANSACTIONS WITH AFFILIATES
Generally, transactions between a savings institution or its
subsidiaries and its affiliates are required to be on terms as favorable to the
institution as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the institution's capital. Affiliates of Atlantic Coast Federal include Atlantic
Coast Federal Corporation and any company which is under common control with
Atlantic Coast Federal. In addition, a savings institution may not lend to any
affiliate engaged in activities not permissible for a bank holding company or
acquire the securities of most affiliates. The Office of Thrift Supervision has
the discretion to treat subsidiaries of savings institutions as affiliates on a
case by case basis.
On April 1, 2003, the Federal Reserve's Regulation W, which
comprehensively interprets sections 23A and 23B, became effective. The Federal
Reserve Act and Regulation W are applicable to savings associations such as
Atlantic Coast Federal. The Regulation unifies and updates staff interpretations
issued over the years, incorporates several new interpretative proposals (such
as to clarify when transactions with an unrelated third party will be attributed
to an affiliate), and addresses new issues arising as a result of the expanded
scope of nonbanking activities engaged in by banks and bank holding companies in
recent years and authorized for financial holding companies under the
Gramm-Leach-Bliley Act.
In addition, the Office of Thrift Supervision regulations prohibit a
savings institution from lending to any of its affiliates that is engaged in
activities that are not permissible for bank holding companies and from
purchasing the securities of any affiliate, other than a subsidiary.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the Office of
Thrift Supervision. These conflict of interest regulations and other statutes
also impose restrictions on loans to such persons and their related interests.
Among other things, such loans must generally be made on terms substantially the
same as for loans to unaffiliated individuals.
FEDERAL SECURITIES LAW
The stock of Atlantic Coast Federal Corporation is registered with the
SEC under the Securities Exchange Act of 1934, as amended. Atlantic Coast
Federal Corporation will be subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Securities Exchange Act of 1934.
Atlantic Coast Federal Corporation stock held by persons who are
affiliates of Atlantic Coast Federal Corporation may not be resold without
registration unless sold in accordance with
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certain resale restrictions. Affiliates are generally considered to be officers,
directors and principal stockholders. If Atlantic Coast Federal Corporation
meets specified current public information requirements, each affiliate of
Atlantic Coast Federal Corporation will be able to sell in the public market,
without registration, a limited number of shares in any three-month period.
SARBANES-OXLEY ACT OF 2002.
The Sarbanes-Oxley Act of 2002 was signed into law by President Bush on
July 30, 2002 in response to public concerns regarding corporate accountability
in connection with recent accounting scandals. The stated goals of the
Sarbanes-Oxley Act are to increase corporate responsibility, to provide for
enhanced penalties for accounting and auditing improprieties at publicly traded
companies and to protect investors by improving the accuracy and reliability of
corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act
generally applies to all companies that file or are required to file periodic
reports with the SEC, under the Securities Exchange Act of 1934, including
Atlantic Coast Federal Corporation.
The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules, requires the SEC and securities
exchanges to adopt extensive additional disclosure, corporate governance and
other related rules and mandates further studies of certain issues by the SEC
and the Comptroller General. The Sarbanes-Oxley Act represents significant
federal involvement in matters traditionally left to state regulatory systems,
such as the regulation of the accounting profession, and to state corporate law,
such as the relationship between a board of directors and management and between
a board of directors and its committees.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts, primarily checking, NOW and Super NOW checking accounts.
At December 31, 2003, Atlantic Coast Federal was in compliance with these
reserve requirements. Savings institutions are authorized to borrow from the
Federal Reserve Bank "discount window," but Federal Reserve Board regulations
require institutions to exhaust other reasonable alternative sources of funds,
including Federal Home Loan Bank borrowings, before borrowing from the Federal
Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM
Atlantic Coast Federal is a member of the Federal Home Loan Bank of
Atlanta, which is one of 12 regional Federal Home Loan Banks that administers
the home financing credit function of savings institutions. Each Federal Home
Loan Bank serves as a reserve or central bank for its members within its
assigned region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the Federal Home Loan Bank System. It makes loans or
advances to members in accordance with policies and procedures, established by
the board of directors of the Federal Home Loan Bank, which are subject to the
oversight of the Federal Housing Finance Board. All advances from the Federal
Home Loan Bank are required to be fully secured by sufficient collateral as
determined by the Federal Home Loan Bank. In addition, all long-term advances
are required to provide funds for residential home financing.
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As a member, Atlantic Coast Federal is required to purchase and maintain
stock in the Federal Home Loan Bank of Atlanta. At December 31, 2003, Atlantic
Coast Federal had $3.1 million in Federal Home Loan Bank stock, which was in
compliance with this requirement. In past years, Atlantic Coast Federal has
received substantial dividends on its Federal Home Loan Bank stock. Atlantic
Coast Federal received dividends in the amount of $93,373 for the year ended
December 31, 2003. Over the past two fiscal years such dividends have averaged
4.62% and were 3.58% for the fiscal year ended December 31, 2003.
Under federal law, the Federal Home Loan Banks are required to provide
funds for the resolution of troubled savings institutions and to contribute to
low- and moderately-priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have affected adversely
the level of Federal Home Loan Bank dividends paid and could continue to do so
in the future. These contributions could also have an adverse effect on the
value of Federal Home Loan Bank stock in the future. A reduction in value of
Atlantic Coast Federal's Federal Home Loan Bank stock may result in a
corresponding reduction in Atlantic Coast Federal's capital.
TAXATION
FEDERAL TAXATION
GENERAL. Atlantic Coast Federal Corporation and Atlantic Coast Federal
are subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of
federal taxation is intended only to summarize pertinent federal income tax
matters and is not a comprehensive description of the tax rules applicable to
Atlantic Coast Federal Corporation or Atlantic Coast Federal. Atlantic Coast
Federal Corporation and Atlantic Coast Federal, MHC will file their initial
separate federal income tax returns for the year ended December 31, 2003.
Atlantic Coast Federal's federal income tax returns have never been audited by
the IRS.
For various business reasons, it is not anticipated that Atlantic Coast
Federal Corporation will elect to file a consolidated federal income tax return
with Atlantic Coast Federal. It is anticipated that any cash distributions made
by Atlantic Coast Federal Corporation to its stockholders would be considered to
be taxable dividends and not as a non-taxable return of capital to stockholders
for federal and state tax purposes.
METHOD OF ACCOUNTING. For federal income tax purposes, Atlantic Coast
Federal currently reports its income and expenses on the accrual method of
accounting and uses a fiscal year ending on December 31, for filing its federal
income tax return. Due to its 100% ownership by Atlantic Coast Federal
Corporation, Atlantic Coast Federal meets the Internal Revenue Code definition
of an affiliated corporation.
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Atlantic Coast Federal
Corporation may eliminate from its taxable income dividends received from
Atlantic Coast Federal. The corporate dividends-received deduction is 100%, in
the
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case of dividends received from affiliated corporations irrespective of whether
a consolidated federal income tax return is filed.
STATE TAXATION
Atlantic Coast Federal Corporation and Atlantic Coast Federal are
subject to the Georgia and Florida corporate income taxes which are assessed at
the rate of 6.00% and 5.50%, respectively. For both states, taxable income
generally means federal taxable income subject to certain modifications provided
for in the applicable state statutes.
RESTRICTIONS ON ACQUISITION
OF ATLANTIC COAST FEDERAL CORPORATION AND ATLANTIC COAST
FEDERAL
The principal federal regulatory restrictions which affect the ability
of any person, firm or entity to acquire Atlantic Coast Federal Corporation,
Atlantic Coast Federal or their respective capital stock are described below.
Also discussed are certain provisions in Atlantic Coast Federal Corporation's
stock charter and bylaws which may be deemed to affect the ability of a person,
firm or entity to acquire Atlantic Coast Federal Corporation.
FEDERAL LAW
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a savings institution unless the Office of Thrift Supervision
has been given 60 days prior written notice. The Home Owners' Loan Act provides
that no company may acquire "control" of a savings institution without the prior
approval of the Office of Thrift Supervision. Any company that acquires such
control becomes a savings and loan holding company subject to registration,
examination and regulation by the Office of Thrift Supervision. Pursuant to
federal regulations, control of a savings institution (including its holding
company) is conclusively deemed to have been acquired by, among other things,
the acquisition of more than 25% of any class of voting stock of the institution
or the ability to control the election of a majority of the directors of an
institution. Moreover, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of voting stock, or
of more than 25% of any class of stock of a savings institution, where certain
enumerated "control factors" are also present in the acquisition. The Office of
Thrift Supervision may prohibit an acquisition of control if:
o it would result in a monopoly or substantially lessen
competition;
o the financial condition of the acquiring person might jeopardize
the financial stability of the institution; or
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o the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors
or of the public to permit the acquisition of control by such
person.
These restrictions do not apply to the acquisition of a savings institution's
capital stock by one or more tax-qualified employee stock benefit plans,
provided that the plans do not have beneficial ownership of more than 25% of any
class of equity security of the savings institution.
For a period of three years following completion of the stock offering,
Office of Thrift Supervision regulations generally prohibit any person from
acquiring or making an offer to acquire beneficial ownership of more than 10% of
the stock of Atlantic Coast Federal Corporation or Atlantic Coast Federal
without Office of Thrift Supervision approval.
CHARTER AND BYLAWS OF ATLANTIC COAST FEDERAL CORPORATION
The following discussion is a summary of certain provisions of the
charter and bylaws of Atlantic Coast Federal Corporation that relate to
restrictions of acquisitions. The description is necessarily general and
qualified by reference to the articles of charter and bylaws.
DIRECTORS. Certain provisions of Atlantic Coast Federal Corporation's
bylaws will impede changes in majority control of the board of directors.
Atlantic Coast Federal Corporation's bylaws provide that the board of directors
will be divided into three classes, with directors in each class elected for
three-year staggered terms. Thus, assuming a board of three directors or more,
it would take two annual elections to replace a majority of Atlantic Coast
Federal Corporation's board. The bylaws also provide that any vacancy occurring
in the board of directors, including a vacancy created by an increase in the
number of directors, shall be filled by a majority vote of the directors then in
office. Finally, the bylaws impose certain notice and information requirements
in connection with the nomination by stockholders of candidates for election to
the board of directors or the proposal by stockholders of business to be acted
upon at an annual meeting of stockholders.
RESTRICTIONS ON CALL OF SPECIAL MEETINGS. The federal stock charter of
Atlantic Coast Federal Corporation provides that for a period of five years from
the date of the completion of the stock offering a special meeting of
stockholders may be called only through a resolution of the board of directors
for matters relating to a change in control of Atlantic Coast Federal
Corporation or amendments to its charter.
ABSENCE OF CUMULATIVE VOTING. Atlantic Coast Federal Corporation's
federal stock charter does not provide for cumulative voting rights in the
election of directors. This means that Atlantic Coast Federal, MHC, as the
holder of a majority of the shares eligible to be voted at a meeting of
stockholders may elect all of the directors of Atlantic Coast Federal
Corporation and thus prevent a minority stockholder from obtaining
representation on the Board of Directors.
AUTHORIZED BUT UNISSUED SHARES OF CAPITAL STOCK. After the stock
offering, Atlantic Coast Federal Corporation will have authorized but unissued
shares of common and preferred stock. See "Description of Capital Stock." The
board of directors could use these shares of common and preferred stock to
render more difficult or to discourage an attempt to obtain
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control of Atlantic Coast Federal Corporation by means of a merger, tender offer
or proxy statement. We anticipate, however, that it is unlikely that we will use
the shares for this purpose, since Atlantic Coast Federal, MHC must always own
at least a majority of our common stock.
Our federal stock charter also authorizes 2,000,000 shares of serial
preferred stock, no par value per share. Atlantic Coast Federal Corporation is
authorized to issue preferred stock from time to time in one or more series
subject to applicable provisions of law, and the board of directors is
authorized to fix the designations, and relative preferences, limitations,
voting rights, if any, including without limitation, offering rights of such
shares (which could be multiple or as a separate class). In the event of a
proposed merger, tender offer or other attempt to gain control of Atlantic Coast
Federal Corporation that the board of directors does not approve, it might be
possible for the board of directors to authorize the issuance of a series of
preferred stock with rights and preferences that would impede that completion of
the transaction. If Atlantic Coast Federal Corporation issues any preferred
stock which disparately reduced the voting rights of the common stock, the
common stock could be required to be delisted from the Nasdaq system. An effect
of the possible issuance of preferred stock, therefore may be to deter a future
attempt to gain control of Atlantic Coast Federal Corporation. The board of
directors has no present plan or understanding to issue any preferred stock.
LIMITATION ON VOTING RIGHTS. The federal stock charter of Atlantic Coast
Federal Corporation provides that for a period of five years from the completion
of the stock offering by Atlantic Coast Federal Corporation, no person other
than Atlantic Coast Federal, MHC may offer to acquire or acquire the beneficial
ownership of more than 10% of any class of equity security of Atlantic Coast
Federal Corporation. This provision does not apply to any tax-qualified employee
benefit plan or Atlantic Coast Federal Corporation or to an underwriter or
member of an underwriting or selling group involving the public sale or resale
of securities of Atlantic Coast Federal Corporation or any of its subsidiaries
so long as after the sale or resale, no underwriter or member of the selling
group is a beneficial owner of more than 10% of any class of equity securities
of Atlantic Coast Federal Corporation. In addition, during this five-year
period, all shares owned over the l0% limit may not be voted in any matter
submitted to stockholders for a vote.
OWNERSHIP OF COMMON STOCK BY MANAGEMENT. We expect our directors and
officers to purchase up to 341,900 shares of common stock in the offering.
Directors and officers are expected to control the voting of 6.19% of the shares
of common stock sold in the offering (at the maximum of the offering range), and
may control the voting of approximately 8.0% of the shares of common stock sold
in the offering through the ESOP. Under the terms of the ESOP, unallocated
shares and shares for which the employee did not provide voting instructions
will be voted by the independent trustees as directed by the Board of Directors
of Atlantic Coast Federal Corporation. In addition, the officers and directors
of Atlantic Coast Federal Corporation are also officers and directors of
Atlantic Coast Federal, MHC which, after the stock offering, will own at least a
majority of Atlantic Coast Federal Corporation's common stock.
Certain provisions of Atlantic Coast Federal Corporation's proposed
stock option plan and other benefit plans may provide for benefits and cash
payments in the event of a change in control of Atlantic Coast Federal
Corporation. The plans may also provide for accelerated vesting in the event of
a change in control. These provisions may have the effect of increasing
117
the cost of, and thereby discouraging, a future attempt to take over Atlantic
Coast Federal Corporation and thus generally may serve to perpetuate current
management.
DESCRIPTION OF CAPITAL STOCK OF
ATLANTIC COAST FEDERAL CORPORATION
GENERAL
Atlantic Coast Federal Corporation is authorized to issue 18,000,000
shares of common stock having a par value of $0.01 per share and 2,000,000
shares of preferred stock having a par value of $0.01 per share. Atlantic Coast
Federal Corporation currently expects to issue up to a maximum of 5,520,000
shares of common stock, or 6,348,000 shares in the event that the maximum of the
estimated offering range is increased by 15%, and no shares of preferred stock
in the stock offering. Each share of Atlantic Coast Federal Corporation's common
stock will have the same relative rights as, and will be identical in all
respects with, each other share of common stock. Upon payment of the purchase
price for the common stock in accordance with the plan of stock issuance, all of
the stock will be duly authorized, fully paid and nonassessable. Presented below
is a description of all aspects of Atlantic Coast Federal Corporation's capital
stock which are deemed material to an investment decision with respect to the
stock offering.
The common stock of Atlantic Coast Federal Corporation will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC, or any other governmental agency. The Board of
Directors can, without stockholders approval issue additional shares of common
stock although Atlantic Coast Federal, MHC so long as it is in existence, must
own a majority of the outstanding common stock of Atlantic Coast Federal
Corporation.
COMMON STOCK
DISTRIBUTIONS. Atlantic Coast Federal Corporation can pay dividends if,
as and when declared by its board of directors, subject to compliance with
limitations which are imposed by law. The holders of common stock of Atlantic
Coast Federal Corporation will be entitled to receive and share equally in these
dividends as they may be declared by the board of directors of Atlantic Coast
Federal Corporation out of funds legally available for such purpose. If Atlantic
Coast Federal Corporation issues preferred stock, the holders of such preferred
stock may have a priority over the holders of the common stock with respect to
dividends. See "Our Policy Regarding Dividends."
VOTING RIGHTS. Holders of common stock of Atlantic Coast Federal
Corporation will possess exclusive voting rights in Atlantic Coast Federal
Corporation. Each holder of common stock will be entitled to one vote per share
and will not have any right to cumulate votes in the election of directors,
therefore, directors will be elected by a plurality of the shares actually
voting on the matter. Under certain circumstances, shares in excess of 10% of
the issued and outstanding shares of common stock may be considered "excess
shares" and, accordingly, not be entitled to vote. See "Restrictions on
Acquisition of Atlantic Coast Federal Corporation and
118
Atlantic Coast Federal." If Atlantic Coast Federal Corporation issues preferred
stock, holders of the preferred stock may also possess voting rights.
LIQUIDATION. In the event of any liquidation, dissolution or winding up
of Atlantic Coast Federal, Atlantic Coast Federal Corporation, as holder of
Atlantic Coast Federal's capital stock, would be entitled to receive, after
payment or provision for payment of all debts and liabilities of Atlantic Coast
Federal, including all deposit accounts and accrued interest thereon, all assets
of Atlantic Coast Federal available for distribution. In the event of
liquidation, dissolution or winding up of Atlantic Coast Federal Corporation,
the holders of its common stock would be entitled to receive, after payment or
provision for payment of all its debts and liabilities, all of the assets of
Atlantic Coast Federal Corporation available for distribution. If preferred
stock is issued, the holders thereof may have a priority over the holders of the
common stock in the event of liquidation or dissolution.
RIGHTS TO BUY ADDITIONAL SHARES. Holders of the common stock of Atlantic
Coast Federal Corporation will not be entitled to preemptive rights with respect
to any shares which may be issued. Preemptive rights are the priority right to
buy additional shares if Atlantic Coast Federal Corporation issues more shares
in the future. Therefore, if additional shares are issued by Atlantic Coast
Federal Corporation without the opportunity for existing stockholders to
purchase more shares, a stockholder's ownership interest in Atlantic Coast
Federal Corporation may be subject to dilution. The common stock is not subject
to redemption.
PREFERRED STOCK
None of the shares of Atlantic Coast Federal Corporation's authorized
preferred stock will be issued in the stock offering. This stock may be issued
with preferences and designations as the board of directors may from time to
time determine. The board of directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. Atlantic Coast Federal Corporation has no present plans to issue
preferred stock. If preferred stock is issued in the future, Atlantic Coast
Federal Corporation will not offer preferred stock to promoters except on the
same terms as it is offered to all other existing stockholders or to new
stockholders; or the issuance will be approved by a majority of Atlantic Coast
Federal Corporation's independent directors who do not have an interest in the
transaction and have access, at Atlantic Coast Federal Corporation's expense, to
its or independent legal counsel.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Atlantic Coast Federal Corporation
common stock is Registrar and Transfer Company.
EXPERTS
Our consolidated balance sheets as of December 31, 2003 and 2002 and the
related consolidated statements of income, changes in equity and cash flows for
each of the three years in the period ending December 31, 2003 included in this
prospectus have been audited by Crowe Chizek and Company LLC independent
auditors, as set forth in their report
119
appearing elsewhere herein and in the registration statement, and are included
in reliance upon the reports of this firm given upon the authority as experts in
accounting and auditing.
RP Financial has consented to the publication herein of the summary of
its report to Atlantic Coast Federal Corporation setting forth its opinion as to
the estimated pro forma market value of the common stock upon its issuance and
its letter with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the common stock and the federal income tax consequences
of the stock offering has been passed upon for Atlantic Coast Federal
Corporation by Luse Gorman Pomerenk & Schick, P.C., Washington, D.C., special
counsel to Atlantic Coast Federal and Atlantic Coast Federal Corporation. The
Georgia and Florida income tax consequences of the stock issuance will be passed
upon for Atlantic Coast Federal Corporation by Crowe Chizek and Company LLC, Oak
Brook, Illinois. Certain legal matters will be passed upon for Friedman Billings
Ramsey by Muldoon Murphy Faucette & Aguggia LLP, Washington, D.C.
ADDITIONAL INFORMATION
Atlantic Coast Federal Corporation has filed with the SEC a registration
statement under the Securities Act of 1933 with respect to the common stock
offered hereby. As permitted by the rules and regulations of the SEC, this
prospectus does not contain all the information set forth in the registration
statement. This information, including the appraisal report which is an exhibit
to the registration statement, can be examined without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of this material can be obtained from the SEC at
prescribed rates. In addition, the SEC maintains a web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC, including Atlantic
Coast Federal Corporation. The statements contained in this prospectus as to the
contents of any contract or other document filed as an exhibit to the
registration statement are, of necessity, brief descriptions thereof and are not
necessarily complete; each statement is qualified by reference to the contract
or document.
Atlantic Coast Federal Corporation has filed an Application for Minority
Stock Issuance with the Office of Thrift Supervision with respect to the stock
offering. This prospectus omits certain information contained in this
application. The application may be examined at the principal office of the
Office of Thrift Supervision, 1700 G Street, N.W., Washington, D.C. 20552, and
at the Southeast Regional Office of the Office of Thrift Supervision located at
1475 Peachtree Street, Atlanta, Georgia 30309.
In connection with the stock offering, Atlantic Coast Federal
Corporation has registered its common stock with the SEC under Section 12 of the
Securities Exchange Act of 1934, and, upon such registration, Atlantic Coast
Federal Corporation and the holders of its stock will become subject to the
proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and other requirements of the Securities
Exchange Act of 1934. Under the
120
plan of stock issuance, Atlantic Coast Federal Corporation has undertaken that
it will not terminate this registration for a period of at least three years
following the completion of the stock issuance.
A copy of the plan of stock issuance and the charter and bylaws of
Atlantic Coast Federal Corporation, Atlantic Coast Federal and Atlantic Coast
Federal, MHC and the appraisal report of RP Financial are available without
charge from Atlantic Coast Federal. Requests for such information should be
directed to: Stockholder Relations, Atlantic Coast Federal Corporation, 505
Haines Avenue, Waycross, Georgia 31501 (912) 284-2211.
121
ATLANTIC COAST FEDERAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Auditor.................................................................................F-2
Consolidated Balance Sheets at December 31, 2003 and 2002.....................................................F-3
Consolidated Statements of Income for the Years Ended
December 31, 2003, 2002 and 2001............................................................................F-4
Consolidated Statements of Changes in Equity for the Years Ended
December 31, 2003, 2002 and 2001............................................................................F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002
and 2001....................................................................................................F-6
Notes to Consolidated Financial Statements....................................................................F-7
All schedules are omitted because the required information is not applicable or is included in the
Consolidated Financial Statements and related Notes.
The consolidated financial statements of Atlantic Coast Federal, MHC are not presented, as the only
activity of Atlantic Coast Federal, MHC was the investment in Atlantic Coast Federal Corporation.
[LOGO] CROWE
CROWE CHIZEK AND COMPANY LLC
Member Horwath International
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Atlantic Coast Federal Corporation
Waycross, Georgia
We have audited the accompanying consolidated balance sheets of Atlantic Coast
Federal Corporation (a wholly owned subsidiary of Atlantic Coast Federal Mutual
Holding Company) as of December 31, 2003 and 2002, and the related consolidated
statements of income, changes in equity, and cash flows for the years ended
December 31, 2003, 2002, and 2001. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Atlantic Coast
Federal Corporation as of December 31, 2003 and 2002, and the results of its
operations and its cash flows for the years ended December 31, 2003, 2002, and
2001 in conformity with accounting principles generally accepted in the United
States of America.
/s/ CROWE CHIZEK AND COMPANY LLC
Crowe Chizek and Company LLC
Oak Brook, Illinois
January 23, 2004
F-1.
ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
- -----------------------------------------------------------------------------------------------
2003 2002
---- ----
ASSETS
Cash and due from financial institutions $ 6,674,213 $ 6,735,531
Short-term interest-bearing deposits in other
financial institutions 2,303,756 7,239,774
------------- -------------
Cash and cash equivalents 8,977,969 13,975,305
Other interest-bearing deposits in other
financial institutions 500,000 1,134,939
Securities available for sale 26,038,755 28,599,211
Loans held for sale 487,183 2,447,347
Loans, net of allowance for loan losses of
$6,593,329 in 2003 and $4,691,767 in 2002 435,613,584 379,778,061
Federal Home Loan Bank stock 3,081,500 2,305,000
Accrued interest receivable 2,040,953 2,034,547
Premises and equipment, net 10,597,421 8,818,211
Bank owned life insurance 4,750,300 1,586,363
Other real estate owned 1,078,986 1,140,759
Goodwill 2,661,190 1,413,090
Other assets 3,212,561 4,488,578
------------- -------------
Total assets $ 499,040,402 $ 447,721,411
============= =============
LIABILITIES AND EQUITY
Deposits
Non-interest-bearing demand $ 27,179,395 $ 22,252,858
Interest-bearing demand 14,955,497 14,539,464
Savings and money market 137,633,423 114,980,626
Time 212,487,510 209,106,682
------------- -------------
Total deposits 392,255,825 360,879,630
Federal Home Loan Bank advances 60,971,429 45,442,857
Accrued expenses and other liabilities 2,594,773 2,474,446
------------- -------------
Total liabilities 455,822,027 408,796,933
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued - -
Common stock, $.01 par value; 9,000,000 shares
authorized; shares issued and outstanding
2003 - 1,000 shares; 2002 - 0 shares 10 -
Retained earnings 43,220,688 38,853,464
Accumulated other comprehensive income (loss) (2,323) 71,014
------------- -------------
Total equity 43,218,375 38,924,478
------------- -------------
Total liabilities and equity $ 499,040,402 $ 447,721,411
============= =============
- -----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-2.
ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2003, 2002, and 2001
- -------------------------------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Interest and dividend income
Loans, including fees $ 30,339,950 $ 29,756,130 $ 27,214,502
Securities and interest-bearing deposits
in other financial institutions 872,574 1,056,546 1,921,384
------------- ------------ ------------
Total interest and dividend income 31,212,524 30,812,676 29,135,886
Interest expense
Deposits 9,520,352 10,944,331 13,331,118
Federal Home Loan Bank advances 2,260,398 2,090,408 1,890,250
------------- ------------ ------------
Total interest expense 11,780,750 13,034,739 15,221,368
------------- ------------ ------------
NET INTEREST INCOME 19,431,774 17,777,937 13,914,518
Provision for loan losses 4,237,947 3,683,505 2,080,803
------------- ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,193,827 14,094,432 11,833,715
Noninterest income
Service charges and fees 3,569,047 3,529,981 2,664,121
Gain on sale of loans 2,697,159 125,724 32,177
Gain on sale of securities available for sale 36,059 - 7
Gain (loss) on sale of foreclosed assets (92,629) 634,398 -
Commission income 406,288 287,555 346,735
Interchange fees 678,429 720,584 813,542
Other 238,263 89,941 151,999
------------- ------------ ------------
7,532,616 5,388,183 4,008,581
Noninterest expense
Compensation and benefits 7,052,341 6,498,721 5,342,852
Occupancy and equipment 1,282,449 1,064,524 1,111,095
Data processing 1,289,691 1,083,973 751,811
FDIC premium 60,327 54,222 51,976
Advertising 571,881 424,352 510,000
Outside professional services 1,616,602 1,740,907 776,464
Interchange charges 709,399 904,663 1,013,413
Collection expense and repossessed
asset losses 267,708 181,969 217,003
Telephone 541,826 523,090 609,310
Other 2,518,695 2,234,508 1,972,713
------------- ------------ ------------
15,910,919 14,710,929 12,356,637
------------- ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 6,815,524 4,771,686 3,485,659
Income tax expense 2,398,290 1,584,830 1,289,555
------------- ------------ ------------
NET INCOME $ 4,417,234 $ 3,186,856 $ 2,196,104
============= ============ ============
- -------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3.
ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Years ended December 31, 2003, 2002, and 2001
- ------------------------------------------------------------------------------------------------------------
Accumulated
Other
Common Retained Comprehensive Total
Stock Earnings Income (Loss) Equity
----- -------- ------------ ------
Balance at January 1, 2001 $ - $ 33,470,504 $ (90,467) $ 33,380,037
Comprehensive income:
Net income - 2,196,104 - 2,196,104
Change in net unrealized gain on
securities available for sale, net of
tax of $72,166 - - 117,743 -
-----------
Other comprehensive income 117,743 117,743
--------------
Total comprehensive income - - - 2,313,847
-------- --------------- ----------- --------------
Balance at December 31, 2001 - 35,666,608 27,276 35,693,884
Comprehensive income:
Net income - 3,186,856 - 3,186,856
Change in net unrealized gain on
securities available for sale, net of
tax of $26,807 - - 43,738 -
-----------
Other comprehensive income 43,738 43,738
--------------
Total comprehensive income - - - 3,230,594
-------- --------------- ----------- --------------
Balance at December 31, 2002 - 38,853,464 71,014 38,924,478
Common stock issuance 1,000 shares 10 (10) - -
Dividends declared (50,000) - (50,000)
Comprehensive income:
Net income - 4,417,234 - 4,417,234
Change in net unrealized gain on
securities available for sale, net of
tax of $(44,949) - - (73,337) -
-----------
Other comprehensive income (73,337) (73,337)
--------------
Total comprehensive income - - - 4,343,897
-------- --------------- ----------- --------------
Balance at December 31, 2003 $ 10 $ 43,220,688 $ (2,323) $ 43,218,375
======== =============== =========== ==============
- ------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4.
ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31, 2003, 2002, and 2001
- -------------------------------------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,417,234 $ 3,186,856 $ 2,196,104
Adjustments to reconcile net income
to net cash from operating activities
Provision for loan losses 4,237,947 3,683,505 2,080,803
Gain on sale of loans (2,697,159) (125,724) (32,177)
Loans originated for sale (7,617,436) (13,782,511) (5,940,630)
Proceeds from loan sales 9,692,147 12,904,357 4,529,338
Gain (loss) on sale of other real estate owned 92,629 (634,398) -
Gain on the sale of securities available for sale (36,059) - 7
Net depreciation and amortization 1,404,142 1,206,868 888,962
Increase in accrued interest receivable (6,406) (144,590) (217,159)
Increase in bank owned life insurance (216,739) (86,363) -
Net change in other assets 1,674,849 144,178 (805,939)
Net change in accrued expenses and
other liabilities 120,327 (395,743) 1,603,479
------------- ------------- -------------
Net cash from operating activities 11,065,476 5,956,435 4,302,788
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and payments of
securities available for sale 19,498,787 5,383,558 16,326,755
Proceeds from the sales of securities
available for sale 14,306,859 - 200,000
Purchase of securities available for sale (31,473,161) (20,280,000) (17,027,900)
Loans purchased (34,679,588) (15,822,726) (36,676,580)
Proceeds from the sale of credit card loans 15,536,061 - -
Net change in loans (34,860,878) (27,005,229) (11,724,702)
Expenditures on premises and equipment (1,535,358) (2,696,588) (1,434,132)
Proceeds from the sale of other real estate owned 481,122 1,268,796 -
Cash received for net liabilities assumed in
acquisition of branches 9,143,226 9,568,741 -
Purchase of FHLB stock (776,500) (576,400) (443,100)
Purchase of bank owned life insurance (2,947,198) - -
Net change in other investments 634,939 (295,005) 2,839,938
------------- ------------- -------------
Net cash from investing activities (46,671,689) (50,454,853) (47,939,707)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 15,130,305 35,122,438 31,027,847
FHLB advances 58,845,000 15,000,000 10,000,000
Repayment of FHLB advances (43,316,428) (2,314,286) (2,314,285)
Dividends paid (50,000) - -
------------- ------------- -------------
Net cash from financing activities 30,608,877 47,808,152 38,713,562
------------- ------------- -------------
Net change in cash and cash equivalents (4,997,336) 3,309,734 (4,923,371)
Cash and cash equivalents at beginning of year 13,975,305 10,665,571 15,588,942
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,977,969 $ 13,975,305 $ 10,665,571
============= ============= =============
- -------------------------------------------------------------------------------------------------------------
(Continued)
F-5.
ATLANTIC COAST FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31, 2003, 2002, and 2001
- -------------------------------------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Supplemental cash flow information:
Interest paid $ 11,716,316 $ 12,968,758 $ 15,141,569
Income taxes paid 2,523,500 2,416,080 189,985
Supplemental noncash disclosures:
Loans transferred to other real estate $ 511,978 $ 1,300,606 $ 570,685
Receivable transferred to bank owned
life insurance - 1,500,000 -
- -------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statments.
F-6.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: The accompanying consolidated financial statements include
Atlantic Coast Federal Corporation and its wholly owned subsidiary, Atlantic
Coast Federal ("Atlantic Coast") together referred to as ("the Company"). Also
included in the consolidated financial statements is First Community Financial
Services Inc. ("FCFS"), a wholly owned subsidiary of Atlantic Coast. All
significant intercompany transactions and balances are eliminated in
consolidation. Atlantic Coast Federal Corporation is a wholly owned subsidiary
of Atlantic Coast Federal Mutual Holding Company. These financial statements do
not include the transactions and balances of the mutual company.
Atlantic Coast and FCFS, provide a broad range of banking services. Atlantic
Coast grants credit and accepts deposits from its customers in the normal course
of business primarily in southern coastal Georgia and northern coastal Florida.
On May 30, 2002, Atlantic Coast adopted a Plan of Reorganization into a
three-tier mutual holding company. The Plan of Reorganization became effective
on January 1, 2003. Following the reorganization, the Bank became a wholly owned
subsidiary of Atlantic Coast Federal Corporation ("the Stock Company"), which
became a wholly owned subsidiary of Atlantic Coast Federal Mutual Holding
Company ("the Mutual Company"). The transaction was accounted for at historical
cost. The expense incurred during 2002 for the Plan of Reorganization was
approximately $209,000. The principal activity of the Stock Company is the
ownership of Atlantic Coast Federal. The principal activity of the Mutual
Company is the ownership of the Stock Company.
On November 1, 2000, Atlantic Coast Federal converted its regulatory charter
from a federally chartered credit union to a federally chartered thrift. On that
date the name was changed from Atlantic Coast Federal Credit Union to Atlantic
Coast Federal. The conversion changed the regulatory oversight body from the
National Credit Union Administration to the Office of Thrift Supervision. There
were no significant changes in personal or business operations at the time of
the conversion, however the new charter allows Atlantic Coast enhanced ability
to operate in its markets. Another significant impact on the date of the charter
change was becoming a taxable organization which resulted in the recording of a
beginning deferred tax asset of $1,996,000 due to temporary differences between
the financial statements and tax returns.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS: The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period, as well
as the disclosures provided. Actual results could differ from those estimates.
Estimates associated with the allowance for loan losses, realization of deferred
tax assets, valuation of intangible assets including goodwill and the fair
values of securities and other financial instruments are particularly
susceptible to material change in the near term.
- --------------------------------------------------------------------------------
(Continued)
F-7.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash
equivalents is defined to include cash on hand, cash due from financial
institutions and short-term interest-earning deposits in financial institutions.
The Company reports net cash flows for customer loan transactions, deposit
transactions, and deposits made with other financial institutions.
SECURITIES: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in accumulated
comprehensive income (loss), net of tax. Securities are classified as trading
when held for short-term periods in anticipation of market gains, and are
carried at fair value. Other securities such as Federal Home Loan Bank stock are
carried at cost.
Gains and losses resulting from sales of securities are determined using the
specific identification of amortized cost. Interest and dividend income,
adjusted by amortization of purchase premium or discount over the estimated life
of the security using the level yield method, is included in earnings.
Securities are written down to fair value when a decline in fair value is not
temporary.
LOANS HELD FOR SALE: The Company originates loans for sale in the secondary
market. Loans held for sale are carried at the lower of cost or market in the
aggregate with adjustments for unrealized losses recorded in a valuation account
by a charge against current earnings. Sales in the secondary market are
recognized when full acceptance and funding has been received. Loans are sold
servicing released.
LOANS: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoffs are reported at the principal
balance outstanding, net of unearned loan fees and costs, premium on loans
purchased, and an allowance for loan losses.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs, and premium on loans purchased over the loan
term. Interest income on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well-secured and in
process of collection. Consumer loans are typically charged off no later than
180 days past due. In all cases, loans are placed on nonaccrual or charged-off
at an earlier date if collection of principal or interest is considered
doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
- --------------------------------------------------------------------------------
(Continued)
F-8.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors. Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged-off.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as special mention, substandard, or doubtful. The general
component covers non-classified loans and is based on historical loss experience
adjusted for current factors.
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. If a loan is impaired, a portion of the allowance is allocated so
that the loan is reported, net, at the present value of estimated future cash
flows using the loan's existing rate or at the fair value of collateral if
repayment is expected solely from the collateral. Large groups of smaller
balance homogeneous loans, such as consumer and residential real estate loans,
are collectively evaluated for impairment, and accordingly, they are not
separately identified for impairment disclosures.
FORECLOSED ASSETS: Assets acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure, establishing a new
cost basis and subsequently carried at the lower of carrying value or fair value
less selling costs. Costs relating to improvement of property are capitalized,
whereas costs relating to the holding of property are expensed.
PREMISES AND EQUIPMENT: Land is carried at cost. Buildings and furniture,
fixtures and equipment are carried at cost, less accumulated depreciation and
amortization. Premises and equipment are depreciated using the straight-line and
accelerated methods over the estimated useful lives of the assets. Buildings and
related components have useful lives ranging from 20 to 39 years. Furniture,
fixtures, and equipment have useful lives ranging from 1 to 15 years.
BANK OWNED LIFE INSURANCE: The Company has purchased life insurance policies on
certain key executives. Bank owned life insurance is recorded at its cash
surrender value, or the amount that can be realized.
- --------------------------------------------------------------------------------
(Continued)
F-9.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill resulted from business
acquisitions and represents the excess of the purchase price over the fair value
of acquired tangible assets and liabilities and identifiable intangible assets.
Goodwill is assessed at least annually for impairment and any such impairment is
recognized in the period identified.
Other intangible assets consist of core deposit arising from branch
acquisitions. Core deposit intangibles are initially measured at fair value and
then are amortized on an accelerated method over their estimated useful lives,
which is 10 years.
LONG-TERM ASSETS: Premises and equipment, core deposit and other intangible
assets, and other long-term assets are reviewed for impairment when events
indicate their carrying amount may not be recoverable from future undiscounted
cash flows. If impaired, the assets are recorded at fair value.
BENEFIT PLANS: Profit-sharing and 401k plan expense is the amount contributed as
determined by Board decision. Deferred compensation plan expense is allocated
over years of service.
INCOME TAXES: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
LOSS CONTINGENCIES: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
LOAN COMMITMENTS AND RELATED FINANCIAL INSTRUMENTS: Financial instruments
include off-balance sheet credit instruments including commitments to make loans
and unused lines of credit, issued to meet customer financing needs. The face
amount for these items represents the exposure to loss, before considering
collateral or ability to repay. Such financial instruments are recorded when
they are funded.
DERIVATIVES: All derivative instruments are recorded at their fair values. If
derivative instruments are designated as hedges of fair values, both the change
in the fair value of the hedge and the hedged item are included in current
earnings. Fair value adjustments related to cash flow hedges are recorded in
other comprehensive income and reclassified to earnings when the hedged
transaction is reflected in earnings. Ineffective portions of hedges are
reflected in earnings as they occur.
- --------------------------------------------------------------------------------
(Continued)
F-10.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income (loss). Other comprehensive income (loss) includes the net
change in unrealized appreciation and depreciation on securities available for
sale, net of tax, which is also recognized as a separate component of equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
OPERATING SEGMENTS: While the chief decision-makers monitor the revenue streams
of the various products and services, the identifiable segments are not material
and operations are managed and financial performance is evaluated on a
company-wide basis. Accordingly, all of the financial service operations are
considered by management to be aggregated in one reportable operating segment.
DIVIDEND RESTRICTION: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the bank to the holding company or by
the holding company to shareholders.
ADOPTION OF NEW ACCOUNTING STANDARDS: During 2003, the Company adopted FASB
Statement 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, FASB Statement 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS
WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITIES, FASB Statement 132
(revised 2003), EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT
BENEFITS, FASB INTERPRETATION 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, and FASB Interpretation 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES. Adoption of the new standards did not materially
affect the Company's operating results or financial condition.
RECLASSIFICATIONS: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
- --------------------------------------------------------------------------------
(Continued)
F-11.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES AVAILABLE FOR SALE
The fair value of securities available for sale and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income (loss)
were as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----- ----- ------
December 31, 2003
-----------------
U.S. government and agency $ 7,473,100 $ - $ (26,900)
State and municipal 15,200,940 76,980 (21,519)
Mortgage backed 1,311,878 4,825 (8,501)
Mutual funds 2,052,837 - (28,632)
-------------- ------------ -----------
$ 26,038,755 $ 81,805 $ (85,552)
============== ============ ===========
December 31, 2002
-----------------
U.S. government and agency $ 7,967,776 $ 9,028 $ -
State and municipal 5,139,417 92,527 -
Mortgage backed 2,486,217 12,655 (3,645)
Mutual funds 13,005,801 6,040 (2,066)
-------------- ------------ -----------
$ 28,599,211 $ 120,250 $ (5,711)
============== ============ ===========
Sales of securities available for sale were as follows:
2003 2002 2001
---- ---- ----
Proceeds $ 14,306,859 $ - $ 200,000
Gross gains 82,615 - 7
Gross losses (46,556) - -
At December 31, 2003, the fair value of debt securities by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or repay obligations with or
without call or property penalties. Securities not due at a single maturity
date, primarily mortgage-backed securities, and mutual funds, are shown
separately.
Due in one year or less $ 2,049,583
Due in one to five years 20,624,457
---------------
22,674,040
Mortgage-backed securities 1,311,878
Mutual funds 2,052,837
---------------
$ 26,038,755
===============
- --------------------------------------------------------------------------------
(Continued)
F-12.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES AVAILABLE FOR SALE (Continued)
At year-end 2003 and 2002, there were no holdings of securities of any one
issuer, other than the U.S. government and its agencies, in an amount greater
than 10% of equity, except for a holding at December 31, 2002 in the Asset
Management Fund totaling $9,007,867.
Securities with unrealized losses at December 31, 2003 not recognized in income
are as follows:
Less than 12 Months
-----12 Months----- -----or More----- -----Total-----
--------- ------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
------------------------- ----- ---- ----- ---- ----- ----
U.S. government and
agency $ 7,473,100 $(26,900) $ - $ - $ 7,473,100 $(26,900)
State and municipal 3,142,395 (21,519) - - 3,142,395 (21,519)
Mortgage-backed - - 505,652 (8,501) 505,652 (8,501)
Mutual funds - - 1,958,331 (28,632) 1,958,331 (28,632)
------------- -------- ------------ --------- ------------- --------
Total temporarily impaired $ 10,615,495 $(48,419) $ 2,463,983 $ (37,133) $ 13,079,478 $(85,552)
============= ======== ============ ========= ============= ========
Unrealized losses on securities have not been recognized into income because
management has the intent and ability to hold the securities for the foreseeable
future, and the decline in fair value is largely due to changes in interest
rates.
NOTE 3 - LOANS, NET
Loans at December 31 are summarized as follows:
2003 2002
---- ----
Commercial - non mortgage $ 2,608,455 $ 5,246,859
Commercial real estate and multifamily 64,011,753 45,478,642
Construction loans 30,576,226 30,527,559
One to four family residential mortgage 237,945,796 178,092,100
Consumer and other loans
Automobile 36,550,789 46,979,873
Unsecured 17,856,212 18,999,799
Home equity 38,782,244 32,722,264
Credit card 349,266 14,788,770
Other 12,972,443 11,865,214
-------------- --------------
441,653,184 384,701,080
Allowance for loan losses (6,593,329) (4,691,767)
Net deferred loan (fees) costs 553,729 (231,252)
-------------- --------------
Loans, net $ 435,613,584 $ 379,778,061
============== ==============
- --------------------------------------------------------------------------------
(Continued)
F-13.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 3 - LOANS, NET (Continued)
Activity in the allowance for loan losses was as follows:
2003 2002 2001
---- ---- ----
Beginning balance $ 4,691,767 $ 3,765,676 $ 3,642,233
Provision for loan losses 4,237,947 3,683,505 2,080,803
Loans charged-off (3,247,968) (3,503,207) (2,810,439)
Recoveries 911,583 745,793 853,079
-------------- --------------- --------------
Ending balance $ 6,593,329 $ 4,691,767 $ 3,765,676
============== =============== ==============
Impaired loans were as follows:
2003 2002
---- ----
Year-end loans with no allocated
allowance for loan losses $ - $ -
Year-end loans with allocated
allowance for loan losses 11,439,000 1,664,000
--------------- --------------
Total $ 11,439,000 $ 1,664,000
=============== ==============
Amount of the allowance for loan
losses allocated $ 3,859,000 $ 667,000
2003 2002 2001
---- ---- ----
Average of impaired loans
during the year $ 13,104,000 $ 1,852,000 $ -
Interest income recognized
during impairment 536,000 - -
Cash-basis interest income
recognized 536,000 - -
Nonperforming loans were as follows:
2003 2002
---- ----
Loans past due over 90 days
still on accrual $ - $ -
Nonaccrual loans 7,567,000 2,897,000
Nonperforming loans includes both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified as impaired
loans.
- --------------------------------------------------------------------------------
(Continued)
F-14.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 3 - LOANS, NET (Continued)
In July 2001, the Company entered into a sale and servicing agreement whereby a
pool of leases totaling $2,011,000 was purchased. The leases are collateralized
by small equipment and automobiles. In addition, each lease was backed by a
surety bond. At December 31, 2001, the remaining balance on the pool of leases
was $1,924,000. Payments have not been received since December 2001. The Company
filed claims with the insurance company on the surety bonds for past due
payments. At December 31, 2001, management had not made any provision for loan
losses with respect to these leases.
During 2002, the insurance company did not perform on the claims. Therefore, in
early 2002, the Company placed the leases on nonaccrual status. The insurance
company has alleged that most, if not all, of the leases sold by the seller were
fraudulent or fictitious. The insurance company has filed a suit against the
seller of the leases. Subsequent to the suit against the seller, the insurance
company later named the Company as a defendant. The seller of the leases has
since filed bankruptcy and the Company does not expect recovery from the seller
or the bankruptcy trustee. The Company has filed a suit against the insurance
company, asserting, among other things, breach of contract and bad faith. In
2002, the Company was informed by the bankruptcy trustee that certain leases
owned by the Company were fictitious. As a result, the Company charged-off
approximately $260,000 during 2002. As of December 31, 2002, the remaining
balance on these leases was approximately $1,664,000 and were classified as
impaired. Management is vigorously pursuing collection on the surety bonds. At
December 31, 2002, management had allocated approximately $667,000 of the
allowance for loan losses with respect to these leases.
During 2003, management has continued to pursue collection on the surety bonds.
During December 2003, the Company charged-off an additional $664,000 of the
leases. At December 31, 2003, the remaining balance on these leases is
approximately $1,000,000, and management has allocated approximately $150,000 of
the allowance for loan losses with respect to these leases. Legal costs incurred
on this matter were $500,000, $447,000, and $0 for 2003, 2002, and 2001.
The Company has originated loans in the ordinary course of business with
directors, executive officers, and their associates. These loans totaled
approximately $ 1,286,000 and $1,029,000 at December 31, 2003 and 2002. The
activity on these loans during 2003 was as follows:
Beginning balance $ 1,029,000
New loans 677,000
Effect of changes in related parties (138,000)
Repayments (282,000)
--------------
Ending balance $ 1,286,000
==============
- --------------------------------------------------------------------------------
(Continued)
F-15.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 3 - LOANS, NET (Continued)
On July 31, 2003, the Company sold its credit card portfolio with balances
totaling $12,953,000 to a third party. As a result of the sale a gain of
$2,583,000 was recorded. At December 31, 2003, a liability for final settlement
of the sale in the amount of $265,000 has been recorded in the consolidated
balance sheet. The liability was established by an offset to the gain on sale.
The liability is expected to be settled in the first quarter of 2004. In
conjunction with the sale, the Company entered into an alliance agreement with
an initial term of five years. The alliance agreement permits the purchaser the
rights to market credit cards to the Company's customers. In addition, it
restricts the Company from providing credit cards to its customers for a
five-year period.
NOTE 4 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
2003 2002
---- ----
Loans $ 1,875,126 $ 1,864,228
Securities 143,657 135,977
FHLB stock dividend 22,170 34,342
--------------- --------------
$ 2,040,953 $ 2,034,547
=============== ==============
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
2003 2002
---- ----
Land $ 3,405,323 $ 1,911,119
Buildings and leasehold improvements 9,511,085 9,531,240
Furniture, fixtures and equipment 6,413,759 5,486,059
Equipment in process 123,094 40,657
--------------- --------------
19,453,261 16,969,075
Accumulated depreciation and amortization (8,855,840) (8,150,864)
-------------- --------------
$ 10,597,421 $ 8,818,211
=============== ==============
Depreciation expense was $1,268,100, $1,164,318, and $878,747 for 2003, 2002,
and 2001.
- --------------------------------------------------------------------------------
(Continued)
F-16.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
GOODWILL
The change in balance for goodwill during the year is as follows:
2003 2002
---- ----
Beginning of year $ 1,413,090 $ -
Acquired goodwill 1,248,100 1,413,090
------------- ------------
End of year $ 2,661,190 $ 1,413,090
============= ============
ACQUIRED INTANGIBLE ASSETS
Acquired intangible assets included in other assets in the consolidated balance
sheets were as follows as of year end:
2 0 0 3 2 0 0 2
------- -------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized intangible assets:
Core deposit intangibles $ 611,023 $ (137,769) $ 231,023 $ (63,938)
Aggregate amortization expense was $73,831, $63,938 and $0 for 2003, 2002 and
2001.
Estimated amortization expense for each of the next five years:
2004 $ 70,901
2005 69,475
2006 68,051
2007 66,626
2008 63,420
- --------------------------------------------------------------------------------
(Continued)
F-17.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
Time deposits of $100,000 or more were approximately $56,488,000 and $45,374,000
at December 31, 2003 and 2002. Deposit balances over $100,000 are not federally
insured.
Scheduled maturities of time deposits for the next five years at December 31,
2003 were as follows:
2004 $ 147,245,634
2005 34,438,157
2006 16,443,453
2007 6,923,155
2008 7,437,111
-------------
$ 212,487,510
=============
Deposits from directors, executive officers and their associates at December 31,
2003 and 2002 were approximately $984,000 and $783,000.
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
At December 31, 2003, advances from the Federal Home Loan Bank of Atlanta
totaled $60,971,429 and have variable and fixed interest rates ranging from
1.23% to 6.93% with a weighted average rate of 4.27%. At December 31, 2002,
advances from the Federal Home Loan Bank of Atlanta totaled $45,442,857 and had
variable and fixed interest rates ranging from 2.88% to 6.93% with a weighted
average rate of 4.91%.
At December 31, 2003, the advances mature as follows:
2004 $ 657,144
2005 11,314,285
2006 -
2007 -
2008 5,000,000
Thereafter 44,000,000
-------------
$ 60,971,429
=============
The Company has a borrowing capacity of 30% of total assets with the Federal
Home Loan Bank of Atlanta. Mortgage loans totaling approximately $235,536,000
and $176,430,000 were pledged as collateral at year-end 2003 and 2002 for the
FHLB advances. At December 31, 2003 and 2002 Atlantic Coast owned $3,081,500 and
$2,301,500 of FHLB stock, which also secures debts to the FHLB.
- --------------------------------------------------------------------------------
(Continued)
F-18.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 9 - INTEREST RATE SWAP
The Company has an interest rate swap agreement to make fixed interest payments
in exchange for variable interest payments. The interest rate swap is used to
mitigate overall risk to changes in interest rates during the life of the swap
and is a component of the Company's asset liability management strategy to
reduce the risk that changes in interest rates will change net interest margin.
The notional amount of the interest rate swap does not represent amounts
exchanged by the parties. The amount exchanged is determined by reference to the
notional amount and the other terms of the interest rate swap.
This interest rate swap has been designated as a cash flow hedge of a certain
FHLB advance and was determined to be fully effective during 2003. As such, no
amount of ineffectiveness was included in net income. The Company expects the
hedge to remain fully effective during the remaining term of the swap.
Summary information about the interest rate swap at year-end 2003 is as follows:
2003
----
Notional amounts $ 5,000,000
Weighted average pay rates 2.38%
Weighted average receive rates 1.23%
Maturity 1.8 years
The estimated fair value of the interest rate swap is not material to the
consolidated financial statements.
NOTE 10 - EMPLOYEE BENEFITS
DEFINED CONTRIBUTION PLAN: The Company has a qualified contribution plan
covering substantially all full-time employees meeting certain age and length of
service requirements. The plan consists of participants that may contribute
between 2% and 15% of gross income with a company match of up to 5%. Total plan
expense was approximately $231,000, $207,000, and $147,000 for 2003, 2002, and
2001.
DIRECTOR RETIREMENT PLAN: In July 2001, the Company established a director
retirement plan for non-employee members of the Board. The plan provides monthly
benefits for a period of ten years following retirement. The expense for the
plan was $115,000, $304,000, and $70,000 for 2003, 2002, and 2001. The related
plan liability was $489,000, $374,000, and $70,000 at December 31, 2003, 2002,
and 2001.
- --------------------------------------------------------------------------------
(Continued)
F-19.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 10 - EMPLOYEE BENEFITS (Continued)
DEFERRED DIRECTOR FEE PLAN: In late 2002, the Company established a deferred
director fee plan for certain directors electing to defer their director fees.
These fees are expensed as earned and the plan accumulates the fees plus
earnings. At December 31, 2003 and 2002, the liability for the plan was $32,400
and $1,600.
SUPPLEMENTAL RETIREMENT PLANS: In 2002, the Company established supplemental
retirement plans for certain officers. These plans generally provide for the
payment of supplemental retirement benefits over a period of fifteen (15) to
twenty (20) years after retirement. Vesting generally occurs over a ten-year
period. During 2003 and 2002, expense for the supplemental retirement plans
totaled $220,000 and $108,000, and the accrued liability totaled $328,000 and
$108,000 at December 31, 2003 and 2002.
NOTE 11 - INCOME TAXES
Income tax expense was as follows:
2003 2002 2001
---- ---- ----
Current $ 3,296,876 $ 1,701,691 $ (88,551)
Deferred (898,586) (116,861) 1,378,106
-------------- --------------- --------------
Total $ 2,398,290 $ 1,584,830 $ 1,289,555
============== =============== ==============
The effective tax rate differs from the statutory federal income tax rate as
follows:
2003 2002 2001
---- ---- ----
Income taxes at statutory rate of 34% $ 2,317,278 $ 1,622,373 $ 1,185,124
Increase (decrease) from
State income tax, net of
federal tax effect 228,858 177,597 117,169
Tax-exempt income (65,863) (16,953) (4,209)
Non-taxable gain - (208,174) -
Cash surrender value increase (73,691) (29,363) -
Other, net (8,292) 39,350 (8,529)
-------------- --------------- --------------
Income tax expense $ 2,398,290 $ 1,584,830 $ 1,289,555
============== =============== ==============
- --------------------------------------------------------------------------------
(Continued)
F-20.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES (Continued)
Year-end deferred tax assets and liabilities were due to the following.
2003 2002
---- ----
Deferred tax assets:
Allowance for loan losses $ 523,648 $ -
Depreciation 961,961 1,208,991
Deferred compensation arrangements 310,379 183,233
Other real estate 66,058 11,307
Organizational costs 63,563 79,453
Net unrealized loss on securities available for sale 1,424 -
Other 593 54,907
--------------- --------------
1,927,626 1,537,891
Deferred tax liabilities:
Net unrealized gain on securities available for sale - (43,525)
Gain on the sale on fixed assets - (224,010)
Allowance for loan losses - (320,557)
Acquired customer intangibles (34,292) -
--------------- --------------
(34,292) (588,092)
--------------- --------------
Net deferred tax asset $ 1,893,334 $ 949,799
=============== ==============
No valuation allowance was provided on deferred tax assets as of December 31,
2003 and 2002.
NOTE 12 - REGULATORY MATTERS
Atlantic Coast Federal is subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements. The prompt corrective
action regulations provide for five classifications: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized, although these terms are not used to represent
overall financial condition.
- --------------------------------------------------------------------------------
(Continued)
F-21.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 12 - REGULATORY MATTERS (Continued)
At year end, Atlantic Coast Federal's actual and required capital levels (in
millions) and ratios were:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2003
-----------------------
Total capital (to risk weighted assets) $ 44.4 12.9% $ 27.5 8.0% $ 34.4 10.0%
Tier 1 (core) capital (to risk weighted
assets) 40.0 11.7% 13.7 4.0% 20.6 6.0%
Tier 1 (core) capital (to adjusted total
assets) 40.0 8.1% 19.8 4.0% 24.7 5.0%
As of December 31, 2002
-----------------------
Total capital (to risk weighted assets) $ 41.2 12.6% $ 26.2 8.0% $ 32.8 10.0%
Tier 1 (core) capital (to risk weighted
assets) 37.3 11.4% 13.1 4.0% 19.7 6.0%
Tier 1 (core) capital (to adjusted total
assets) 37.3 8.4% 17.8 4.0% 22.3 5.0%
At December 31, 2003 and 2002, Atlantic Coast Federal was classified as "well
capitalized." There are no conditions or events since December 31, 2003 that
management believes have changed the classification.
The Qualified Thrift Lender test requires at least 65% of assets be maintained
in housing-related finance and other specified areas. If this test is not met,
limits are placed on growth, branching, new investments, FHLB advances and
dividends, or Atlantic Coast Federal must convert to a commercial bank charter.
Management believes that this test is met.
Banking regulations limit capital distributions by savings associations.
Generally, capital distributions are limited to undistributed net income for the
current and prior two years. At year-end 2003, approximately $7,400,000 is
available to pay dividends to the Stock Holding Company.
- --------------------------------------------------------------------------------
(Continued)
F-22.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 12 - REGULATORY MATTERS (Continued)
On May 29, 2003 the Board of Directors adopted a Resolution addressing certain
areas of operation of the Company. The Resolution included an agreement to limit
the total assets of the Company to no more than $510 million at December 31,
2003. In addition, the Board agreed to discontinue certain lending activities
until adequate staffing, underwriting policies and procedures, and loan review
programs were established and subject to review by the Office of Thrift
Supervision. These lending activities included construction, non-residential
real estate, multi-family real estate, land acquisition and land development,
and non-mortgage commercial loans. As of December 31, 2003, the Company believes
it has addressed all matters related to the Resolution. However, the Company
cannot originate new commercial construction loans or non-mortgage commercial
loans earlier than the completion of the next regulatory examination completed
by the Office of Thrift Supervision.
The following is a reconciliation of the Company's equity under accounting
principles generally accepted in the United States of America to regulatory
capital as of the dates indicated (in thousands):
----December 31,----
------------
2003 2002
---- ----
GAAP equity $ 43,218 $ 38,924
Intangible assets (3,134) (1,580)
Unrealized loss (gain) on securities
available for sale 2 (71)
----------- -----------
Tier I Capital 40,086 37,273
General regulatory loan loss reserves 4,315 3,945
----------- -----------
Total capital $ 44,401 $ 41,218
=========== ===========
NOTE 13 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. The principal commitments are as
follows at year end:
2003 2002
---- ----
Undisbursed portion of loans closed $ 28,759,000 $ 17,659,000
Unused lines of credit 17,497,000 56,445,000
- --------------------------------------------------------------------------------
(Continued)
F-23.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
At December 31, 2003, the commitments disclosed above were all variable rate
commitments with a range from 4% to 18%.
Since certain commitments to make loans and lines of credit and to fund loans in
process expire without being used, the amount does not necessarily represent
future cash commitments. In addition, commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. The exposure to credit loss in the event
of nonperformance by the other party to these financial instruments is
represented by the contractual amount of these instruments. The Company follows
the same credit policy to make such commitments as is followed for those loans
recorded on the consolidated balance sheet.
The Company maintains a line of credit for $7.5 million with Compass Bank with
no outstanding balances as of December 31, 2003 and 2002.
In 2003, the Company also obtained a line of credit for $13.0 million with the
Bankers Bank with no outstanding balance as of December 31, 2003.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair value of financial instruments were as
follows at year end.
---------------2003------------- --------------2002-------------
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
FINANCIAL ASSETS
Cash and cash equivalents $ 8,977,969 $ 8,978,000 $ 13,975,305 $ 13,975,000
Other interest-bearing deposits
in other financial institutions 500,000 500,000 1,134,939 1,135,000
Securities available for sale 26,038,755 26,039,000 28,599,211 28,599,000
Loans held for sale 487,183 487,000 2,447,347 2,447,000
Loans, net 435,613,584 434,872,000 379,778,061 388,138,000
Federal Home Loan Bank stock 3,081,500 3,082,000 2,305,000 2,305,000
Accrued interest receivable 2,040,953 2,041,000 2,034,547 2,035,000
Bank owned life insurance 4,750,300 4,750,000 1,586,363 1,586,000
FINANCIAL LIABILITIES
Deposits (392,255,825) (393,162,000) (360,879,630) (362,380,000)
Federal Home Loan Bank advances (60,971,429) (66,923,000) (45,442,857) (46,597,000)
The methods and assumptions used to estimate fair value are described as
follows.
- --------------------------------------------------------------------------------
(Continued)
F-24.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Carrying amount is the estimated fair value for cash and cash equivalents, other
interest-bearing deposit in other financial institutions, Federal Home Loan Bank
stock, accrued interest receivable, demand and savings deposits and variable
rate loans or deposits that reprice frequently and fully. Security fair values
are based on market prices or dealer quotes, and if no such information is
available, on the rate and term of the security and information about the
issuer. For fixed rate loans or deposits and for variable rate loans or deposits
with infrequent repricing or repricing limits, fair value is based on discounted
cash flows using current market rates applied to the estimated life and credit
risk. Fair value of debt is based on current rates for similar financing. The
estimated fair value of other financial instruments and off-balance-sheet loan
commitments approximate cost and are not considered significant to this
presentation.
NOTE 15 - MINORITY STOCK OFFERING
On February 25, 2003, the Board of Directors of Atlantic Coast Federal Mutual
Holding Company adopted a resolution to sell common stock in an amount equal to
40% (minority Stock Offering) of the consolidated pro forma market value of the
stock holding company and the Bank after giving effect to the offering. A
subscription offering of the shares of common stock in the stock holding company
will be offered initially to the Company's eligible deposit account holders and
the Company's tax qualified employee benefit plan, then to the other members of
the Company. Any shares of the holding company's common stock not sold in the
subscription offering will be offered for sale to the general public, giving
preference to the Company's market area.
Upon completion of the minority Stock Offering, the mutual holding company will
own 60% of the outstanding stock of the stock holding company, with the
remaining 40% held by the public. The stock holding company will own 100% of the
federal stock savings bank. The federal stock savings bank may not pay dividends
to the stock holding company if the dividends would cause the federal stock
savings bank to fall below the "well capitalized" capital threshold.
The Stock Holding Company intends to contribute approximately 50% of the
proceeds of the offering to the Bank. The Stock Holding Company will also lend
its employee stock ownership plan cash to enable the plan to buy up to 8% of the
shares issued in the offering to persons other than the MHC. The balance will be
retained as the Stock Holding Company's initial capitalization and may be used
for general business purposes including investment in securities, repurchasing
shares of its common stock, paying dividends, or pursuing acquisitions. The
funds received by the Bank will be used for general business purposes including
originating loans and purchasing securities and may also be used for growth
through expansion of the branch office network or acquisitions.
- --------------------------------------------------------------------------------
(Continued)3
F-25.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 15 - MINORITY STOCK OFFERING (Continued)
The Company currently expects the stock offering to close towards the end of the
second quarter of 2004 or the beginning of the third quarter of 2004. Offering
costs will be deferred and deducted from the proceeds of the shares sold in the
stock offering. If the offering is not completed, all costs will be charged to
expense. At December 31, 2003, $190,855 of costs have been incurred.
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
ATLANTIC COAST FEDERAL CORPORATION
CONDENSED BALANCE SHEET
December 31, 2003
ASSETS
Cash and cash equivalents $ 50,000
Investment in subsidiary 43,168,375
--------------
Total assets $ 43,218,375
==============
SHAREHOLDER'S EQUITY $ 43,218,375
==============
ATLANTIC COAST FEDERAL CORPORATION
CONDENSED STATEMENT OF INCOME
Year Ended December 31, 2003
Income
Equity in undistributed net income of subsidiary $ 4,317,234
Dividends from subsidiary 100,000
--------------
Net income $ 4,417,234
==============
- --------------------------------------------------------------------------------
(Continued)
F-26.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
ATLANTIC COAST FEDERAL CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,417,234
Adjustments:
Equity in undistributed earnings of subsidiary (4,317,234)
-------------
Net cash from operating activities 100,000
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to mutual holding company (50,000)
-------------
Net cash from financing activities (50,000)
-------------
Net change in cash and cash equivalents 50,000
Cash and cash equivalents at beginning of year -
-------------
Cash and cash equivalents at end of year $ 50,000
=============
NOTE 17 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
2003 2002 2001
---- ---- ----
Unrealized holding gains and losses on
securities available for sale $ (82,227) $ 70,545 $ 189,909
Less reclassification adjustments for gains
recognized in income (36,059) - -
------------ ----------- ------------
Net unrealized gains and losses (118,286) 70,545 189,909
Tax effect (44,949) 26,807 72,166
------------ ----------- ------------
Other comprehensive income (loss) $ (73,337) $ 43,738 $ 117,743
============ =========== ============
- --------------------------------------------------------------------------------
(Continued)
F-27.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 18 - BRANCH ACQUISITIONS
2003 BRANCH PURCHASES
During 2003, the Company purchased two branch office facilities and assumed
related deposits from another financial institution. Approximately $16.2 million
of deposits were assumed, $1.5 million in fixed assets acquired, $4.0 million in
loans acquired, $44,000 in other liabilities were assumed and $9.1 million of
cash was received. The transaction resulted in both amortizable intangibles and
non-amortizable goodwill, totaling $1.6 million. The core deposit intangible
(approximately $380,000) will be amortized to expense over 10 years using an
accelerated method. The Company acquired the branch at this premium to expand
its customer base to enhance deposit fee income, provide an opportunity to
market additional products and services to new customers, and improve customer
convenience by adding new locations.
2002 BRANCH PURCHASE
In 2002, the Company purchased a branch office facility and assumed related
deposits from another financial institution. Approximately $20.1 million of
deposits were assumed, $750,000 in fixed assets acquired, $7.9 million in loans
acquired, $24,000 in other liabilities were assumed and $9.6 million of cash was
received. The transaction resulted in both amortizable intangibles and
non-amortizable goodwill, totaling $1.6 million. The core deposit intangible
(approximately $231,000) will be amortized to expense over 10 years using an
accelerated method. The Company acquired the branch at this premium to expand
its customer base to enhance deposit fee income, provide an opportunity to
market additional products and services to new customers, and improve customer
convenience by adding a new location.
- --------------------------------------------------------------------------------
(Continued)
F-28.
ATLANTIC COAST FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest Net Interest Net
Income Income Income
------ ------ ------
2003
- ----
First quarter $ 8,022,000 $ 4,936,000 $ 985,000
Second quarter 8,049,000 4,958,000 1,010,000
Third quarter 7,605,000 4,789,000 1,672,000*
Fourth quarter 7,537,000 4,748,000 750,000
2002
- ----
First quarter $ 7,244,000 $ 3,882,000 $ 791,000
Second quarter 7,633,000 4,451,000 1,253,000
Third quarter 7,946,000 4,661,000 1,069,000
Fourth quarter 7,990,000 4,785,000 74,000**
* The third quarter of 2003 was impacted by the previously disclosed sale of
the Company's credit card portfolio. The gain on the sale of the credit
card portfolio was partially offset by an increase in provision for loan
losses charged to expense to provide specific reserve allocations on
certain commercial loans.
** The fourth quarter of 2002 was significantly impacted by an increased
provision for loan losses.
- -------------------------------------------------------------------------------
F-29.
No person has been authorized to give any information or to
make any representation other than as contained in this
prospectus in connection with the offering made hereby, and,
if given or made, such other information or representation
must not be relied upon as having been authorized by
Atlantic Coast Federal Corporation, Atlantic Coast Federal
or Friedman Billings Ramsey. This prospectus does not
constitute an offer to sell or a solicitation of an offer to
buy any of the securities offered hereby to any person in
any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or
solicitation is not qualified to do so, or to any person to
whom it is unlawful to make such offer or solicitation in
such jurisdiction. Neither the delivery of this prospectus UP TO
nor any sale hereunder shall under any circumstances create
any implication that there has been no change in the affairs
of Atlantic Coast Federal Corporation or Atlantic Coast
Federal since any of the dates as of which information is 6,348,000 SHARES
furnished herein or since the date hereof.
--------------
TABLE OF CONTENTS ATLANTIC COAST FEDERAL CORPORATION
PAGE (Holding Company for
Atlantic Coast Federal)
Summary.......................................................
Risk Factors..................................................
Selected Consolidated Financial and Other Data................
Atlantic Coast Federal Corporation............................
Atlantic Coast Federal........................................
Atlantic Coast Federal, MHC................................... COMMON STOCK
How We Intend to Use the Proceeds.............................
Our Policy Regarding Dividends................................
Market for the Common Stock...................................
Pro Forma Data................................................
Capitalization................................................
Pro Forma Regulatory Capital Analysis......................... --------------
The Stock Offering............................................
Proposed Stock Purchases by Management........................ PROSPECTUS
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ --------------
Business of Atlantic Coast Federal, MHC.......................
Business of Atlantic Coast Federal Corporation................ FRIEDMAN BILLINGS RAMSEY
Business of Atlantic Coast Federal............................
Management ...................................................
How We Are Regulated.......................................... __________, 2004
Taxation......................................................
Restrictions on Acquisitions of Atlantic Coast Federal
Corporation and Atlantic Coast Federal.....................
Description of Capital Stock of Atlantic Coast Federal
Corporation................................................
Transfer Agent and Registrar..................................
Experts.......................................................
Legal and Tax Opinions........................................
Additional Information........................................
Index to Consolidated Financial Statements....................
- -----------------------------------------------------
DEALER PROSPECTUS DELIVERY OBLIGATIONS
Until the later of _____, 2004 or 25 days after the
commencement of the syndicated Community offering, if any,
all dealers effecting transactions in the registered
securities, whether or not participating in this
distribution, may be required to deliver a prospectus. This
is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution Amount
* Legal Fees and Expenses....................................... $ 300,000
* Accounting Fees and Expenses.................................. 200,000
* Conversion Agent and Data Processing Fees..................... 75,000
* Marketing Agent Fees (1)...................................... 436,600
* Marketing Agent Expenses, including legal fees and expenses... 50,000
* Appraisal and Business Plan Fees and Expenses................. 40,000
* Printing, Postage, Mailing and EDGAR.......................... 130,000
* OTS Filing Fee................................................ 6,400
* Sec Filing Fee................................................ 8,043
* Nasdaq Fee.................................................... 100,000
* Stock Transfer Agent and Certificates......................... 20,000
* Other Expenses................................................ 9,957
------------
* Total ........................................................ $ 1,376,000
============
- -----------------------
* Estimated
(1) Atlantic Coast Federal Corporation has retained Friedman Billings Ramsey
to assist in the sale of common stock on a best efforts basis in the
offerings. Amount is based upon the sale of the common stock at the
maximum of the offering range.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 545.121 of the Office of Thrift Supervision (OTS) regulations
provides indemnification for directors and officers of the Atlantic Coast
Federal. Although there are no indemnification provisions in the charter and
bylaws of the Registrant, all the directors and officers of the Registrant hold
the same position with Atlantic Coast Federal and have indemnification under OTS
Regulations as described below.
Generally, federal regulations define areas for indemnity coverage for
federal savings associations as follows:
(a) Any person against whom any action is brought or threatened
because that person is or was a director or officer of the savings association
shall be indemnified by the savings association for:
(i) Any amount for which that person becomes liable under a
judgment in such action; and
(ii) Reasonable costs and expenses, including reasonable
attorneys' fees, actually paid or incurred by that
person in defending or settling such action, or in
enforcing his or her rights under this section if he or
she attains a favorable judgment in such enforcement
action.
(b) Indemnification shall be made to such person under paragraph (b)
of this Section only if:
(i) Final judgment on the merits is in his or her favor; or
(ii) In case of:
a. Settlement,
b. Final judgment against him or her, or
c. Final judgment in his or her favor, other than
on the merits, if a majority of the
disinterested directors of the savings
association determine that he or she was acting
in good faith within the scope of his or her
employment or authority as he or she could
reasonably have perceived it under the
circumstances and for a purpose he
or she could reasonably have believed under the
circumstances was in the best interest of the
savings association or its members. However, no
indemnification shall be made unless the
association gives the Office at least 60 days
notice of its intention to make such
indemnification. Such notice shall state the
facts on which the action arose, the terms of
any settlement, and any disposition of the
action by a court. Such notice, a copy thereof,
and a certified copy of the resolution
containing the required determination by the
board of directors shall be sent to the Regional
Director, who shall promptly acknowledge receipt
thereof. The notice period shall run from the
date of such receipt. No such indemnification
shall be made if the OTS advises the association
in writing, within such notice period, of its
objection thereto.
(c) As used in this paragraph:
(i) "Action" means any judicial or administrative
proceeding, or threatened proceeding, whether civil,
criminal, or otherwise, including any appeal or other
proceeding for review;
(ii) "Court" includes, without limitation, any court to which
or in which any appeal or any proceeding for review is
brought;
(iii) "Final Judgment" means a judgment, decree, or order
which is not appealable or as to which the period for
appeal has expired with no appeal taken;
(iv) "Settlement" includes the entry of a judgment by consent
or confession or a plea of guilty or of NOLO CONTENDERE.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
The exhibits and financial statement schedules filed as part of
this registration statement are as follows:
(A) LIST OF EXHIBITS
1.1 Engagement Letter between Atlantic Coast Federal Corporation and
Friedman Billings Ramsey
1.2 Form of Agency Agreement between Atlantic Coast Federal Corporation and
Friedman Billings Ramsey*
2 Plan of Stock Issuance
3.1 Charter of Atlantic Coast Federal Corporation
3.2 Bylaws of Atlantic Coast Federal Corporation
4 Form of Common Stock Certificate of Atlantic Coast Federal Corporation
5 Opinion of Luse Gorman Pomerenk & Schick, P.C. regarding legality of
securities being registered
8.1 Form of Federal Tax Opinion of Luse Gorman Pomerenk & Schick, P.C.
10.1 Employee Stock Ownership Plan
10.2 Employment Agreement with Robert J. Larison, Jr.
10.3 Supplemental Executive Retirement Agreement with Robert J. Larison, Jr.
10.4 Supplemental Executive Retirement Plan
10.5 Director Retirement Plan
10.6 Director Fee Deferral Plan*
21 Subsidiaries of Registrant
23.1 Consent of Luse Gorman Pomerenk & Schick (contained in Opinions
included as Exhibits 5 and 8)
23.2 Consent of Crowe Chizek and Company LLC
23.3 Consent of RP Financial, L.C.
24 Power of Attorney (set forth on signature page)
99.1 Appraisal Agreement between Atlantic Coast Federal Corporation and RP
Financial, L.C.
99.2 Business Plan Agreement between Atlantic Coast Federal Corporation and
RP Financial, L.C.
99.3 Appraisal Report of RP Financial, L.C.*
99.4 Letter of RP Financial, L.C. with respect to Subscription Rights
99.5 Marketing Materials*
99.6 99.6 Order and Acknowledgment Form*
99.7 Data Processing Services Agreement with Mellon Investor Services
* To be filed supplementally or by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are filed because the required information is
not applicable or is included in the consolidated financial statements or
related notes.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any duration from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned registrant will provide to the underwriter at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Waycross,
State of Georgia on March 12, 2004.
ATLANTIC COAST FEDERAL CORPORATION
By: /s/ Robert J. Larison, Jr.
------------------------------------
Robert J. Larison, Jr.
President, Chief Executive Officer
and Director
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of Atlantic Coast Federal
Corporation (the "Company") hereby severally constitute and appoint Robert J.
Larison, Jr. as our true and lawful attorney and agent, to do any and all things
in our names in the capacities indicated below which said Robert J. Larison, Jr.
may deem necessary or advisable to enable the Company to comply with the
Securities Act of 1933, and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with the registration
statement on Form S-1 relating to the offering of the Company's common stock,
including specifically, but not limited to, power and authority to sign for us
in our names in the capacities indicated below the registration statement and
any and all amendments (including post-effective amendments) thereto; and we
hereby approve, ratify and confirm all that said Robert J. Larison, Jr. shall do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Robert J. Larison, Jr. President, Chief Executive March 12, 2004
- ------------------------------ Officer and Director(Principal
Robert J. Larison, Jr. Executive Officer)
/s/ Jon C. Parker, Sr. Senior Vice President, Chief March 12, 2004
- ------------------------------ Financial Officer and Director
Jon C. Parker, Sr. (Principal Financial and
Accounting Officer)
/s/ John M. Hinson Director March 12, 2004
- ------------------------------
John M. Hinson
/s/ Charles E. Martin Director March 12, 2004
- ------------------------------
Charles E. Martin
/s/ I.J. McGahee Director March 12, 2004
- ------------------------------
I. J. McGahee
/s/ Cyril M. Morris Director March 12, 2004
- ------------------------------
Cyril M. Morris
/s/ Robert J. Smith Director March 12, 2004
- ------------------------------
Robert J. Smith
/s/ Forrest W. Sweat, Jr. Director March 12, 2004
- ------------------------------
Forrest W. Sweat, Jr.
/s/ H. Dennis Woods Director March 12, 2004
- ------------------------------
H. Dennis Woods
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 2004
REGISTRATION NO. 333-________
================================================================================
---------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------
EXHIBITS
TO
REGISTRATION STATEMENT
ON
FORM S-1
ATLANTIC COAST FEDERAL CORPORATION
WAYCROSS, GEORGIA
================================================================================
EXHIBIT INDEX
1.1 Engagement Letter between Atlantic Coast Federal Corporation and Friedman Billings Ramsey
1.2 Form of Agency Agreement between Atlantic Coast Federal Corporation and Friedman Billings Ramsey*
2 Plan of Stock Issuance
3.1 Charter of Atlantic Coast Federal Corporation
3.2 Bylaws of Atlantic Coast Federal Corporation
4 Form of Common Stock Certificate of Atlantic Coast Federal Corporation
5 Opinion of Luse Gorman Pomerenk & Schick, P.C. regarding legality of securities being registered
8.1 Form of Federal Tax Opinion of Luse Gorman Pomerenk & Schick, P.C.
10.1 Employee Stock Ownership Plan
10.2 Employment Agreement with Robert J. Larison, Jr.
10.3 Supplemental Executive Retirement Agreement with Robert J. Larison, Jr.
10.4 Supplemental Executive Retirement Plan
10.5 Director Retirement Plan
10.6 Director Fee Deferral Plan*
21 Subsidiaries of Registrant
23.1 Consent of Luse Gorman Pomerenk & Schick (contained in Opinions included as Exhibits 5 and 8)
23.2 Consent of Crowe Chizek and Company LLC
23.3 Consent of RP Financial, L.C.
24 Power of Attorney (set forth on signature page)
99.1 Appraisal Agreement between Atlantic Coast Federal Corporation and RP Financial, L.C.
99.2 Business Plan Agreement between Atlantic Coast Federal Corporation and RP Financial, L.C.
99.3 Appraisal Report of RP Financial, L.C.*
99.4 Letter of RP Financial, L.C. with respect to Subscription Rights
99.5 Marketing Materials*
99.6 Order and Acknowledgment Form*
99.7 Data Processing Services Agreement with Mellon Investor Services
- -------------------------------
* To be filed supplementally or by amendment.