------------------------------------------------------
PRO FORMA VALUATION REPORT
ATLANTIC COAST FEDERAL CORPORATION
HOLDING COMPANY FOR
ATLANTIC COAST FEDERAL
WAYCROSS, GEORGIA
DATED AS OF:
MARCH 5, 2004
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PREPARED BY:
RP(R) FINANCIAL, LC.
1700 NORTH MOORE STREET
SUITE 2210
ARLINGTON, VIRGINIA 22209
RP(R) FINANCIAL, LC.
- ----------------------------------------------------
Financial Services Industry Consultants
March 5, 2004
Board of Directors
Atlantic Coast Federal Mutual Holding Company
Atlantic Coast Federal Corporation
Atlantic Coast Federal
505 Haines Avenue
Waycross, Georgia 31501
Members of the Boards:
At your request, we have completed and hereby provide an independent
appraisal ("Appraisal") of the estimated pro forma market value of the Common
Stock which is to be offered in connection with the Plan of Stock Issuance (the
"Plan"), described below.
This Appraisal is furnished pursuant to the requirements of 563b.7 and has
been prepared in accordance with the "Guidelines for Appraisal Reports for the
Valuation of Savings and Loan Associations Converting from Mutual to Stock Form
of Organization" of the Office of Thrift Supervision ("OTS"), including the most
recent revisions as of October 21, 1994, and applicable interpretations thereof.
DESCRIPTION OF PLAN OF STOCK ISSUANCE
Atlantic Coast Federal Mutual Holding Company (the "MHC") is a federally
chartered mutual holding company regulated by the OTS. The MHC was formed in
2003 in conjunction with the mutual holding company reorganization of Atlantic
Coast Federal, Waycross, Georgia, ("Atlantic Coast Federal" or the "Bank"); no
stock was issued publicly in the mutual holding company reorganization.
Simultaneous with the mutual holding company reorganization, a wholly-owned
mid-tier stock holding company was formed known as Atlantic Coast Federal
Corporation (the "Company") and Atlantic Coast Federal became a wholly-owned
subsidiary of the Company. Pursuant to the Plan, the Company will offer for sale
up to 49.0% of its common stock (the "Minority Stock Issuance") to the Bank's
Eligible Account Holders, Supplemental Eligible Account Holders and
tax-qualified plans of the Bank (including the employee stock ownership plan, or
"ESOP"). Any shares that are not sold in the Subscription Offering may be
offered for sale in the Direct Community Offering and subsequently, if
appropriate, to the public in a Syndicated Community Offering. The number of
shares of common stock to be sold in the Offering will approximate 40% of the
total shares. The number of shares issued to the MHC will approximate 60% of the
total shares.
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WASHINGTON HEADQUARTERS
Rosslyn Center Telephone: (703) 528-1700
1700 North Moore Street, Suite 2210 Fax No.: (703) 528-1788
Arlington, VA 22209 Toll-Free No.: (866) 723-0594
www.rpfinancial.com E-Mail: mail@rpfinancial.com
BOARD OF DIRECTORS
MARCH 5, 2004
PAGE 2
Immediately following the Minority Stock Issuance, the primary assets of
the Company will be the capital stock of the Bank and the net offering proceeds
remaining after contributing proceeds to the Bank. The Company will retain up to
50% of the net offering proceeds. The Company intends to use a portion of the
proceeds to make a loan directly to the ESOP to enable the ESOP to purchase up
to 8.0% of the shares of common stock sold in the offering.
RP(R) FINANCIAL, LC.
RP(R) Financial, LC. ("RP Financial") is a financial consulting and
valuation firm serving the financial services industry nationwide that, among
other things, specializes in financial valuations and analyses of business
enterprises and securities, including the pro forma valuation for savings
institutions converting from mutual-to-stock form. The background and experience
of RP Financial is detailed in Exhibit V-1. We believe that, except for the fee
we will receive for our appraisal and assisting the Bank and the Company in the
preparation of the post-conversion business plan, we are independent of the
Company, the Bank, the MHC and the other parties engaged by the Bank or the
Company to assist in the Minority Stock Issuance.
VALUATION METHODOLOGY
In preparing our appraisal, we have reviewed the Bank's and the Company's
regulatory applications, including the prospectus as filed with the OTS and the
Securities and Exchange Commission ("SEC"). We have conducted a financial
analysis of the Bank that has included a review of its audited financial
information for fiscal years ended December 31, 1999 through 2003, and due
diligence related discussions with the Company's management; Crowe Chizek and
Company LLC, the Company's independent auditor; Luse, Gorman Pomerenk and
Schick, the Company's legal counsel for the stock conversion, and Friedman,
Billings, Ramsey & Co., Inc., the Company's financial and marketing advisors in
connection with the Company's stock offering. All conclusions set forth in the
Appraisal were reached independently from such discussions. In addition, where
appropriate, we have considered information based on other available published
sources that we believe are reliable. While we believe the information and data
gathered from all these sources are reliable, we cannot guarantee the accuracy
and completeness of such information.
We have investigated the competitive environment within which the Company
operates and have assessed the Company's relative strengths and weaknesses. We
have kept abreast of the changing regulatory and legislative environment for
financial institutions and analyzed the potential impact on the Company and the
industry as a whole. We have analyzed the potential effects of the stock
issuance on the Company's operating characteristics and financial performance as
they relate to the pro forma market value. We have reviewed the economy in the
Company's primary market area and have compared the Company's financial
performance and condition with publicly-traded thrifts in mutual holding company
form, as well as all publicly-traded thrifts. We have reviewed conditions in the
securities markets in general and in the market for thrift stocks in particular,
including the market for existing thrift issues and the market
BOARD OF DIRECTORS
MARCH 5, 2004
PAGE 3
for initial public offerings by thrifts. We have specifically considered the
market for the stock of publicly-traded mutual holding companies, including the
market for initial public offerings in conjunction with other MHC
reorganizations. We have excluded from such analyses thrifts subject to
announced or rumored acquisition, mutual holding company institutions that have
announced their intent to pursue second step conversions, and/or those
institutions that exhibit other unusual characteristics. We have also considered
the expected market for the Company's public shares.
Our Appraisal is based on the Company's representation that the information
contained in the regulatory applications and additional information furnished to
us by the Company, its independent auditors, legal counsel and other authorized
agents are truthful, accurate and complete. We did not independently verify the
financial statements and other information provided by the Company, its
independent auditors, legal counsel and other authorized agents nor did we
independently value the individual assets or liabilities, on or off balance
sheet, of the Company. The valuation considers the Company only as a going
concern and should not be considered as an indication of the Company's
liquidation value.
Our appraised value is predicated on a continuation of the current
operating environment for the Bank, the MHC and the Company and for all thrifts
and their holding companies, including mutual holding companies. Changes in the
local, state and national economy, the legislative and regulatory environment
for financial institutions and mutual holding companies, the stock market,
interest rates, and other external forces (such as natural disasters or
significant world events) may occur from time to time, often with great
unpredictability, and may materially impact the value of thrift stocks as a
whole or the Bank's, the MHC's and the Company's values alone. It is our
understanding that there are no current or long-term plans for pursuing a second
step conversion or for selling control of the Company or the Bank at this time.
To the extent that such factors can be foreseen, they have been factored into
our analysis.
Pro forma market value is defined as the price at which the Company's
stock, immediately upon completion of the offering, would change hands between a
willing buyer and a willing seller, neither being under any compulsion to buy or
sell and both having reasonable knowledge of relevant facts.
BOARD OF DIRECTORS
MARCH 5, 2004
PAGE 4
VALUATION CONCLUSION
It is our opinion that, as of March 5, 2004, the aggregate market value of
the Company's common stock, assuming a full conversion offering, is $120.0
million. The resulting range of value pursuant to regulatory guidelines and the
corresponding number of shares based on the $10.00 per share offering price is
set forth below:
Total Aggregate
Shares Issued(1) Market Value(1)
---------------- ---------------
Minimum 10,200,000 $102,000,000
Midpoint 12,000,000 $120,000,000
Maximum 13,800,000 $138,000,000
Supermaximum 15,870,000 $158,700,000
(1) Based on a $10.00 per share price, pursuant to a full conversion.
Based on the foregoing valuation, the Board has determined to offer 40% of
the full value for sale in the minority stock offering, the following range:
Offering
Total Shares Mhc Shares Shares
------------ ---------- ------
SHARES(1)
Minimum 10,200,000 6,120,000 4,080,000
Midpoint 12,000,000 7,200,000 4,800,000
Maximum 13,800,000 8,280,000 5,520,000
Supermaximum 15,870,000 9,522,000 6,348,000
DISTRIBUTION OF SHARES(2)
Minimum 100.00% 60.00% 40.0%
Midpoint 100.00% 60.00% 40.0%
Maximum 100.00% 60.00% 40.0%
Supermaximum 100.00% 60.00% 40.0%
AGGREGATE MARKET VALUE
Minimum $102,000,000 $61,200,000 $40,800,000
Midpoint $120,000,000 $72,000,000 $48,000,000
Maximum $138,000,000 $82,800,000 $55,200,000
Supermaximum $158,700,000 $95,220,000 $63,480,000
(1) Based on offering price of $10.00 per share.
(2) Based on 40.00% of the conversion valuation range.
BOARD OF DIRECTORS
MARCH 5, 2004
PAGE 5
LIMITING FACTORS AND CONSIDERATIONS
Our valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing shares of the
Common Stock. Moreover, because such 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 who purchase
shares of Common Stock in the Offering will thereafter be able to buy or sell
such shares at prices related to the foregoing valuation of the pro forma market
value thereof.
RP Financial's valuation was determined based on the financial condition
and operations of the Bank as of December 31, 2003, the date of the financial
data included in the regulatory applications and prospectus.
RP Financial is not a seller of securities within the meaning of any
federal and state securities laws and any report prepared by RP Financial shall
not be used as an offer or solicitation with respect to the purchase or sale of
any securities. RP Financial maintains a policy which prohibits the company, its
principals or employees from purchasing stock of its client institutions.
The valuation will be updated as provided for in the conversion regulations
and guidelines. These updates will consider, among other things, any
developments or changes in the Company's financial performance and condition,
management policies, and current conditions in the equity markets for thrift
shares. These updates may also consider changes in other external factors which
impact value including, but not limited to: various changes in the legislative
and regulatory environment, the stock market and the market for thrift stocks,
and interest rates. Should any such new developments or changes be material, in
our opinion, to the valuation of the shares, appropriate adjustments to the
estimated pro forma market value will be made. The reasons for any such
adjustments will be explained in the update at the date of the release of the
update.
Respectfully submitted,
RP(R)FINANCIAL, LC.
William E. Pommerening
Chief Executive Officer
James P. Hennessey
Senior Vice President
RP FINANCIAL, LC.
TABLE OF CONTENTS
ATLANTIC COAST FEDERAL
WAYCROSS, GEORGIA
PAGE
DESCRIPTION NUMBER
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CHAPTER ONE OVERVIEW AND FINANCIAL ANALYSIS
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Introduction 1.1
Description of Plan of Stock Issuance 1.2
Strategic Overview 1.4
Balance Sheet Trends 1.7
Income and Expense Trends 1.11
Interest Rate Risk Management 1.16
Lending Activities and Strategy 1.17
Asset Quality 1.21
Funding Composition and Strategy 1.22
Subsidiaries 1.23
Legal Proceedings 1.23
CHAPTER TWO MARKET AREA
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Introduction 2.1
Local and Regional Market Conditions 2.3
Market Area Demographics 2.4
Local Economy/Largest Employers 2.7
Unemployment Rates 2.8
Competition 2.9
CHAPTER THREE PEER GROUP ANALYSIS
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Peer Group Selection 3.1
Basis of Comparison 3.2
Selected Peer Group 3.3
Financial Condition 3.5
Income and Expense Components 3.8
Loan Composition 3.11
Credit Risk 3.12
Interest Rate Risk 3.15
Summary 3.15
RP FINANCIAL, LC.
TABLE OF CONTENTS
ATLANTIC COAST FEDERAL
WAYCROSS, GEORGIA
(CONTINUED)
PAGE
DESCRIPTION NUMBER
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CHAPTER FOUR VALUATION ANALYSIS
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Introduction 4.1
Appraisal Guidelines 4.1
RP Financial Approach to the Valuation 4.2
Valuation Analysis 4.3
1. Financial Condition 4.3
2. Profitability, Growth and Viability of Earnings 4.4
3. Asset Growth 4.6
4. Primary Market Area 4.6
5. Dividends 4.8
6. Liquidity of the Shares 4.9
7. Marketing of the Issue 4.9
A. The Public Market 4.9
B. The New Issue Market 4.14
C. The Acquisition Market 4.15
8. Management 4.17
9. Effect of Government Regulation and Regulatory Reform 4.17
Summary of Adjustments 4.18
Basis of Valuation - Fully-Converted Pricing Ratios 4.18
Valuation Approaches: Fully-Converted Basis 4.21
Comparison to Recent Conversions and MHC Offerings 4.26
Valuation Conclusion 4.26
RP FINANCIAL, LC.
LIST OF TABLES
ATLANTIC COAST FEDERAL
WAYCROSS, GEORGIA
TABLE
NUMBER DESCRIPTION PAGE
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1.1 Historical Balance Sheets 1.8
1.2 Historical Income Statements 1.12
2.1 Summary Demographic Information 2.5
2.2 Major Employers in Ware County and the Jacksonville MSA 2.8
2.3 Unemployment Trends 2.9
2.4 Deposit Summary 2.11
2.5 Competitor Analysis 2.12
3.1 Peer Group of Publicly-Traded Thrifts 3.4
3.2 Balance Sheet Composition and Growth Rates 3.6
3.3 Income as a Percent of Average Assets and Yields, Costs, Spreads 3.9
3.4 Loan Portfolio Composition and Related Information 3.13
3.5 Credit Risk Measures and Related Information 3.14
3.6 Interest Rate Risk Measures and Net Interest Income Volatility 3.16
4.1 Peer Group Market Area Comparative Analysis 4.7
4.2 Pricing Characteristics and After-Market Trends 4.16
4.3 Calculation of Implied Per Share Data - Incorporating MHC
Second Step Conversion 4.20
4.4 MHC Institutions - Implied Pricing Ratios, Full Conversion Basis 4.28
4.5 Public Market Pricing 4.29
RP FINANCIAL, LC.
PAGE 1.1
I. OVERVIEW AND FINANCIAL ANALYSIS
INTRODUCTION
Atlantic Coast Federal ("Atlantic Coast" or the "Bank") is a
federally-chartered stock savings bank which conducts operations through its
main office in Waycross, Georgia, and a total of 13 additional branch offices
(includes one limited service facility) which cover a broad section of
southeastern portions of the State of Georgia and northeastern sections of the
State of Florida. Specifically, the northernmost office is located in Garden
City, Georgia, near the City of Savannah, to the Orange Park and Lake City
offices in northeast Florida, which are outside the City of Jacksonville.
Certain of the locations reflect, in part, the credit union roots and the
location of CSX Corporation's operations, and reflect several prior acquisitions
(credit unions and bank branch acquisitions). The Bank also employs a variety of
alternative delivery mechanisms, including approximately 15 ATMs, online banking
and a telephone call center.
Originally chartered in 1939 as "Atlantic Coast Line Credit Union", serving
the employees of the CSX Corporation and its predecessors, Atlantic Coast
evolved through the years into a full-service multi-branch financial institution
serving the general public and operating in southeast Georgia and northeast
Florida. Atlantic Coast completed a conversion from a federal credit union
charter to a federal mutual savings bank charter as of November 1, 2000 (the
"Charter Conversion"). The objective of the Charter Conversion was to better
serve customers and the local community through the broader lending and to
expand its customer base beyond the limited field of membership permitted for
credit unions. The Charter Conversion and related growth potential coupled with
the ability to raise external capital through the mutual holding company
structure are believed to enhance the ability to remain competitive while
providing customers with superior service and a broad array of financial
services products.
The Bank's post Charter Conversion operations have been characterized by
relatively strong growth in loans and deposits. A portion of the growth is
attributable to several branch acquisitions as Atlantic Coast acquired a total
of three branches in fiscal 2002 and 2003 in two separate transactions.
Additionally, Atlantic Coast has taken advantage of its expanded lending
RP FINANCIAL, LC.
PAGE 1.2
authority, as evidenced in the growth of permanent residential mortgages and
commercial and multi-family loans ("income producing property loans").
Since the Charter Conversion, the Bank has been regulated by the Office of
Thrift Supervision ("OTS"). The Bank is currently a member of the Federal Home
Loan Bank ("FHLB") system. The Bank's deposits are insured up to the regulatory
maximums by the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC").
Atlantic Coast reorganized into a mutual holding company ("MHC") structure
in January 2003, and no stock was issued publicly at the time. Simultaneous with
the MHC reorganization, a wholly-owned mid-tier stock holding company was formed
known as Atlantic Coast Federal Corporation ("ACFC" or the "Company"), and
Atlantic Coast became a wholly-owned subsidiary of the Company. The MHC and the
Company were both capitalized with $50,000 in cash concurrent with their
formation. The public stock offering being pursued by the Company will not
result in any organizational change.
Atlantic Coast Federal MHC is a federally chartered mutual holding company
which was formed in January 2003 in conjunction with the mutual holding company
reorganization of Atlantic Coast Federal. As a result of the mutual holding
company reorganization in which no stock was issued publicly, Atlantic Coast
Federal Bank converted to a stock bank and issued all of its common stock to
Atlantic Coast Federal Corporation, the mid-tier holding company and the MHC's
wholly-owned subsidiary. At the present time, the assets of the MHC include
approximately $50,000 of cash as well as the common stock of Atlantic Coast
Federal Corporation. Currently, loans and deposits to CSX Corporation employees
are estimated to equal less than 20%, and management believes that the
proportion of business with CSX employees will continue to diminish in the
future.
DESCRIPTION OF PLAN OF STOCK ISSUANCE
Pursuant to the Plan of Stock Issuance, the Company will publicly offer a
40% minority position of its common stock ("Minority Stock Issuance" or
"Offering"), and the MHC will retain a 60% majority interest in the Company.
ACFC will continue to be the sole subsidiary of
RP FINANCIAL, LC.
PAGE 1.3
the MHC and will own 100% of the Bank's outstanding stock. The Company will
retain approximately 50% of the net offering proceeds, a portion of which will
be loaned to the newly-formed employee stock ownership plan ("ESOP") to purchase
8% of the offering shares.
The offering proceeds are expected to facilitate the Company's continued
expansion and diversification. The Offering also provides the opportunity for
local stock ownership, which may enhance the financial success of the Company if
local shareholders become/remain customers and promote the Company's products
and services. The following summary indicates the initial allocation and
reinvestment of the offering proceeds.
o MHC. The MHC currently is the sole shareholder of the Company,
and will retain a 60% majority ownership upon completion of the
Offering. The MHC is not currently expected to engage in business
activity other than stock ownership of the Company. The MHC was
capitalized with $50,000 upon formation January 1, 2003.
o ATLANTIC COAST FEDERAL CORPORATION. The Company is expected to
retain up to 50% of the net offering proceeds, which will be
utilized to fund the loan for stock purchased by the newly-formed
ESOP and will retained by the Company for initial reinvestment in
high quality investment securities with short to intermediate
term maturities. Over time, such funds are earmarked for various
corporate purposes, including the possible payment of regular
and/or special cash dividends, infusing additional equity into
the Bank and/or repurchases of publicly-held common stock.
Dividends are expected to be periodically paid to the Company
from the Bank.
o ATLANTIC COAST FEDERAL. At least 50% of the net proceeds will be
infused into the Bank as equity. The net investable cash is
expected to be lower than the paid-in capital, based on
expectations of deposit withdrawals to fund stock purchases. Cash
proceeds infused into the Bank will initially become part of
general funds, which are expected to be initially invested into
cash and short-term investments pending longer-term reinvestment
into loans and investments.
The Company expects to continue to pursue a controlled growth strategy,
leveraging its strong pro forma capital, primarily through growth through the
current delivery channels. If appropriate, ACFC may also consider various
capital management strategies to assist in the long-run objective of increasing
return on equity.
RP FINANCIAL, LC.
PAGE 1.4
STRATEGIC OVERVIEW
As noted previously, the Company has implemented a strategy to continue to
cater to its historical credit union field of membership, but also to reduce its
perceived risk profile (particularly credit risk profile) by broadening the
customer base. This customer diversification strategy was facilitated through
the Charter Conversion in conjunction with broadening the traditional and
alternative delivery channels, emphasizing marketing and competitive pricing
strategies and building both the internal loan origination capacity and building
broker relationships to increase loan volume. During the mid-1990s, the deposit
and loan balances attributable to CSX Corporation employees accounted for the
substantial majority of assets and liabilities. Today, having increased in size,
the proportion of deposits and loans are estimated by management to have
diminished to less than 20%, which illustrates the success of its customer
diversification strategy. The loan customer diversification is directly
attributable to the purchase of branches and expanded mortgage lending
activities, including both internal originations and purchases.
As the credit union lending restrictions were removed, the Company
commenced an active program of originating loans to non-customers. This loan
customer diversification has lessened the Company's credit risk profile directly
linked to the employee concentration with CSX Corporation. At the same time, the
Company's credit risk exposure has increased as reflected by data pertaining to
non-performing assets which shows that non-performing assets ("NPAs") have
increased from $1.6 million (0.52% of assets) as of the end of fiscal 1999, to
$8.6 million (1.71% of assets) as of the end of fiscal 2003.
In response to the perceived deterioration in asset quality and in response
to findings of following a regulatory examination completed by the OTS in early
2003, the Board of Directors adopted a resolution (the "Resolution") on May 29,
2003, addressing certain areas of operation of Atlantic Coast Federal
Corporation. The Resolution addressed limiting the total assets of Atlantic
Coast Federal Corporation 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 included commercial, construction,
non-residential real estate, land acquisition and land development, and
non-
RP FINANCIAL, LC.
PAGE 1.5
mortgage commercial loans. The Company believes it is has addressed all matters
related to the resolution, as the Bank's commercial loan department has recently
been restructured, and as policies and procedures have been revamped to address
areas of regulatory criticism while an experienced commercial lender has also
been employed to manage the commercial lending operations. However, loans
underwritten pursuant to prior underwriting processes and procedures comprise
the majority of the loan portfolio.
Balance sheet growth has been primarily generated in the Jacksonville
market in northern Florida given the large size and more favorable growth
characteristics of the Jacksonville area in comparison to the Waycross area
where the Company's operations have historically been centered. In order to
accelerate the ability to grow in ACFC's northern Florida markets, the Company
acquired three branches in two separate transactions (consummated in fiscal 2002
and 2003). In total, the Company assumed approximately $30 million of deposits,
and acquired $2 million in fixed assets acquired, $15 million in loans
branch-related loans. The transaction resulted in both amortizable intangibles
and non-amortizable goodwill, totaling $3 million. The core deposit intangible
(approximately $1 million in the aggregate for the three acquisitions) is being
amortized to expense over 10 years using an accelerated method. The Company will
seek to continue to growth through the acquisition of branches or other
financial institutions, as well as through de novo branching and organic growth
realized through the current existing branch and delivery system. Additionally,
the Company anticipates that growth opportunities will result from bank
consolidation in the local market and the resulting fallout of customers who are
attracted to ACFC's community-bank orientation and emphasis on customer service.
The ability to market to a broader customer base (both from an employer and
geographic standpoint) and the ability to offer an expanded line of products,
particularly in the mortgage area, have contributed to the Company's asset and
loan growth, which have equaled 12.6% and 13.1% respectively, since the end of
fiscal 1999. However, while the Charter Conversion enhanced the ability to
expand deposits, loans and assets, such growth has not translated into
significant core earnings growth. Specifically, the Company's conversion to a
taxable entity coupled with growth in operating costs and loan loss provisions
substantially offset the increase in the net interest margin from a core
earnings perspective.
RP FINANCIAL, LC.
PAGE 1.6
The Company's current operating strategy is designed to take advantage of
the broad geographic footprint encompassed by ACFC's offices, particularly in
the northern Florida market which is perceived to be a growth oriented market by
management.
The Company's strong loan growth in recent years has been largely
attributable to the origination of mortgage loans (as well as limited
purchases), most of which are secured by properties within the Company's
markets. The focus of the ACFC's mortgage lending encompasses both residential
(i.e., secured by 1-4 family properties) and commercial and multi-family
property lending. Approximately 50% of the Company's residential mortgage loans
are originated through broker relationships while the balance is originated by
in-house personnel. The Company has also supplemented its internal loan
origination capacity through 1-4 family residential loan purchases, primarily of
adjustable rate loans. The Company also employs a staff of 4 commercial loan
officers who originated the majority of the Company's commercial and
multi-family mortgage loan volume in fiscal 2003.
The Company's strong deposit growth has been bolstered by the purchase of
three branches and the employment of premium pricing of deposits and low fees on
transaction accounts. Expectedly, the Company's cost of deposits exceeds the
competitive market average. The Company's recent growth has also been bolstered
through the utilization of borrowed funds (FHLB advances).
While ACFC recognized certain benefits as a credit union including its
non-taxable status and strong corporate ties, that charter limited the types of
products and services it could offer and to whom. Prior to the Charter
Conversion, the Company had developed a niche in mortgage lending but was
limited in its ability to expand such lending operations beyond the field of
membership. Today, the Company has the ability to serve the local community and
offer a more diverse array of products and services. ACFC offers a wide array of
banking services including savings, certificate and checking accounts, ATM and
debit cards, wire transfers, Internet banking, fixed or adjustable-rate mortgage
loans on residential, multifamily and commercial properties as well as consumer
loans. The business strategy employed by the Company seeks to provide quality
service, charge limited fee, pay highly competitive rates on savings, and charge
equitable loan rates.
RP FINANCIAL, LC.
PAGE 1.7
BALANCE SHEET TRENDS
GROWTH TRENDS
Growth trends over the last five years underscore the impact of the
foregoing strategies, particularly following the Charter Conversion. For
example, during fiscal 2000, the Company's assets increased by only 7.7%, which
was relatively comparable to the growth rate experienced throughout the latter
half of the 1990s. By comparison, since the Charter Conversion, annual asset
growth has approximated 14.3% (see Table 1.1 for details; the detailed audited
and unaudited financial statements are incorporated herein by reference as noted
in Exhibit I-1, and key operating ratios are set forth in Exhibit I-2). The
majority of the asset and loan growth since the Charter Conversion has been
funded with competitively priced deposits, although the Company has also
increased borrowings to supplement deposits. The Company's growth in the most
recent fiscal year approximated 11% and was reflective of the $510 million asset
cap pursuant to the Resolution.
Annual equity growth equaled 11.7% since the end of fiscal 1999, in part
reflecting the Company's tax benefit realized as a result of the Charter
Conversion and its fully taxable status beginning in fiscal 2001. The
post-offering equity growth rate is expected to initially fall below historical
levels given the increased equity, the initial anticipated low return on the net
offering proceeds in the current interest rate environment and the cost of the
stock benefit plans and public company reporting. Over the longer term, as the
new equity is leveraged through growth, the return on equity is expected to
improve.
From a funding perspective, the Company has been pricing its deposits at a
premium and/or been providing low fee or other attractive features on its
transaction accounts. Thus, many of the Company's depositors are either rate or
fee-based customers, which again provide limited opportunity for cross-selling,
particularly for those depositors who are located outside the Company's market
area. Similarly, many of the Company's loans are originated through brokers
where there is little, if any, on-going relationship with the customer. These
characteristics will be considered in the pricing section.
RP FINANCIAL, LC.
PAGE 1.8
Table 1.1
Atlantic Coast Federal
Historical Balance Sheets
(Amount and Percent of Assets)
For the Fiscal Year Ended December 31,
-----------------------------------------------------------------------------------------
1999 2000 2001 2002
-------------------- -------------------- --------------------- --------------------
Amount Pct Amount Pct Amount Pct Amount Pct
------ --- ------ --- ------ --- ------ ---
($000) (%) ($000) (%) ($000) (%) ($000) (%)
Total Amount of:
Assets $310,230 100.00% $334,231 100.00% $376,862 100.00% $447,721 100.00%
Cash and Cash Equivalents 18,562 5.98% 15,589 4.66% 10,666 2.83% 13,975 3.12%
Loans Receivable (net) 266,409 85.87% 287,907 86.14% 333,656 88.54% 379,778 84.82%
Investment Securities - AFS 12,765 4.11% 12,923 3.87% 13,670 3.63% 28,599 6.39%
Other Investments 2,784 0.90% 3,680 1.10% 840 0.22% 1,135 0.25%
FHLB Stock 1,104 0.36% 1,286 0.38% 1,729 0.46% 2,305 0.51%
Intangible Assets 0 0.00% 0 0.00% 0 0.00% 1,580 0.35%
Deposits 263,308 84.88% 274,513 82.13% 305,541 81.07% 360,880 80.60%
Borrowed Funds 17,786 5.73% 25,071 7.50% 32,757 8.69% 45,443 10.15%
Total Equity 27,752 8.95% 33,380 9.99% 35,694 9.47% 38,924 8.69%
Loans/Deposits 101.60% 105.35% 109.77% 105.88%
Number of Full Service Offices 9 9 9 10
(Continued)
Compounded
-------------------- Annual
2003 Growth Rate
-------------------- -----------
Amount Pct Pct
------ --- ---
($000) (%) (%)
Total Amount of:
Assets $499,040 100.00% 12.62%
Cash and Cash Equivalents 8,978 1.80% -16.61%
Loans Receivable (net) 435,614 87.29% 13.08%
Investment Securities - AFS 26,039 5.22% 19.51%
Other Investments 500 0.10% -34.90%
FHLB Stock 3,082 0.62% 29.28%
Intangible Assets 2,661 0.53% N.M.
Deposits 392,256 78.60% 10.48%
Borrowed Funds 60,971 12.22% 36.07%
Total Equity 43,218 8.66% 11.71%
Loans/Deposits 111.84%
Number of Full Service Offices 13
Source: Atlantic Coast Federal's prospectus.
RP FINANCIAL, LC.
PAGE 1.9
LOANS RECEIVABLE
In conjunction with the charter conversion to a mutual thrift, the Company
has been emphasizing real estate lending, including primarily the origination
and purchase of 1-4 family residential mortgage loans as well as commercial and
multi-family mortgage loans. The majority of ACFC's 1-4 family residential
mortgage loans consist of loans which are conforming to standards set by Freddie
Mac, Fannie Mae or Ginnie Mae, notwithstanding the fact that the Company
generally holds loans it originates for portfolio. The Company seeks to
emphasize residential mortgages which are variable rate or hybrid ARMs (i.e.,
fixed for a period of up to 7 years and adjustable thereafter). The Company also
offers 15 and 30 year fixed rate loans, and may sell a portion of such loans for
interest rate risk management purposes. However, the Company has recently
retained such loans in an effort to maintain its asset yields and overall
profitability in the low interest rate environment currently prevailing. The
remaining balance of the mortgage loan portfolio consists of a mix of loans
secured by multi-family and commercial properties as well as properties under
construction.
ACFC's loan portfolio composition as of December 31, 2003, reflects the
Company's emphasis on residential lending, whereby permanent first mortgage
loans secured by 1-4 family residential properties totaled $237.9 million, equal
to 53.9% of total loans, while an additional 8.8% of the portfolio was comprised
of home equity loans or lines of credit secured by 1-4 family residential
properties. At the same date, multi-family and commercial real estate loans
approximated 14.5% of the loan portfolio while the balance of the loan portfolio
consisted of construction and loans (6.9%) and non-mortgage loans (15.9%). The
relatively large balance of consumer loans reflects ACFC's credit union roots
and historical emphasis on consumer lending. The Company has deemphasized
consumer lending since completing the Charter Conversion and recently sold the
majority of its credit card portfolio.
CASH, INVESTMENTS AND MORTGAGE-BACKED SECURITIES
ACFC's preference is to deploy the majority of assets into loans while
maintaining required liquidity. The Company anticipates initially reinvesting
the net offering proceeds into investments with short-to-intermediate
maturities, pending longer-term deployment primarily into loans.
RP FINANCIAL, LC.
PAGE 1.10
As of December 31, 2003, the Company's portfolio of cash and liquidity
investments totaled $38.6 million, or 7.7% of total assets. At this date, this
portfolio was comprised of non-interest bearing cash and cash equivalents ($9.0
million), interest-bearing deposits at other financial institutions ($0.5
million), and various investment quality securities ($26.0 million) including
securities issued by various federal entities, municipal securities,
mortgage-backed securities and mutual funds. All of the Company's investment
securities are classified as available for sale ("AFS"). Additionally, the
Company maintains a modest investment in FHLB stock with a book value of $3.1
million.
FUNDING STRUCTURE
Retail deposits have generally met the substantial portion of the Company's
funding needs supplemented with a modest amount of borrowed funds from the
Federal Home Loan Bank of Atlanta. Prior to the Charter Conversion, ACFC also
had the capacity to borrow from a corporate credit union.
The Company maintains a strong level of savings and transaction accounts,
which totaled $179.8 million, or 45.8% of total deposits, as of December 31,
2003, however, certificates of deposits ("CDs") comprise the single largest
segment of deposits and equaled $212.5 million, or 54.2% of total deposits. In
comparison, demand deposit, money market and passbook savings accounts equaled
$42.1 million (10.7% of deposits), $60.3 million (15.4% of deposits), and $77.4
million (19.7% of deposits).
Borrowings have been utilized primarily as a supplemental funding source to
fund lending activity. As of December 31, 2003, borrowed funds consisted of
$61.0 million of FHLB advances, with maturities extending out to 2014. The
Company has utilized advances both for liquidity management (i.e., to bolster
cash for lending) and interest rate risk management purposes (i.e., to lock in a
rate on longer term funds). The Company may continue to utilize borrowings as a
supplemental funding source in the future, generally on a short-to-intermediate
term basis.
RP FINANCIAL, LC.
PAGE 1.11
CAPITAL
Annual capital growth for the Company has approximated 11.65% since the end
of fiscal 1999. As of December 31, 2003, ACFC's equity totaled $43.2 million, or
8.64% of total assets, while tangible equity equaled $40.5 million, equal to
8.11% of total assets. The Bank maintained capital surpluses relative to its
regulatory capital requirements at December 31, 2003, and thus qualified as a
"well capitalized" institution. The offering proceeds will serve to further
strengthen Atlantic Coast's regulatory capital position and support further
growth. The equity growth rate is expected to slow for the Company on a
post-offering basis given the pro forma increase in equity, low reinvestment
yields currently available and the potential dividend policy.
INCOME AND EXPENSE TRENDS
The Company's historical earnings and profitability reflect the impact of
the Charter Conversion. Specifically, earnings and profitability reflect the
resulting taxable status since the beginning of 2000 and the large one-time
benefit from the establishment of a deferred tax asset attributable primarily to
the valuation allowances. In order to analyze earnings on a comparable basis
prior to the Charter Conversion, we have applied a 38% tax rate to pre-tax
earnings.
Earnings for the 12 months ended December 31, 2003, totaled $4.4 million,
or 0.91% of average assets (see Table 1.2), while core earnings were estimated
at $2.7 million, or 0.56% of average assets, after adjusting for non-recurring
expenses on a tax-effected basis. The Company's reported and core earnings have
fluctuated over the last five fiscal years, reflecting the impact of taxes,
growth and non-recurring gains on sale. Specifically, peak earnings on a
reported basis were equal to $5.6 million ($2.2 million on a tax adjusted basis)
in fiscal 2000 as income reflected a non-recurring tax benefit upon the
Company's conversion to a taxable entity. Reported earnings subsequently
declined in fiscal 2001 reflecting in part, the impact of taxes. Earnings in
fiscal 2002 and 2003 were supported by non-recurring gains on sale while core
earnings (i.e., reported earnings adjusted to exclude non-recurring items)
reported modest increases over these periods. These trends are described more
fully below.
RP(R) FINANCIAL, LC.
PAGE 1.12
Table 1.2
Atlantic Coast Federal
Historical Income Statements
For the Fiscal Year Ended December 31,
-------------------------------------------------------------------
1999 2000 2001
---------------------- --------------------- --------------------
Amount Pct(1) Amount Pct(1) Amount Pct(1)
------ ------ ------ ------ ------ ------
($000) (%) ($000) (%) ($000) (%)
Interest Income $25,829 8.46% $27,013 8.14% $29,136 8.09%
Interest Expense (12,189) -3.99% (13,551) -4.08% (15,221) -4.23%
-------- ------ -------- ------ -------- ------
Net Interest Income $13,640 4.47% $13,462 4.06% $13,915 3.87%
Provision for Loan Losses (2,963) -0.97% (1,700) -0.51% (2,081) -0.58%
-------- ------ -------- ------ -------- ------
Net Interest Income after Provisions $10,677 3.50% $11,762 3.55% $11,834 3.29%
Other Operating Income 3,248 1.06% 3,734 1.13% 3,970 1.10%
Operating Expense (11,115) -3.64% (11,984) -3.61% (12,357) -3.43%
-------- ------ -------- ------ -------- ------
Net Operating Income $ 2,810 0.92% $ 3,512 1.06% $ 3,447 0.96%
Net Gain(Loss) on Sale of Loans $ - 0.00% $ - 0.00% $ 32 0.01%
Net Gain(Loss) on Sale of Foreclosed Assets - 0.00% - 0.00% - 0.00%
Net Gain(Loss) on Sale of AFS Securities - 0.00% - 0.00% 7 0.00%
-------- ------ -------- ------ -------- ------
Total Non-Operating Income/(Expense) $ - 0.00% $ - 0.00% $ 39 0.01%
Net Income Before Tax $ 2,810 0.92% $ 3,512 1.06% $ 3,486 0.97%
Income Taxes 0 0.00% 2,062 0.62% (1,290) -0.36%
-------- ------ -------- ------ -------- ------
Net Income (Loss) Before Extraord. Items $ 2,810 0.92% $ 5,574 1.68% $ 2,196 0.61%
Estimated Core Net Income
Net Income $ 2,810 0.92% $ 5,574 1.68% $ 2,196 0.61%
Addback(Deduct): Non-Recurring (Inc)/Exp - 0.00% - 0.00% (39) -0.01%
Tax Effect (1) - 0.00% - 0.00% 14 0.00%
-------- ------ -------- ------ -------- ------
Estimated Core Net Income $ 2,810 0.92% $ 5,574 1.68% $ 2,172 0.60%
Estimated Core Income
if Taxable at a 38% Effective Tax Rate $ 1,742 0.57% $ 2,177 0.66% $ 2,172 0.60%
Memo:
Expense Coverage Ratio (2) 122.72% 112.34% 112.61%
Efficiency Ratio (3) 65.81% 69.69% 69.09%
Effective Tax Rate 0.00% -58.71% 37.00%
(Continued)
---------------------------------------------
2002 2003 2002 2003
---------------------- ---------------------
Amount Pct(1) Amount Pct(1)
------ ------ ------ ------
($000) (%) ($000) (%)
Interest Income $30,813 7.35% $31,213 6.43% $7,119 $7,732
Interest Expense (13,035) -3.11% (11,781) -2.43% (3,362) (3,086)
-------- ------ -------- ------ ------- -------
Net Interest Income $17,778 4.24% $19,432 4.00% $3,757 $4,646
Provision for Loan Losses (3,683) -0.88% (4,238) -0.87% (667) (757)
-------- ------ -------- ------ ------- -------
Net Interest Income after Provisions $14,095 3.36% $15,194 3.13% $3,090 $3,890
Other Operating Income 4,628 1.10% 4,893 1.01% 1,173 1,378
Operating Expense (14,711) -3.51% (15,911) -3.28% (3,072) (3,777)
-------- ------ -------- ------ ------- -------
Net Operating Income $ 4,012 0.96% $ 4,176 0.86% $1,192 $1,491
Net Gain(Loss) on Sale of Loans $ 126 0.03% $ 2,697 0.56% $ 31 $ 75
Net Gain(Loss) on Sale of Foreclosed Assets - 0.00% (93) -0.02% - -
Net Gain(Loss) on Sale of AFS Securities 634 0.15% 36 0.01% - -
-------- ------ -------- ------ ------- -------
Total Non-Operating Income/(Expense) $ 760 0.18% $ 2,640 0.54% $ 31 $ 75
Net Income Before Tax $ 4,772 1.14% $ 6,816 1.40% $1,223 $1,566
Income Taxes (1,585) -0.38% (2,399) -0.49% (432) (581)
-------- ------ -------- ------ ------- -------
Net Income (Loss) Before Extraord. Items $ 3,187 0.76% $ 4,417 0.91% $ 791 $ 985
Estimated Core Net Income
Net Income $ 3,187 0.76% $ 4,417 0.91%
Addback(Deduct): Non-Recurring (Inc)/Exp (760) -0.18% (2,640) -0.54%
Tax Effect (1) 252 0.06% 929 0.19%
------- ------ ------- ------
Estimated Core Net Income $ 2,680 0.64% $ 2,706 0.56%
Estimated Core Income
if Taxable at a 38% Effective Tax Rate $ 2,680 0.64% $ 2,706 0.56%
Memo:
Expense Coverage Ratio (2) 120.85% 122.13%
Efficiency Ratio (3) 65.66% 65.41%
Effective Tax Rate 33.21% 35.20%
(1) Reflects effective tax rate for each period.
(2) Net interest income divided by operating expenses.
(3) Operating expenses as a percent of the sum of net interest income and other operating income (excluding gains on sale).
RP(R) FINANCIAL, LC.
PAGE 1.13
NET INTEREST INCOME
Net interest income steadily increased over the last five fiscal years,
primarily reflecting the benefit of balance sheet growth. Specifically, net
interest income increased from $13.6 million in fiscal 1999 to $19.4 million in
fiscal 2003. Measured as a percentage of average assets, the Company's net
interest margin reflects a downward trend between fiscal 1999 and 2003,
declining from 4.47% of average assets to 4.00% of average assets. However, the
majority of the reduction occurred in fiscal 1999 as the Company's ratio of net
interest income to average assets has fluctuated within a 37 basis point range
since fiscal 2000.
The modest decline in the net interest income ratio primarily reflects
expanded mortgage lending, which has lower yields than consumer lending.
Moreover, loan yields have been adversely impacted by the high prepayment rates,
particularly on higher coupon loans. Additionally, some of the residential ARMs
had low initial "teaser" rates which provided a limited spread compared to the
cost of funds. Also, the Company's cost of funds is relatively high as the
growth objectives were realized through highly competitive pricing on selected
deposit accounts.
The Company spreads registered improvement since fiscal 2001 (see Exhibit
I-4), increasing from 3.38% in fiscal 2001, to 3.94% and 3.96% in fiscal 2002
and fiscal 2003, respectively. The improvement in ACFC's spreads is primarily
the result of a reduction in the Company's cost of funds, from 5.11% in fiscal
2001, to 2.95% in fiscal 2003, which was partially offset by a 158 basis point
reduction in the Company's asset yields over the corresponding time frame.
LOAN LOSS PROVISIONS
Provisions for loan losses have historically reflected the large balance of
consumer loans, particularly automobile loans which resulted in a high level of
chargeoffs. Loan loss provisions have remained relatively high subsequent to the
Charter Conversion and shift in lending strategy reflecting: (1) the high growth
in total loans, including income producing property loans; and (2) the Company's
limited experience historically with respect to income producing property
lending and the higher risk profile of such lending. Additionally, recent loan
loss provisions also reflect the increase in NPAs, including reserves allocated
to specific problem
RP(R) FINANCIAL, LC.
PAGE 1.13
loans included in the balance of classified assets. Going forward, the Company
will continue to evaluate the adequacy of the level of general valuation
allowances ("GVAs") on a regular basis, and establish additional loan loss
provisions in accordance with the Company's asset classification and loss
reserve policies. For the 12 months ended December 31, 2003, loan loss
provisions totaled $4.2 million, or 0.87% of average assets.
NON-INTEREST INCOME
Non-interest income for the most recent 12 months totaled $4.9 million, or
1.01% of average assets, primarily reflecting fee income generated through: the
Company's deposit accounts, including various service and non-sufficient fund
("NSF") charges and interchange fees; and ATM related fees, reflecting foreign
transactions at its ATMs and interchange income resulting from the Company's
customers utilizing foreign ATMs.
The Company sold its credit card portfolio with a principal balance of
approximately $13.0 million for a $2.6 million gain, which is reflected as a
non-operating income item for purposes of this analysis. In the future, ACFC
expects that interchange income (and expenses) will diminish as a result of the
sale of this portfolio.
OPERATING EXPENSES
Prior to the Charter Conversion, the Company had a relatively high level of
operating expenses, reflecting a comparatively greater number of labor intensive
transaction accounts and smaller consumer loans. Since the Charter Conversion,
operating expenses have increased at a relatively rapid pace, in part reflecting
the additional compensation, marketing, and other costs related to the growth
and expansion plans. In particular, operating costs have increased as a result
of the costs related to the acquisition of branches and the related staffing
costs. Additionally, the Company has incurred expenses as it sought to resolve
problem assets (including the related litigation costs) and bolster its staff
and credit administration processes and procedures in response to the Resolution
adopted in May 2003. As a result, operating expenses increased from $11.1
million in fiscal 1999, to $15.9 million for fiscal 2003. However, the Company's
relatively faster balance sheet growth has diminished the operating expense
ratio, which declined from 3.64% of average assets in fiscal 1999, to 3.28% in
fiscal 2003.
RP(R) FINANCIAL, LC.
PAGE 1.15
Operating expenses are expected to increase on a post-offering basis as a
result of the expense of the stock-related benefit plans and the costs related
to operating as a public company. At the same time, continued balance sheet
growth and reinvestment of the offering proceeds should at least partially
offset the anticipated expense increase.
NON-OPERATING INCOME/EXPENSE
Non-operating income and expense items have been a significant factor in
the Company's operations. In this regard, gains on the sale of loans have been
the most significant contributor to the Company's non-operating revenues
reflecting the impact of the sale of the credit card portfolio in fiscal 2003.
Other significant non-operating items include gains on the sale of investments
in fiscal 2002. The gains on the sale of loans and investments are primarily
interest rate related and/or are otherwise a one-time event (such as the sale of
the credit card portfolio which reflects the termination of a business line).
For the 12 months ended December 31, 2003, net non-operating income totaled $2.6
million, equal to 0.54% of average assets. From a valuation perspective, we will
give less weight to non-recurring gains.
TAXES
Prior to fiscal 2000, ACFC incurred no tax liabilities due to its exempt
status as a credit union. Following the Charter Conversion, the Company became
subject to standard taxation, which approximated a combined federal and state
tax rate of 35% for the most recent fiscal year.
EFFICIENCY RATIO
The Company's efficiency ratio improved since fiscal 2000, from 69.96% to
65.41% in fiscal 2003, as balance sheet growth offset operating expense growth.
Important from a core earnings perspective, the efficiency ratios ignore the
impact of loan loss provisions which have trended upward in response to both
growth of the loan portfolio and an increase in the level of NPAs. On a
post-offering basis, the efficiency ratio may show some slight improvement,
although low reinvestment yields may limit the benefit.
RP(R) FINANCIAL, LC.
PAGE 1.16
INTEREST RATE RISK MANAGEMENT
The primary aspects of the Company's interest rate risk management include:
>> Emphasizing the origination of adjustable rate residential
mortgage loans or hybrid ARMS with repricing frequencies of up to
seven years when market conditions permit;
>> Selling a portion of the fixed rate mortgage loans originated
based on risk and profitability considerations;
>> Maintaining a diversified loan portfolio which includes loans
secured by commercial real estate and multi-family properties as
well as non-mortgage loans which carry short terms to maturity
and/or variable interest rates;
>> Improving commercial loan underwriting and administration with
the objective of maintaining strong asset quality (this will
limit loan losses and enable the Company to maintain a high ratio
of interest-earning assets);
>> Maintaining a balance of cash or short-term investments; and
>> Maintaining an acceptable level of capital which provides a
favorable level of interest-earning assets relative to
interest-bearing liabilities.
The rate shock analysis as of December 31, 2003 (see Exhibit I-5) reflects
a modest liability sensitive position as the expected change in net portfolio
value ("NPV") under a 200 basis point increase in interest rates was a negative
53 basis points and the post-shock NPV ratio equaled 14.09%. Accordingly, the
Bank possesses a "Minimal" exposure to interest rate risk as of December 31,
2003. Based on OTS estimates incorporating December 31, 2003 financial data and
market rate information, assuming a positive 200 basis point instantaneous and
permanent rate shock, the Bank's post-shock NPV ratio fell in the fourth
quintile relative to all OTS regulated thrifts while the change in NPV also put
the Company in the fourth quintile. Thus, the Company's risk exposure is at the
lower end of the range in comparison to other OTS regulated thrifts.
Overall, the data suggests ACFC's earnings would be negatively impacted by
rising interest rates, but to a lesser extent, relative to other OTS regulated
institutions. At the same time, there are numerous limitations inherent in such
analyses, such as the credit risk of Company's adjustable rate loans in a rising
interest rate environment. Moreover, the
RP(R) FINANCIAL, LC.
PAGE 1.17
Company's interest rate risk exposure is projected to be further reduced
following the completion of the conversion and reinvestment of the net
conversion proceeds into interest-earning assets.
LENDING ACTIVITIES AND STRATEGY
Since the Charter Conversion, the Company has been primarily emphasizing
real estate lending, primarily 1-4 family residential mortgage loans and, to a
lesser extent, commercial mortgage and multi-family mortgage loans. The majority
of the Company's 1-4 family residential mortgage loans consist of loans which
are conforming to agency standards, and the non-conforming residential loans are
conforming but for the loan amount (i.e., jumbo loans). To a lesser extent, the
Company extends consumer loans. Details regarding the Company's loan portfolio
composition are included in Exhibits I-6, I-7 and I-8.
RESIDENTIAL LENDING
As of December 31, 2003, residential mortgage loans approximated $237.9
million, or 53.9% of total loans. ACFC originates both fixed rate and adjustable
rate 1-4 family mortgage loans. The Company's general philosophy is to seek to
originate adjustable rate loans and/or shorter-term fixed rate mortgage loans
for portfolio (hybrid loans with a fixed rate of up to 7 years initially) when
competitive and market conditions permit. The Company also originates longer
term fixed rate loans and may either place such loans into portfolio or sell
them on a servicing released basis, depending upon various considerations which
include an assessment of the interest rate risk exposure of holding the loans.
ACFC has recently been originating longer term fixed rate loans for portfolio
with the objective of maintaining overall yields and profitability.
The repricing of ARM loans is tied to a variety of indexes primarily
including the U.S. Treasury rate and LIBOR. Depending on the type of loan, there
are a variety of periodic and lifetime rate caps which are generally structured
based on the conditions prevailing in the competitive market.
ACFC originates one-to-four family loans up to a loan-to-value ("LTV")
ratio of 97%, with private mortgage insurance ("PMI") being required for loans
in excess of an 80.0%
RP(R) FINANCIAL, LC.
PAGE 1.18
LTV ratio. Substantially all of the 1-4 family mortgage loans originated or
purchased by the Company are secured by residences in the Company's markets in
Georgia and Florida.
As a complement to 1-4 family permanent mortgage lending, the Company also
offers home equity loans including fixed rate amortizing term loans and variable
rate lines of credit tied to the Prime rate.
MULTI-FAMILY AND COMMERCIAL MORTGAGE LENDING
Commercial real estate and multi-family loans totaled $64.0 million, equal
to 14.5% of total loans. Commercial real estate and multi-family loans
originated by ACFC are extended up to a loan-to-value ("LTV") ratio of 75% and
carry adjustable rates with amortization periods generally ranging from 20 to 30
years, and a minimum debt service coverage of 1.2 times. The Company's fixed
rate product, which comprises the largest portion of ACFC's loan origination
volumes historically, have typically been originated with five or ten year call
provisions and priced at a premium to the rate of the U.S. Treasury of
corresponding maturity. Prepayment penalties are frequently incorporated into
the loan agreements to discourage prepayment within the first several years of
the loan. Adjustable rate loans typically consist of loans which are fixed for
the first five years and reprice annually thereafter.
The typical commercial or multi-family loans that the Company seeks to
originate or purchase has a principal balance in the range of $500,000 to $1.5
million, but may be larger, particularly if the loan is well-collateralized or
extended to a very credit-worthy borrower. Such loans are typically
collateralized by local properties (within the Company's normal lending
territory), consisting primarily of small office buildings, family-type business
establishments and apartment buildings. The Company's commercial real estate and
multi-family loan portfolio has exhibited relatively strong growth since the
Charter Conversion and has grown proportionally to total loans. Furthermore,
management has targeted the portfolio for future growth, both in dollar terms
and as a percentage of the loan portfolio.
CONSTRUCTION LOANS
Construction loans comprised the balance of the Company's mortgage loan
portfolio, amounting to $30.6 million (6.9% of total loans) at December 31,
2003. While the Company
RP(R) FINANCIAL, LC.
PAGE 1.19
was for several years an active participant in commercial construction lending,
ACFC has largely ceased such lending and is primarily focused on residential
construction lending.
Residential construction loans will continue to be offered by the Company
in the future, generally for the construction of pre-sold homes, which typically
convert into permanent loans at the end of the construction period. The Company
requires an 80% LTV ratio for construction loans on owner occupied homes. ACFC
may lend to builders for "spec" homes but in such cases, will require a LTV
ratio of 80% or less. In this regard, the Company is seeking to participate in
the significant residential construction business in prevailing in the
Jacksonville area. The Company's builder loan portfolio is typically limited to
small to mid-sized developers, and the Company seeks to limit the exposure to
any one builder to approximately five houses under construction at any one time.
NON-MORTGAGE LOANS
ACFC originates non-mortgage loans, including commercial and consumer loans
(excluding mortgage-based home equity loans which totaled $38.8 million), which
in the aggregate, totaled $70.4 million as of December 31, 2003 (15.9% of total
loans). The majority of ACFC's non-mortgage loans consist of consumer loans
including primarily auto loans, personal credit lines, and other miscellaneous
consumer loans. The current consumer loan portfolio reflects its credit union
roots but the portfolio balance has diminished by more than 50% over the last
three years as ACFC has focused its lending efforts on mortgage loans, as they
are perceived to be more profitable. Moreover, shrinkage has been facilitated by
the sale of the majority of the credit card portfolio with a balance of $13.0
million for a $2.7 million gain in fiscal 2003. While the Company will continue
to offer consumer loans in the future, the portfolio is expected to diminish in
proportion to total loans.
In the past, the Company occasionally extended commercial loans, leases,
working capital lines of credit, loans for equipment and loans for other
business purposes. Such loans are typically extended to accommodate existing
customers. As of December 31, 2003, the portfolio of commercial non-mortgage
loans totaled $2.6 million. A portion of the commercial loans in the Company's
portfolio were acquired with branches purchased over the last several years. The
RP(R) FINANCIAL, LC.
PAGE 1.20
Company is precluded from making non-mortgage commercial loans until at least
the next regulatory examination by the Resolution.
LOAN ORIGINATIONS, PURCHASES AND SALES
The Company's 1-4 family mortgage loan originations will primarily come
from the following: (1) internal loan originations generated through direct
solicitation by the Company's business development officers or by referrals
through ACFC's branches or presence on the Internet; (2) loan brokers; and (3)
whole loan participation purchases from other lenders (primarily within the
Company's normal lending territory). The Company also periodically evaluates the
purchase of 1-4 family residential mortgage loan pools from various secondary
market sources. Such loans may be comprised of loans both within and outside the
Company's primary market.
The Company also employs a staff of 4 commercial loan officers who
originate the majority of the Company's commercial and multi-family mortgage
loan volume in fiscal 2003. ACFC may also utilize loan brokers to acquire
commercial and multi-family mortgage loans from time-to-time or may purchase
participation interests from other lenders.
Consumer loans are primarily extended to provide a full range of services
to customers and are originated by in-house staff. Such loans are primarily
evaluated utilizing statistical credit scoring models to evaluate the borrowers
creditworthiness.
Exhibit I-9, which shows the Company's recent data regarding loan
originations, repayments and sales, highlights ACFC's emphasis on mortgage
lending. The Company's loan diversification efforts are evidenced by the
multi-family, commercial mortgage and construction loan level, which totaled
$56.5 million, or 25.9% of all loan originations in fiscal 2003. However,
residential mortgage loan originations comprised the bulk of all loan
originations, totaling $111.6 million (51.3% of total originations). Moreover,
the Company has been an active loan purchaser acquiring $34.7 million of loans
(primarily adjustable rate 1-4 family mortgages) in the most recent fiscal year.
RP(R) FINANCIAL, LC.
PAGE 1.21
ASSET QUALITY
The Company's asset quality has historically reflected a moderate level of
delinquency, primarily in the consumer loan portfolio, but ACFC has recently
experienced deterioration in its asset quality ratios as reflected in the
increasing level of NPAs and classified assets experienced over the last several
years. Moreover, reserve coverage in relation to non-performing loans has also
declined. Such trends are reflected in the data in Exhibit I-10, which shows
that the balance of NPAs has increased, from $1.6 million, equal to 0.52% of
assets in fiscal 1999, to $8.6 million, equal to 1.73% of assets at the end of
fiscal 2003. As of December 31, 2003, classified assets totaled $19.9 million,
equal to 4.0% of assets, which reflects a 652.0% increase from the prior fiscal
year end. While the balance of NPAs has been increasing, reserve coverage as a
percent of non-performing loans has diminished, from 310.23% at the end of
fiscal 1999 to 87.13% as of the end of fiscal 2003 (see Exhibit I-11).
The increase in nonperforming loans and impaired loans primarily consists
of a few large commercial real estate loans 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 this regard, 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.
Approximately $2.6 million or 40% 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 is approximately
$4.8 million as of December 31, 2003. ACFC has 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.
At December 31, 2003, the Company owned an interest in lease pools with an
outstanding balance of approximately $1.0 million, net of approximately $150,000
of the allowance for loan losses which has been allocated to these leases. The
seller of the leases has declared bankruptcy and the Company does not expect to
recover any funds from this source. The Company has filed claims against the
insurance company which had issued surety bonds in connection with the leases
while the insurance company has filed suit against the seller of the
RP(R) FINANCIAL, LC.
PAGE 1.22
leases as well as ACFC. The outcome of this matter is uncertain but the Company
has incurred significant expense in connection with these assets over the last
several years. Legal costs incurred on this matter were $447,000 and $500,000
for 2002 and 2003, respectively. Management continues to vigorously pursue
collection on the surety bonds.
In addition to these specific asset quality problems, we believe there are
several other risk factors with respect to the Company's asset quality. First, a
significant element of growth within the loan portfolio has consisted of loans
secured by commercial and multi-family properties. The performance of such loans
tends to be highly correlated to the strength of the local economy including the
real estate markets, all of which have been very strong in the Company's markets
through the last several years. Accordingly, in the event of a market downturn,
loan portfolio quality may likely diminish more rapidly in comparison to other
local lenders. The second risk factor pertains to the limited seasoning of a
large portion of the loan portfolio. As reflected in Table 1.1, the balance of
loans receivable has increased by $169 million, or by 63% since the end of
fiscal 1999. The limited seasoning of the portfolio is important since asset
quality problems in mortgage loans often do not initially arise within the first
several years following origination. Moreover, many of the loans originated
recently have had relatively large balances (see the discussion regarding
specific asset quality problems above), which concentrates the Company's credit
risk exposure in the event of delinquency of even a small number of large loans.
FUNDING COMPOSITION AND STRATEGY
As of September 30, 2003, the Company's assets were funded primarily with
deposits, and, to a lesser extent, borrowings and equity (see Exhibits I-12,
I-13 and I-14). The Company's deposit services cater to primarily individuals
rather than commercial businesses.
DEPOSITS
Local retail deposits have consistently addressed the substantial portion
of ACFC's funding needs, with core deposits in the form of non-interest bearing
checking, passbook accounts, and money market deposit accounts comprising the
majority of deposits. In the aggregate, these accounts totaled $179.8 million,
or 45.8% of total deposits as of December 31, 2003. At this same date, CDs
accounted for approximately 54.2% of deposits. Approximately
RP(R) FINANCIAL, LC.
PAGE 1.23
70% of CDs had remaining maturities of one year or less. Large balance CDs (i.e.
balances greater than $100,000), which tend to be more rate sensitive than lower
balance CDs, accounted for $56.5 million, or 14.4% of deposits, at September 30,
2002.
BORROWINGS
Borrowings have been utilized primarily as a supplemental funding source to
fund lending and investment security activity. As of December 31, 2003, borrowed
funds consisted of $70.0 million of Federal Home Loan Bank (FHLB) advances.
Maturities on ACFC's portfolio of borrowed funds extend out to as long as 10
years (2014). Borrowed funds have been employed both as a liquidity management
tool (i.e., to bolster funds when deposits fall short of the Company's
requirements), as an earnings tool (i.e., to increase interest-earning assets
through leverage), and as an interest rate risk management tool (i.e., a means
of locking in longer term funds). The Company will continue to utilize
borrowings as a supplemental funding source in the future, generally for these
same purposes.
SUBSIDIARIES
At December 31, 2003 ACFC did not have any subsidiaries other than the Bank
and First Community Financial Services, Inc., an inactive wholly-owned
subsidiary of ACFC.
LEGAL PROCEEDINGS
Other than the routine legal proceedings that occur in the Company's
ordinary course of business, the Company is not involved in litigation which is
expected to have a material impact on the ACFC's financial condition or
operations.
RP FINANCIAL, LC.
PAGE 2.1
II. MARKET AREA
INTRODUCTION
ACFC currently conducts operations through its main office in Waycross,
Georgia, and a total of 13 additional branch offices which cover a broad section
of southeastern portions of the State of Georgia and northeastern sections of
the State of Florida. Specifically, the northernmost office is located in Garden
City, Georgia, near the City of Savannah, and the branch network extends to the
Orange Park and Lake City offices in northeast Florida, which are outside the
City of Jacksonville. Certain of the locations reflect, in part, the credit
union roots and the location of CSX Corporation's operations, and reflect
several prior acquisitions (credit unions and bank branch acquisitions).
Important from the perspective of this analysis, the Company's offices,
deposits and lending activities are concentrated in two areas including
Waycross, Georgia (Ware County) where the headquarters office as well as one
branch are located, and in Jacksonville (Duval County) where five branches are
situated, and which has been an area of growth for the Company which has
purchased 3 branches in Jacksonville over the last several years. Overall,
approximately three-quarters of the Company's deposits were in these two markets
as of June 30, 2003. Given this regional concentration, the regional economic
and demographic trends for the Waycross, Georgia and Jacksonville markets have
been the focus of the analysis set forth herein.
A map reflecting the broad geographic coverage of ACFC's offices as well as
the relative concentration of offices in the Waycross and Jacksonville markets
is set forth below.
RP FINANCIAL, LC.
PAGE 2.2
[PICTURE OMITTED]
Future growth opportunities for ACFC depend on the growth and stability of
the regional economy, demographic growth trends, and the nature and intensity of
the competitive environment. These factors have been briefly examined in the
following pages to help determine the growth potential that exists for the
Company and the relative economic health of ACFC's market area. The growth
potential and the stability provided by the market area have a direct bearing on
the market value of the Company, and will be factored into our valuation
analysis accordingly.
RP FINANCIAL, LC.
PAGE 2.3
LOCAL AND REGIONAL MARKET CONDITIONS
ECONOMIC OVERVIEW - WARE COUNTY, GEORGIA
Ware County is a primarily rural area with a population estimated at
35,000, less than 15,000 of who lived in the City of Waycross. The economy of
the market area is based on manufacturing, transportation and service industries
and agriculture. The transportation sector is dominated by CSX Transportation,
which employs more than 1,500 workers at its "Hump Yard" in Waycross, which is
essentially serves as a major southeastern switching yard and service center for
the CSX Railroad. Many of the smaller manufacturing industries and other
employers in Waycross and the surrounding area are related to the town's
location at a major regional rail hub for CSX Transpiration and ready access to
major highways (Waycross is at the junction of U.S. Routes 1, 82 and 84, which
provide easy access to major interstate routes including I-95 and I-75). Farm
products produced in Ware County and the surrounding area primarily include
blueberries, tobacco and cotton as well as livestock, including cattle and hogs.
Importantly, Ware County is a relatively small market with limited growth
trends. Thus, the Company has been seeking to expand its market into larger more
growth oriented markets such as Duval County, Florida, which is described below.
ECONOMIC OVERVIEW - DUVAL COUNTY, FLORIDA
Jacksonville's economy has historically been tied to the military and
defense industries, primarily the Navy, and has realized strong growth since the
beginning of World War II. As a result of the mild climate, the location on the
ACFC of Florida, and relatively low cost of living in comparison to many areas
of southern Florida has attracted many retirees and the surrounding area has a
significant tourism industry. Moreover, many other businesses including banks
and financial services companies have transformed Jacksonville into a regional
financial center in the southeastern U.S. These characteristics, coupled with
growth of the Port of Jacksonville into the 14th largest port in the U.S. have
all contributed to growth of the Jacksonville area economy.
RP FINANCIAL, LC.
PAGE 2.4
MARKET AREA DEMOGRAPHICS
Table 2.1 includes detailed information regarding the demographic trends
for the Company's market area counties from 2000 to 2003 and projected through
2008. Data for the State of Georgia and Florida is included for comparative
purposes. The shows a wide diversity of size and growth levels for the markets
served by ACFC. In this regard, the Ware County market (Waycross) where the
Company maintains approximately one-third of its deposits, is relatively small
(total population approximating 35,000) and has actually been shrinking in terms
of its total population base over the last decade. While the Company's other
markets in Georgia (Chatham County and Coffee County) are larger in terms of the
overall population and household levels, the Company's retail presence in these
markets is relatively limited (they represented 4.3% and 3.3% of the Company's
total deposits as of June 30, 2003.
At the same time, the rationale for targeted expansion into larger more
vibrant markets is clearly evidenced in the data as Duval County, Florida (i.e.,
the Jacksonville market) represents a comparatively huge market (816,000
residents and 1.1 million residents in the Jacksonville MSA) which has been
growing relatively rapidly (by almost 20% since the beginning of the last
decade). Likewise, the other Florida markets in Clay and Columbia Counties where
the Company maintains office facilities have experienced favorable growth
trends, which the Company will seek to exploit in the future.
Income characteristics for the Company's markets are also reflected in the
data set forth in Table 2.1. Generally, ACFC's markets in Georgia are in rural
and/or less prosperous regions of the state, which is reflected in the
comparatively moderate income levels as measured by average household income,
median household income and per capita income. Specifically, the median
household and per capita income in Ware County equaled $31,124 and 16,766,
respectively, as of 2003, which falls 35% and 32% below the state aggregate,
respectively. While income levels in the Company's other Georgia markets are
higher than Ware County, they too fall below the Georgia aggregate level.
By comparison, income levels in Duval County where the Company is seeking
to grow are relatively comparable to the Florida aggregate. In this regard, the
median household
RP(R) Financial, LC.
Page 2.5
Table 2.1
Atlantic Coast Financial Corporation
Summary Demographic Information
Year Growth Rate
---------------------------------------- -----------
POPULATION (000) 2000 2003 2008 2000-2003 2003-2008
- ---------------- ---- ---- ---- --------- ---------
United States 281,422 291,629 309,303 1.2% 1.2%
Georgia 8,186 8,813 9,955 2.5% 2.5%
Chatham County 232 236 242 0.6% 0.5%
Coffee County 37 39 43 1.7% 1.8%
Ware County 35 35 35 -0.3% -0.3%
HOUSEHOLDS (000)
United States 105,480 109,362 117,074 1.2% 1.4%
Georgia 3,006 3,233 3,672 2.4% 2.6%
Chatham County 90 92 95 0.8% 0.7%
Coffee County 13 14 16 1.9% 2.0%
Ware County 13 13 13 -0.1% -0.1%
MEDIAN HOUSEHOLD INCOME ($)
United States $42,729 $46,615 $54,319 2.9% 3.1%
Georgia 43,201 48,001 57,317 3.6% 3.6%
Chatham County 38,020 42,626 50,135 3.9% 3.3%
Coffee County 31,329 34,239 39,305 3.0% 2.8%
Ware County 28,487 31,124 34,711 3.0% 2.2%
PER CAPITA INCOME - ($)
United States $21,587 $24,733 ---- 4.6% N/A
Georgia 21,154 24,628 ---- 5.2% N/A
Chatham County 21,152 25,207 ---- 6.0% N/A
Coffee County 15,530 18,254 ---- 5.5% N/A
Ware County 14,384 16,766 ---- 5.2% N/A
Less Than $25,000 to $50,000- $100,000 to
2003 HH INCOME DIST.(%) $25,000 50,000 $100,000 $150,000 $150,000+
- ----------------------- -------- ------ --------- -------- ---------
United States 25.5 27.8 30.5 13.1 3.2
Georgia 24.5 27.5 31.6 10.1 6.3
Chatham County 30.1 27.8 28.0 8.0 6.2
Coffee County 36.3 32.4 23.4 4.4 3.4
Ware County 41.2 30.8 22.4 3.7 1.8
RP(R) FINANCIAL, LC.
PAGE 2.6
Table 2.1
Atlantic Coast Financial Corporation
Summary Demographic Information
Year Growth Rate
---------------------------------------- -----------
POPULATION (000) 2000 2003 2008 2000-2003 2003-2008
- ---------------- ---- ---- ---- --------- ---------
United States 281,422 291,629 309,303 1.2% 1.2%
Florida 15,982 16,996 18,700 2.1% 1.9%
Clay County 141 153 173 2.8% 2.5%
Columbia County 57 60 66 1.9% 1.9%
Duval County 779 816 871 1.6% 1.3%
HOUSEHOLDS (000)
- ----------------
United States 105,480 109,362 117,074 1.2% 1.4%
Florida 6,338 6,729 7,452 2.0% 2.1%
Clay County 50 55 63 2.9% 2.8%
Columbia County 21 22 25 2.2% 2.2%
Duval County 304 318 342 1.6% 1.4%
MEDIAN HOUSEHOLD INCOME ($)
- ---------------------------
United States $42,729 $46,615 $54,319 2.9% 3.1%
Florida 39,303 42,332 48,611 2.5% 2.8%
Clay County 49,106 52,412 59,302 2.2% 2.5%
Columbia County 31,048 33,473 37,782 2.5% 2.5%
Duval County 41,116 44,061 50,254 2.3% 2.7%
PER CAPITA INCOME - ($)
- ------------------------
United States $21,587 $24,733 ---- 4.6% N/A
Florida 21,557 24,118 ---- 3.8% N/A
Clay County 20,868 22,903 ---- 3.2% N/A
Columbia County 14,598 16,583 ---- 4.3% N/A
Duval County 20,753 23,046 ---- 3.6% N/A
Less Than $25,000 to $50,000- $100,000 to
2003 HH INCOME DIST.(%) $25,000 50,000 $100,000 $150,000 $150,000+
- ----------------------- ------- ------ -------- -------- ---------
United States 25.5 27.8 30.5 13.1 3.2
Florida 27.8 30.5 28.7 7.9 5.1
Clay County 17.5 29.5 37.8 10.2 4.1
Columbia County 37.2 32.8 24.3 4.3 1.5
Duval County 25.6 31.2 31.0 8.1 4.1
Source: ESBI.
RP FINANCIAL, LC.
PAGE 2.7
income in Duval County equaled $44,061 as of 2003, which exceeded the state
aggregate by 4%, while per capita income equaled $23,046, which fell 4% below
the state aggregate.
LOCAL ECONOMY/LARGEST EMPLOYERS
The largest employers in Ware County and the Jacksonville MSA reflect the
characteristics and trends previously described. In this regard, the major
employers in Ware County reflect the status of Waycross and Ware County as a
regional center for jobs, shopping and health care, among other components. In
this regard, the population of Ware County approximately doubles during the
working day when residents of nearby areas commute into the market for work, at
such large employers as CSX (1,500 employees), Satilla Regional Medical Center
(1,200 employees) and the Wal-Mart (510 employees). Other large manufacturing
employers include General Manufactured Housing and Clayton Homes (producers of
manufactured homes), Carolina Skiff which manufactures small boats and Stewart
Candy which produces candies and sweets.
The largest employers in the Jacksonville MSA reflects the traditionally
large role played by the military, but also reflects the growing importance of
other business and industries on the local economy including health care,
retailing and financial services (see Table 2.2). In this regard, the largest
employer and two of the five largest employers in the market is the U.S. Navy,
which employs more than 25,000 workers at the Mayport Naval Station and the
Jacksonville Naval Air Station. Retailing is also important as Jacksonville
serves as the corporate headquarters for one of the largest grocers in the U.S.
(Winn-Dixie employing 12,097) while another major grocer (Publix Supermarkets)
employs more than 7,000 at regional distribution center. Other large employers
include health care providers and financial services companies, whose presence
in Jacksonville has been growing over the last several decades.
RP FINANCIAL, LC.
PAGE 2.8
Table 2.2
Atlantic Coast Financial Corporation
Major Employers in Ware County and the Jacksonville MSA
2003
Company Employees Product/Service
------- --------- ---------------
WARE COUNTY
-----------
CSX Transportation 1,507 Rail/Freight Transport.
Satilla Regional Medical Center 1,200 Hospital
Ware County Board of Education 1,000 Gov./Education
Wal-Mart 510 Retailer
Ware County Government 350 County Government
General Manufactured Housing 240 Manufactured Housing
City of Waycross 239 Municipal Gvt.
Carolina Skiff 224 Boat Manufacturer
Stewart Candy 170 Candy Manufacturer
Clayton Homes 165 Manufactured Housing
JACKSONVILLE MSA
----------------
Mayport Naval Station 15,000 Government/Military
Duval County Public Schools 14,442 Govt./Education
Winn-Dixie Stores (Corporate Hqtrs.) 12,097 Grocery
Jacksonville N.A.S. 10,317 Government/Military
Blue Cross/Blue Shield 8,500 Health Insurer
State of Florida 7,056 State Government
Publix Supermarkets 7,000 Grocery (Dist. Center)
City of Jacksonville 6,761 Municipal Govt.
Wal-Mart 5,800 Retailer
Baptist Health System 5,584 Health Care
Bank of America 5,500 Regional Banking
Headquarters
Sources: Okefenokee Development Authority for Ware County and the Northeast Florida
Regional Development Partnership for the Jacksonville MSA.
UNEMPLOYMENT RATES
Unemployment levels on a local, state and national level have generally
remained stable or improved slightly, reflecting both the impact of the economic
recovery as well as limited job creation in the face of strong productivity
growth. Specifically, the national
RP FINANCIAL, LC.
PAGE 2.9
unemployment rate has held constant, but there has been improvement in the
Florida and Georgia unemployment rates generally, including the Company's
markets.
Table 2.3
Atlantic Coast Financial Corporation
Unemployment Trends (1)
November 2002 November 2003
Region Unemployment Unemployment
------ ------------ ------------
United States 5.9% 5.9%
Georgia 5.0 4.0
Chatham County 4.0 3.6
Coffee County 5.2 5.7
Ware County 5.1 3.9
Florida 5.3 4.7
Columbia County 4.7 4.3
Clay County 4.3 4.1
Duval County 5.4 5.4
(1) Unemployment rates are not seasonally adjusted.
Source: U.S. Bureau of Labor Statistics.
COMPETITION
As a savings bank with its primary business functions of real estate
lending and the gathering deposits in southeast Georgia and northeast Florida,
ACFC's primary competitors are: (1) other financial institutions with offices in
the local market (including banks, thrifts and credit unions); (2) other
mortgage loan originators; (3) those depository and lending organizations not
physically located within the market but capable of doing business remotely
through the Internet or by other means; and (4) other competitors such as
investment firms, mutual funds, insurance companies, etc.
Competition among financial institutions in the Company's market is
significant. As larger institutions compete for market share to achieve
economies of scale, the environment for the Company's products and services is
expected to remain highly competitive. Community-sized institutions such as ACFC
typically compete with larger institutions on pricing or operate
RP FINANCIAL, LC.
PAGE 2.10
in a niche that will allow for operating margins to be maintained at profitable
levels. The Company's Plan as set forth herein reflects elements of both
strategies.
Table 2.4 displays deposit market trends in recent years for Ware and
Duval Counties as well as the other markets where ACFC maintains branch offices.
The Company maintains a relatively strong market share in Ware County, where it
is the largest financial institution holding approximately 25% of the total
deposit market. Importantly, growth in the Ware County market has been limited,
as total deposits have diminished since 1998 and the bank component of the
deposit base has only realized 5% compounded annual growth overall over the last
several years. The Duval County market represents a much larger market overall
(in excess of $13 billion of total deposits) but ACFC's market share is much
smaller, equal to approximately 1.4% of the total deposit market.
The largest competitors in the markets served by ACFC are comprised of
some of the largest financial institutions in the Southeast U.S. and the nation
as a whole (See Table 2.5). In this regard, while ACFC holds the largest market
share in Ware County, there are other significant competitors including SunTrust
Bank, Waycross Bank & Trust, Blackshear Bank and Bank of America, each of which
holds a 10% share of the deposit market or greater. The Duval County market also
reflects a significant level of competition with a significant number of large
banks, community banks and credit unions. In this regard, the three largest
financial institutions in the market (Bank of America, Wachovia and VyStar
Credit Union) together hold more than 60% of the deposit market.
RP FINANCIAL, LC.
PAGE 2.11
Table 2.4
Atlantic Coast Financial Corporation
Deposit Summary
(Dollars in Thousands)
As of June 30,
-------------------------------------------------------------------------------------
2001 2003
--------------------------------------------- --------------------------------------- Deposit
Market Number of Market No. of Growth Rate
Deposits Share Branches Deposits Share Branches 2001-2003
-------- ----- -------- -------- ----- -------- ---------
STATE OF GEORGIA $102,071,478 100.0% 2,349 $124,882,282 100.0% 2,476 10.6%
Commercial Banks 97,405,804 95.4% 2,251 119,572,075 95.7% 2,335 10.8%
Savings Institutions 4,665,674 4.6% 98 5,310,207 4.3% 141 6.7%
CHATHAM COUNTY $2,674,224 100.0% 73 $3,198,039 100.0% 75 9.4%
Commercial Banks 2,658,728 99.4% 72 3,153,948 98.6% 73 8.9%
Savings Institutions 15,496 0.6% 1 44,091 1.4% 2 68.7%
Atlantic Coast 15,496 0.6% 1 18,858 0.6% 1 10.3%
COFFEE COUNTY $405,172 100.0% 16 $519,495 100.0% 17 13.2%
Commercial Banks 395,759 97.7% 15 505,122 97.2% 16 13.0%
Savings Institutions 9,413 2.3% 1 14,373 2.8% 1 23.6%
Atlantic Coast 9,416 2.3% 1 14,373 2.8% 1 23.5%
WARE COUNTY $520,300 100.0% 10 $573,972 100.0% 10 5.0%
Commercial Banks 333,349 64.1% 7 430,474 75.0% 8 13.6%
Savings Institutions 186,951 35.9% 3 143,498 25.0% 2 -12.4%
Atlantic Coast 136,368 26.2% 2 143,798 25.1% 2 2.7%
STATE OF FLORIDA $222,797,442 100.0% 4,667 $268,173,834 100.0% 4,732 9.7%
Commercial Banks 185,116,837 83.1% 4,034 218,780,132 81.6% 4,059 8.7%
Savings Institutions 37,680,605 16.9% 633 49,393,702 18.4% 673 14.5%
Columbia County $463,683 100.0% 14 $549,310 100.0% 17 8.8%
Commercial Banks 359,589 77.6% 11 430,381 78.3% 13 9.4%
Savings Institutions 104,094 22.4% 3 118,929 21.7% 4 6.9%
Atlantic Coast 27,294 5.9% 1 32,406 5.9% 1 9.0%
CLAY COUNTY $594,698 100.0% 26 $709,972 100.0% 27 9.3%
Commercial Banks 573,592 96.5% 26 680,916 95.9% 26 9.0%
Savings Institutions 21,106 3.5% 0 29,056 4.1% 1 17.3%
Atlantic Coast 21,106 3.5% 0 29,056 4.1% 1 17.3%
DUVAL COUNTY $8,729,153 100.0% 157 $13,705,522 100.0% 164 25.3%
Commercial Banks 8,210,124 94.1% 141 12,080,906 88.1% 149 21.3%
Savings Institutions 519,029 5.9% 16 1,624,616 11.9% 15 76.9%
Atlantic Coast 103,200 1.2% 4 198,161 1.4% 6 38.6%
RP FINANCIAL, LC.
PAGE 2.12
Table 2.5
Atlantic Coast Financial Corporation
Competitor Analysis
Total Market
Rank Company Name City State Charter Branches Deposits Share
- ---- ------------ ---- ----- ------- -------- -------- -----
($000) (%)
WARE COUNTY
- ----------------------------------------------------------------------------------------------------------------------------
1 ATLANTIC COAST FEDERAL WAYCROSS GA THRIFT 2 $138,563 24.64
- ----------------------------------------------------------------------------------------------------------------------------
2 SunTrust Bank Atlanta GA Bank 2 87,768 15.61
3 Waycross Bank & Trust Waycross GA Bank 1 78,298 13.92
4 Blackshear Bank, The Blackshear GA Bank 1 76,076 13.53
5 Bank of America NA Charlotte NC Bank 2 58,613 10.42
6 First Georgia Bank Brunswick GA Bank 1 44,309 7.88
7 Branch Banking & Trust Company Winston-Salem NC Bank 1 41,936 7.46
8 Peoples Bank Blackshear GA Bank 1 26,114 4.64
9 Community United FCU Waycross GA Credit Union 1 7,743 1.38
10 Ware County School Emps FCU Waycross GA Credit Union 1 2,892 0.51
11 ATUSP Federal Credit Union Waycross GA Credit Union 1 0 0
- -
Total 14 $562,312 100.0
DUVAL COUNTY
1 Bank of America NA Charlotte NC Bank 29 3,880,735 25.97
2 Wachovia Bank NA Charlotte NC Bank 45 3,185,301 21.31
3 VyStar Credit Union Jacksonville FL Credit Union 1 2,022,748 13.53
4 First Alliance Bank Jacksonville FL Thrift 4 741,508 4.96
5 SunTrust Bank Atlanta GA Bank 16 699,264 4.68
6 SouthTrust Bank Birmingham AL Bank 24 594,500 3.98
7 Educational Community CU Jacksonville FL Credit Union 1 576,263 3.86
8 Compass Bank Birmingham AL Bank 17 512,424 3.43
9 Florida Telco CU Jacksonville FL Credit Union 1 311,830 2.09
10 AmSouth Bank Birmingham AL Bank 11 244,259 1.63
11 First Guaranty B&TC, Jcksnvlle Jacksonville FL Bank 7 223,667 1.5
12 JAX Federal Credit Union Jacksonville FL Credit Union 1 198,099 1.33
13 State Emps CU Jacksonville FL Credit Union 1 162,106 1.08
14 Gvt Emps CU of FL Jacksonville FL Credit Union 1 139,418 0.93
- ----------------------------------------------------------------------------------------------------------------------------
15 ATLANTIC COAST FEDERAL WAYCROSS GA THRIFT 4 124,597 0.83
- ----------------------------------------------------------------------------------------------------------------------------
All Others Financial Insitutions N.A. N.A. N.A. 56 1,328,143 8.87
-- --------- ----
Total 219 $14,944,862 100.0
Source: Federal Deposit Insurance Corporation.
RP(R) FINANCIAL, LC.
PAGE 3.1
III. PEER GROUP ANALYSIS
This chapter presents an analysis of ACFC's operations versus a group of
comparable companies (the "Peer Group") selected from the universe of all
publicly-traded savings institutions. The primary basis of the pro forma market
valuation of ACFC is provided by these public companies. Factors affecting the
Company's pro forma market value such as financial condition, credit risk,
interest rate risk, and recent operating results can be readily assessed in
relation to the Peer Group. Current market pricing of the Peer Group, subject to
appropriate adjustments to account for differences between ACFC and the Peer
Group, will then be used as a basis for the valuation of ACFC's to-be-issued
common stock.
PEER GROUP SELECTION
The mutual holding company form of ownership has been in existence in its
present form since 1991. As of the date of this appraisal, there were 17
publicly-traded institutions operating as subsidiaries of MHCs. We believe there
are a number of characteristics of MHCs that make their shares distinctly
different than the shares of fully-converted companies. These factors include:
(1) lower aftermarket liquidity in the MHC shares since less than 50% of the
shares are available for trading; (2) guaranteed minority ownership interest,
with no opportunity of exercising voting control of the institution in the MHC
form of organization, thus limiting acquisition speculation in the stock price;
(3) market expectations of the potential impact of "second-step" conversions on
the pricing of public MHC institutions; (4) the regulatory policies regarding
the dividend waiver by MHC institutions; and (5) mid-tier holding companies
(formed by most MHCs) facilitate the ability for stock repurchases, thereby
potentially improving the market for the public shares and the MHC's financial
characteristics. We believe that each of these factors has a distinct impact on
the pricing of the shares of MHC institutions, relative to the market pricing of
shares of fully-converted public companies.
Thus, given the unique characteristics of the MHC form of ownership, RP
Financial concluded that the appropriate Peer Group for ACFC's valuation should
be comprised of thrifts in MHC form, and no full stock companies. In this
regard, a Peer Group comprised of public
RP(R) FINANCIAL, LC.
PAGE 3.2
MHC thrifts is consistent with the regulatory guidelines, and other recently
completed MHC transactions. Further, the Peer Group should be comprised of only
those MHC institutions whose common stock is either listed on a national
exchange or is NASDAQ listed, since the market for companies trading in this
fashion is regular and reported. We believe non-listed MHC institutions are
inappropriate for the Peer Group, since the trading activity for thinly-traded
stocks is typically highly irregular in terms of frequency and price and thus
may not be a reliable indicator of market value. We have excluded from the Peer
Group those public MHC institutions that are currently pursuing a "second-step"
conversion, companies subject to speculative factors or unusual operating
conditions, and companies who have announced a "remutualization" transaction or
a merger with another MHC - as the pricing characteristics of these MHC
institutions are typically distorted. MHCs that recently completed their
minority stock offerings are typically excluded as well, due to the lack of a
seasoned trading history and/or insufficient time to effectively redeploy the
offering proceeds (Cheviot Financial and Clifton Savings Bancorp were excluded
on this basis but their pricing will be assessed in the valuation section in
conjunction with an analysis of the new issue market). Selected characteristics
of the universe of all publicly-traded institutions are included as Exhibit
III-1.
BASIS OF COMPARISON
This appraisal includes two sets of financial data and ratios for each
public MHC institution. The first set of financial data reflects the actual book
value, earnings, assets and operating results reported by the public MHC
institutions in its public filings inclusive of the minority ownership interest
outstanding to the public. The second set of financial data, discussed at length
in the following chapter, places the Peer Group institutions on equal footing by
restating their financial data and pricing ratios on a "fully-converted" basis
assuming the sale of the majority shares held by the MHCs in public offerings
based on their respective current prices and standard assumptions for second
step conversions. This adjustment is appropriate for several reasons, including:
(1) the investment community also prices the stock of MHCs assuming the
completion of a second step conversion; and, MHC institutions have different
proportions of their stock publicly held, so this technique neutralizes such
differences. Throughout the appraisal, the adjusted figures will be specifically
identified as being on a "fully-converted"
RP(R) FINANCIAL, LC.
PAGE 3.3
basis. Unless so noted, the figures referred to in the appraisal will be actual
financial data reported by the public MHC institutions.
Both sets of financial data have their specific use and applicability to
the appraisal. The actual financial data, as reported by the Peer Group
companies and reflective of the minority interest outstanding, will be used
primarily in this Chapter III to make financial comparisons between the Peer
Group and the Company. In this analysis, we consider the pro forma impact of the
offering on the Company. The fully-converted analysis will be more fully
described and quantified in the pricing analysis discussed in Chapter IV. The
fully-converted pricing ratios are considered critical to the valuation analysis
in Chapter IV, because they place each public MHC institution on a
fully-converted basis (making their pricing ratios comparable to the pro forma
valuation conclusion reached herein), eliminate distortion in pricing ratios
between public MHC institutions that have sold different percentage ownership
interests to the public, and reflect the actual pricing ratios (fully-converted
basis) being placed on public MHC institutions in the market today to reflect
the unique trading characteristics of publicly-traded MHC institutions.
SELECTED PEER GROUP
Among the universe of nearly 230 publicly-traded thrifts, the number of
public MHC institutions is relatively small, thereby limiting the selection
process. Under ideal circumstances, the Peer Group would be comprised of at
least ten publicly-traded regionally-based MHC institutions with financial and
operating characteristics comparable to the Company. However, given the limited
number of publicly-traded institutions in the MHC form of ownership, the
selection criteria was necessarily more broadly based, i.e., not confined to a
particular geographic market area, financial and operating characteristics. In
the selection process, publicly-traded MHCs with assets of less than $1 billion
were considered for the Peer Group, in that they were more comparable than
larger thrifts in terms of resources, financial strength, competitive strength
and size and liquidity characteristics of the stock offering. Ten
publicly-traded MHC companies currently maintain assets of less than $1 billion
and all ten were selected for the Peer Group. While the Peer Group is not
exactly comparable to the Company, we believe
RP(R) FINANCIAL, LC.
PAGE 3.4
RP FINANCIAL, LC.
- -----------------
Financial Services Industry Consultants
1700 North Moore Street, Suite 2210
Arlington, Virginia 22209
(703) 528-1700
Table 3.1
Peer Group of Publicly-Traded Thrifts
March 11, 2004(1)
Primary Operating Total Fiscal Conv. Stock Market
Ticker Financial Institution Exchg. Market Strat.(2) Assets Offices Year Date Price Value
- ------ ---------------------------------- ------ --------------- --------- ------ ------- ---- ----- ------ -------
($) ($Mil)
WFD Westfield Finl MHC of MA(47.0) (3) AMEX Southwestern MA Thrift 816 S 10 12-31 12/01 24.16 241
BCSB BCSB Bankcorp MHC of MD (36.0) OTC Northeast MD Thrift 660 11 09-30 07/98 20.00 118
ONFC Oneida Fincl MHC of NY (45.7) OTC Central NY Thrift 428 6 12-31 12/98 14.60 112
ALLB Alliance Bank MHC of PA (20.0) OTC Southeastern PA Thrift 374 8 12-31 03/95 39.00 134
PBHC Pathfinder BC MHC of NY (39.1) (3) OTC Upstate NY Thrift 287 S 5 12-31 11/95 19.81 48
GCBC Green Co Bcrp MHC of NY (43.0) OTC Southeast NY Thrift 272 6 06-30 12/98 35.49 73
ROME Rome Bncp Inc MHC of NY (41.6) (3) OTC Central NY Thrift 262 4 12-31 10/99 33.29 143
JXSB Jcksnville Bcp MHC of IL(45.6) OTC Central IL Thrift 262 7 12-31 04/95 19.99 39
WCFB Wbstr Cty Fed MHC of IA (38.5) OTC Central IA Thrift 106 S 1 12-31 08/94 15.00 57
GOV Gouverneur Bcp MHC of NY(42.4) AMEX Northern NY Thrift 95 1 09-30 03/99 13.68 31
NOTES: (1) Or most recent date available (M=March, S=September, D=December, J=June, E=Estimated, and P=Pro Forma)
(2) Operating strategies are: Thrift=Traditional Thrift, M.B.=Mortgage Banker, R.E.=Real Estate Developer,
Div.=Diversified, and Ret.=Retail Banking.
(3) FDIC savings bank institution.
Source: Corporate offering circulars, data derived from information published in SNL Securities Quarterly Thrift Report,
and financial reports of publicly-traded thrifts.
Date of Last Update: 03/22/04
RP(R) FINANCIAL, LC.
PAGE 3.5
such companies form a good basis for the valuation of the Company. To the extent
significant differences exist, valuation adjustments will be made accordingly.
On average, the Peer Group companies maintain a slightly higher level of
capitalization relative to the universe of all public thrifts, and have lower
profitability and return on equity. On a fully-converted basis, the Peer Group
would have nearly twice the capital level and higher profitability, which would
result in an even lower return on equity. The summary table below underscores
the key differences, particularly in the average pricing ratios between full
stock and MHC institutions (both as reported and on a fully converted basis).
MHC Peer Group
--------------
Fully-
All Reported Converted
Publicly-Traded Basis Basis(1)
--------------- ----- --------
FINANCIAL CHARACTERISTICS (AVERAGES)
Assets ($Mil) $2,489 $356 $413
Equity/Assets (%) 10.78% 12.32% 25.14%
Core Return on Assets (%) 0.66 0.59 0.65
Core Return on Equity (%) 6.79 4.54 2.46
PRICING RATIOS (AVERAGES)(2)
Price/Core Earnings (x) 20.65x 44.05x 37.29x
Price/Book (%) 167.69% 254.21% 102.33%
Price/Assets (%) 18.37 30.82 25.49
(1) Pro forma basis.
(2) Based on market prices as of March 5, 2004.
The following sections present a comparison of ACFC's financial condition,
income and expense trends, loan composition, interest rate risk and credit risk
versus the figures reported by the Peer Group. The conclusions drawn from the
comparative analysis are then factored into the valuation analysis discussed in
the final chapter.
FINANCIAL CONDITION
Table 3.2 shows comparative balance sheet measures for the Company and the
Peer Group. The Company's pre-offering equity ratio of 8.7% of assets falls
below the Peer Group
RP(R) FINANCIAL, LC.
PAGE 3.6
RP FINANCIAL, LC.
- -----------------
Financial Services Industry Consultants
1700 North Moore Street, Suite 2210
Arlington, Virginia 22209
(703) 528-1700
Table 3.2
Balance Sheet Composition and Growth Rates
Comparable Institution Analysis
As of December 31, 2003
Balance Sheet as a Percent of Assets
-----------------------------------------------------------------------------------------
Cash & MBS & Borrowed Subd. Net Goodwill Tng Net MEMO:
Equivalents Invest Loans Deposits Funds Debt Worth & Intang Worth Pref.Stock
----------- ------ ----- -------- --------- ---- ----- -------- ------- ----------
Atlantic Coast Financial Corp.
December 31, 2003 1.8 5.9 87.3 78.6 12.2 0.0 8.7 0.5 8.1 0.0
All Public Companies 4.9 24.1 66.5 67.3 20.1 0.6 10.5 0.6 9.9 0.0
All Public Companies 4.9 24.1 66.5 67.3 20.1 0.6 10.5 0.6 9.9 0.0
State of FL 3.2 17.3 75.4 68.1 20.4 1.7 8.2 0.4 7.8 0.0
Comparable Group Average 5.5 31.0 58.6 76.3 9.7 0.5 12.3 0.6 11.7 0.0
Mid-Atlantic Companies 4.0 29.2 61.4 75.0 11.8 0.7 11.3 0.7 10.6 0.0
Mid-West Companies 9.8 29.7 56.5 78.9 5.1 0.0 14.5 0.6 13.8 0.0
Other Comparative Companies 7.4 45.8 42.4 80.0 4.2 0.0 15.2 0.0 15.2 0.0
Comparable Group
----------------
Mid-Atlantic Companies
----------------------
ALLB Alliance Bank MHC of PA (20.0) 4.1 34.7 55.7 73.4 16.5 0.0 9.4 0.0 9.4 0.0
BCSB BCSB Bankcorp MHC of MD (36.0) 3.0 38.2 54.5 84.2 4.9 3.4 6.7 0.4 6.3 0.0
GOV Gouverneur Bcp MHC of NY(42.4) 3.2 18.9 73.6 60.9 18.1 0.0 18.8 0.0 18.8 0.0
GCBC Green Co Bcrp MHC of NY (43.0) 6.2 39.3 51.7 83.7 4.8 0.0 10.8 0.0 10.8 0.0
ONFC Oneida Fincl MHC of NY (45.7) 2.9 40.6 46.8 71.4 15.7 0.0 11.9 3.0 8.9 0.0
PBHC Pathfinder BC MHC of NY (39.1)(1) 3.0 21.8 68.4 73.8 15.7 1.7 7.4 1.7 5.8 0.0
ROME Rome Bncp Inc MHC of NY (41.6) 5.4 11.1 79.3 77.6 6.9 0.0 14.0 0.0 14.0 0.0
Mid-West Companies
------------------
JXSB Jcksnville Bcp MHC of IL(45.6) 3.8 41.4 48.7 89.8 1.1 0.0 7.7 1.2 6.5 0.0
WCFB Wbstr Cty Fed MHC of IA (38.5)(1) 15.7 18.0 64.3 68.1 9.1 0.0 21.3 0.1 21.2 0.0
New England Companies
---------------------
WFD Westfield Finl MHC of MA(47.0)(1) 7.4 45.8 42.4 80.0 4.2 0.0 15.2 0.0 15.2 0.0
(CONTINUED)
Balance Sheet Annual Growth Rates Regulatory Capital
--------------------------------------------------------------- ------------------------
MBS, Cash & Borrows. Net Tng Net
Assets Investments Loans Deposits & Subdebt Worth Worth Tangible Core Reg.Cap.
-------- ----------- ----- -------- --------- ----- ------- -------- ------ --------
Atlantic Coast Financial Corp.
December 31, 2003 11.46 -16.11 14.70 8.69 34.17 11.03 8.60 8.08 8.08 12.89
All Public Companies 7.69 9.45 6.65 6.68 13.08 3.65 3.22 9.45 9.27 16.64
All Public Companies 7.69 9.45 6.65 6.68 13.08 3.65 3.22 9.45 9.27 16.64
State of FL 13.19 8.92 14.40 11.19 21.45 8.46 8.65 8.16 8.24 14.29
Comparable Group Average 6.74 12.41 2.82 7.18 11.65 0.33 -0.92 11.76 11.02 21.84
Mid-Atlantic Companies 7.90 2.51 9.08 8.55 15.45 0.49 -1.27 9.94 9.94 18.96
Mid-West Companies 4.76 47.38 -12.41 5.94 0.26 0.54 0.41 20.89 13.72 29.02
Other Comparative Companies 2.61 11.73 -10.56 0.02 NM -1.19 -1.19 0.00 0.00 0.00
Comparable Group
----------------
Mid-Atlantic Companies
----------------------
ALLB Alliance Bank MHC of PA (20.0) 1.65 -10.38 11.58 2.13 -0.36 -0.16 -0.16 NM NM NM
BCSB BCSB Bankcorp MHC of MD (36.0) 10.14 43.33 -8.77 8.93 NM -3.10 -3.11 8.00 8.00 16.07
GOV Gouverneur Bcp MHC of NY(42.4) 9.68 -25.82 25.48 6.94 28.36 2.26 2.26 18.10 18.10 33.90
GCBC Green Co Bcrp MHC of NY (43.0) 14.99 25.95 6.96 14.95 44.44 5.44 5.44 8.70 8.70 19.22
ONFC Oneida Fincl MHC of NY (45.7) 2.76 2.94 1.36 4.71 -8.30 5.77 5.86 7.83 7.83 13.20
PBHC Pathfinder BC MHC of NY (39.1)(1) 11.35 8.28 12.59 17.95 7.32 -7.99 -20.39 7.05 7.05 12.43
ROME Rome Bncp Inc MHC of NY (41.6) 4.74 -26.71 14.37 4.24 21.25 1.23 1.23 NM NM NM
Mid-West Companies
------------------
JXSB Jcksnville Bcp MHC of IL(45.6) 3.69 32.32 -14.49 4.24 0.52 -1.08 -0.82 NM 6.54 13.13
WCFB Wbstr Cty Fed MHC of IA (38.5)(1) 5.82 62.44 -10.33 7.64 0.00 2.17 1.65 20.89 20.89 44.91
New England Companies
---------------------
WFD Westfield Finl MHC of MA(47.0)(1) 2.61 11.73 -10.56 0.02 NM -1.19 -1.19 NM NM NM
(1) Financial information is for the quarter ending September 30, 2003.
Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC.
calculations. The information provided in this table has been obtained from sources we believe are reliable,
but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2004 by RP Financial, LC.
RP(R) FINANCIAL, LC.
PAGE 3.7
average of 12.3%; however, with the addition of offering proceeds, the pro forma
capital position will exceed the Peer Group's ratio. Intangible assets were
comparable for both the Company and the Peer Group, equal to 0.5% and 0.6%,
respectively. The increased equity is anticipated to enhance ACFC's earnings
potential through reinvestment of proceeds, lower funding costs and potentially
through profitable growth. However, at the same time, the increased pro forma
capital position is expected to result in a decline in the Company's return on
equity ("ROE"), based on both reported and core earnings. Both the Company's and
the Peer Group's current equity ratios reflect strong surpluses over regulatory
capital requirements; and on a post-offering basis the Company's cushion over
capital requirements will be enhanced.
The Company's asset composition reflects a comparatively higher
concentration of loans to assets, at 87.3% versus a 58.6% average for the Peer
Group. Comparatively, the ratio of cash, investments, and MBS for the Company
was lower than for the Peer Group (7.7% of assets versus 36.5% for the Peer
Group). Overall, the Company's interest-earning assets ("IEA") approximated
94.0% of assets, which was lower than the comparative Peer Group ratio of 95.1%.
The Company's lower IEA ratio reflects, in part, the Company's relatively large
number of branches, investment in fixed assets, coupled with a comparable level
of intangible assets in comparison to the Peer Group. On a pro forma basis, the
Company's IEA will improve as the net proceeds are reinvested into IEA.
The Company's deposits equaled 78.6% of assets, which was above the Peer
Group average of 76.3%. Borrowings were utilized to a lesser degree by the Peer
Group, at 9.7% versus the ACFC's ratio of 12.2%. Total interest-bearing
liabilities ("IBL") maintained by ACFC and the Peer Group, equaled 90.8% and
86.0% of assets, respectively. The ratio of IBL will be reduced on a
post-offering basis as the Company funds a greater portion of its operations out
of capital.
ACFC posted a higher annual asset growth than the Peer Group, at 11.46% and
6.74%, respectively. The Company's comparatively faster growth is attributable
to relatively strong loan growth, reflecting the Company's efforts to leverage
capital and take advantage of the expanded lending powers (both from a product
and geographic standpoint) following the Charter Conversion. Over this same
period, the Company's loans increased 14.70% versus 2.82% for the
RP(R) FINANCIAL, LC.
PAGE 3.8
Peer Group on average, with the Company's faster loan growth being attributable
to both strong origination levels which were supplemented by purchases. The Peer
Group's asset growth may be reflective of their efforts to undertake wholesale
leveraging of their comparatively strong capital ratios, as growth of
investments was higher in comparison to both the industry average and the
Company.
The growth rate of both deposits and borrowings for the Company exceeded
the Peer Group average as ACFC sought to fund asset growth. Specifically, the
annual growth rate for deposits was 8.69% versus an average of 7.18% for the
Peer Group. The growth rate for borrowings was comparatively stronger for the
Company, equaling 34.17% versus 11.65% for the Peer Group on average.
The Company's equity increased 11.03%, versus 0.33% for the Peer Group. The
Peer Group's more limited equity growth, notwithstanding comparable
profitability, reflects dividend and capital management strategies. On a
post-offering basis, the Company's capital growth rate is expected to decline
due to the increased equity level and marginal short-term net proceeds
reinvestment benefit.
INCOME AND EXPENSE COMPONENTS
Table 3.3 displays comparative statements of operations for the Company and
the Peer Group. ACFC and the Peer Group reported net income to average assets
ratios of 0.91% and 0.61%, respectively. The Company's operations reflect a
relatively favorable level of net interest income and fee income, the benefits
of which are offset by a comparatively higher level of operating expenses and
loan loss provisions. Moreover, reported earnings for ACFC were supported by
non-operating gains on sale while the Peer Group's earnings primarily consisted
of core earnings elements.
The Company's relatively strong interest income ratio relative to the Peer
Group supported its stronger ratio of net interest income to average assets,
notwithstanding a higher ratio of interest expense. The Company's higher
interest income ratio was realized through its higher ratio of loans, which
supported a higher yield on interest-earning assets (6.91% for the Company
versus 5.56% for the Peer Group). The Company's modestly higher interest expense
RP(R) FINANCIAL, LC.
PAGE 3.9
RP FINANCIAL, LC.
- -----------------
Financial Services Industry Consultants
1700 North Moore Street, Suite 2210
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(703) 528-1700
Table 3.3
Income as a Percent of Average Assets and Yields, Costs, Spreads
Comparable Institution Analysis
For the Twelve Months Ended December 31, 2003
Net Interest Income Other Income G&A/Other Exp.
---------------------------------- -------------------------- -----------------------
Loss NII Total
Net Provis. After Loan R.E. Other Other G&A Goodwill
Income Income Expense NII on IEA Provis. Fees Oper. Income Income Expense Amort.
------ ------ ------- ----- ------ ------ ---- ---- ------ ------ ------- --------
Atlantic Coast Financial Corp.
------------------------------
December 31, 2003 0.91 6.43 2.43 4.00 0.87 3.13 0.00 0.00 1.01 1.01 3.28 0.00
All Public Companies 0.83 5.29 2.27 3.02 0.17 2.85 0.06 0.00 0.57 0.63 2.50 0.02
All Public Companies 0.83 5.29 2.27 3.02 0.17 2.85 0.06 0.00 0.57 0.63 2.50 0.02
State of FL 0.96 5.27 2.27 3.00 0.16 2.84 0.05 0.10 1.23 1.38 2.84 0.00
Comparable Group Average 0.61 5.31 2.03 3.28 0.20 3.08 0.03 0.00 0.63 0.66 2.91 0.01
Mid-Atlantic Companies 0.61 5.37 1.98 3.39 0.15 3.24 0.02 0.01 0.73 0.76 3.16 0.01
Mid-West Companies 0.74 5.46 2.28 3.18 0.43 2.75 0.08 -0.01 0.45 0.52 2.42 0.02
Other Comparable Companies 0.35 4.60 1.87 2.73 0.09 2.64 0.01 0.00 0.26 0.00 2.14 0.00
Comparable Group
----------------
Mid-Atlantic Companies
----------------------
ALLB Alliance Bank MHC of PA (20.0) 0.58 5.31 2.26 3.05 0.13 2.92 0.01 0.04 0.32 0.36 2.68 0.00
BCSB BCSB Bankcorp MHC of MD (36.0) 0.16 5.05 2.48 2.57 0.20 2.37 0.03 0.01 0.15 0.19 2.39 0.01
GOV Gouverneur Bcp MHC of NY(42.4) 0.78 5.86 2.00 3.86 0.09 3.77 0.00 -0.05 0.32 0.27 2.84 0.00
GCBC Green Co Bcrp MHC of NY (43.0) 0.97 5.14 1.49 3.65 0.08 3.57 0.00 0.00 1.03 1.04 3.21 0.00
ONFC Oneida Fincl MHC of NY (45.7) 0.74 4.91 1.94 2.97 0.13 2.84 0.00 0.00 2.32 2.32 4.40 0.02
PBHC Pathfinder BC MHC of NY (39.1)(1) 0.48 5.59 2.26 3.33 0.24 3.09 0.09 0.03 0.47 0.59 3.17 0.06
ROME Rome Bncp Inc MHC of NY (41.6) 0.59 5.72 1.40 4.33 0.20 4.13 0.00 0.00 0.53 0.54 3.42 0.00
Mid-West Companies
------------------
JXSB Jcksnville Bcp MHC of IL(45.6) 0.32 4.98 2.22 2.76 0.80 1.96 0.15 -0.01 0.54 0.69 2.76 0.03
WCFB Wbstr Cty Fed MHC of IA (38.5)(1) 1.16 5.94 2.34 3.60 0.06 3.54 0.00 0.00 0.35 0.35 2.08 0.01
New England Companies
---------------------
WFD Westfield Finl MHC of MA(47.0)(1) 0.35 4.60 1.87 2.73 0.09 2.64 0.01 0.00 0.26 0.27 2.14 0.00
(CONTINUED)
Non-Op. Items Yields, Costs, and Spreads
-------------- -----------------------------
MEMO: MEMO:
Net Extrao. Yield Cost Yld-Cost Assets/ Effective
Gains Items On Assets of Funds Spread FTE Emp. Tax Rate
----- ------- --------- -------- ------ ------- --------
Atlantic Coast Financial Corp.
------------------------------ 0.54 0.00 6.91 2.95 3.96 2,988 35.20
December 31, 2003
0.29 0.00 5.42 2.54 2.88 4,506 34.59
All Public Companies 0.29 0.00 5.42 2.54 2.88 4,506 34.59
All Public Companies 0.11 0.03 5.52 2.55 2.97 5,192 35.60
State of FL 0.04 0.00 5.56 2.36 3.20 3,129 30.61
Comparable Group Average 0.04 0.00 5.65 2.27 3.37 3,120 27.24
Mid-Atlantic Companies 0.12 0.00 5.67 2.74 2.93 3,152 35.63
Mid-West Companies -0.08 0.00 4.78 2.23 2.55 0 49.18
Other Comparable Companies
Comparable Group
----------------
Mid-Atlantic Companies
---------------------- 0.00 0.00 5.60 2.52 3.08 NM 3.31
ALLB Alliance Bank MHC of PA (20.0) 0.08 0.00 5.21 2.74 2.47 3,773 31.07
BCSB BCSB Bankcorp MHC of MD (36.0) 0.08 0.00 6.04 2.55 3.49 3,059 38.35
GOV Gouverneur Bcp MHC of NY(42.4) 0.01 0.00 5.28 1.69 3.59 3,198 30.96
GCBC Green Co Bcrp MHC of NY (43.0) 0.27 0.00 5.41 2.22 3.20 2,780 26.89
ONFC Oneida Fincl MHC of NY (45.7) 0.19 0.00 6.01 2.52 3.49 2,791 26.20
PBHC Pathfinder BC MHC of NY (39.1)(1) -0.35 0.00 5.97 1.66 4.31 NM 33.88
ROME Rome Bncp Inc MHC of NY (41.6)
Mid-West Companies
------------------ 0.22 0.00 5.28 2.44 2.83 2,219 NM
JXSB Jcksnville Bcp MHC of IL(45.6) 0.01 0.00 6.06 3.03 3.03 4,085 35.63
WCFB Wbstr Cty Fed MHC of IA (38.5)(1)
New England Companies
--------------------- -0.08 0.00 4.78 2.23 2.55 NM 49.18
WFD Westfield Finl MHC of MA(47.0)(1)
(1) Financial information is for the quarter ending September 30, 2003.
Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC.
calculations. The information provided in this table has been obtained from sources we believe are reliable,
but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2004 by RP Financial, LC.
RP(R) FINANCIAL, LC.
PAGE 3.10
ratio, 2.43% versus 2.03% of average assets for the Peer Group, reflects the
Company's higher IBL ratio, and higher use of borrowings and the impact of
ACFC's growth strategy on its retail funding costs. ACFC's interest expense
ratio is expected to diminish on a pro forma basis, as the conversion proceeds
will represent interest-free funds for the Company (the Company's cost of funds
equaled 2.95% versus 2.36% for the Peer Group on average).
Non-interest income equaled 1.01% of average assets for ACFC versus an
average of 0.66% for the Peer Group. The Company's non-interest income ratio is
comparatively higher, primarily reflecting the high level of fee income
generated through the Company's deposit accounts and large ATM network. The
Company recently sold its credit card portfolio with a principal balance of
approximately $13.0 million for a $2.6 million gain, which is reflected as a
non-operating income item for purposes of this analysis. In the future, ACFC
expects that interchange income (and expense) will diminish as a result of the
sale of the credit card portfolio.
The operating expense ratios for ACFC and the Peer Group were 3.28% and
2.91%, respectively, while intangible amortization was relatively nominal for
both. As noted in Section One, several factors have caused ACFC to operate with
a high operating expense ratio including the additional compensation, marketing,
and other costs related to the growth and expansion plans. In particular,
operating costs have increased as a result of the costs related to the
acquisition of branches and the related staffing costs. Additionally, the
Company has incurred expenses as it sought to resolve problem assets (including
the related litigation costs) and bolster its staff and credit administration
processes and procedures in response to the Resolution adopted in May 2003. On a
post-offering basis, ACFC's operating expenses can be expected to increase with
the stock benefit plans and cost of operating as a public company, but will be
seeking to leverage its overhead and infrastructure through future balance sheet
growth.
ACFC's efficiency ratio (operating expenses as a percent of the sum of
non-interest operating income and net interest income) of 65.4% is more
favorable than the Peer Group's ratio of 73.9%. On a post-offering basis, the
Company's efficiency ratio may improve marginally. Thus, the Company's
efficiency ratio is expected to remain at an advantage. Importantly, the
efficiency ratio does not include the impact of loan loss provisions which have
adversely impacted the Company's operating results as noted below.
RP(R) FINANCIAL, LC.
PAGE 3.11
Loan loss provisions for the Company were well above the Peer Group
average, amounting to 0.87% and 0.20% of average assets for ACFC and the Peer
Group, respectively. The higher level of loan loss provisions for the Company in
recent periods in comparison to the Peer Group reflects: (1) the high growth in
total loans, including income producing property loans; and (2) the Company's
limited experience historically with respect to income producing property
lending and the higher risk profile of such lending. Additionally, recent loan
loss provisions also reflect the increase in NPAs, including reserves allocated
to specific problem loans included in the balance of classified assets.
Non-operating income of 54 basis points for ACFC consisted primarily of
gains on the sale of the credit card portfolio, as well as gains on the sale of
investment securities net of losses on foreclosed assets. The Peer Group
reported net non-operating income equal to 0.04% of average assets, which was
largely comprised of gains on the sale of loans and investments. The gain on the
sale of the credit card loans (which comprises the bulk of non-operating items)
is believed to be a one-time event, and, thus is not viewed as being a recurring
source of income. Accordingly, they will be excluded from the calculation of the
core valuation earnings base.
The Company's effective tax rate for the last 12 months of 35.2% is
modestly above the Peer Group average of 30.6%. The Company expects that its
effective tax rate will continue to approximate the recent historical level in
fiscal 2004, and thus remain at a comparative disadvantage relative to the Peer
Group.
LOAN COMPOSITION
ACFC's loan portfolio reflects a comparatively greater concentration of 1-4
family residential mortgage loans and MBS, which aggregated to 55.7% of assets
and 46.3% of assets for the Company and the Peer Group, respectively (see Table
3.4). Loans secured by permanent 1-4 family residential mortgage loans equaled
55.5% of assets for the Company versus 35.2% on average for the Peer Group,
while MBS comprised 0.3 and 11.2%, respectively.
ACFC's lending activities show greater diversification in the areas of
multi-family and commercial mortgage lending, construction and non-mortgage
consumer lending. Specifically, multi-family and commercial mortgage loans
represented 12.8% of assets as compared to only
RP(R) FINANCIAL, LC.
PAGE 3.12
10.8% for the Peer Group, construction loans equaled 6.1% of assets for the
Company versus 1.2% for the Peer Group while consumer loans equaled 13.6% of
assets for the Company as compared to 4.5% for the Peer Group on average.
Conversely, the Peer Group maintained a modest business loan portfolio (5.9% of
assets), while the Company was not significantly engaged in this lending area.
The Company's more significant diversification into higher risk types of lending
coupled with its greater investment in loans overall translated into higher
risk-weighted-assets ratio compared to the Peer Group (68.97% versus 55.76% for
the Peer Group).
CREDIT RISK
The Company maintains higher credit risk exposure in comparison to the Peer
Group, based both on the nature of its asset composition and taking into
consideration more objective measures such as key asset quality ratios. The
Company reported a higher NPAs/assets ratio than the Peer Group, at 1.73% of
assets and 0.71% of assets, respectively (see Table 3.5). Likewise,
non-performing loans as a percent of total loans were above the Peer Group
average (1.71% and 0.82%, respectively). Reserve coverage in relation to
non-performing loans and assets was less favorable for the Company, equaling
87.13% versus an average of 226.76% for the Peer Group. Reserve coverage in
relation to NPAs was also lower for the Company, equal to 49.02% versus an
average of 223.33% for the Peer Group. The Company has experienced higher net
loan chargeoffs (0.54% of loans versus an average of 0.37% for the Peer Group)
in comparison to the Peer Group. However, the Company's reserve ratio in
relation to total loans was higher than for the Peer Group.
In addition to the Company's greater credit risk exposure as measured these
objective measures, the nature of the Company's loan portfolio, including the
high proportion of income producing property loans and the limited seasoning of
a significant portion of the portfolio, coupled with the recent increase in
classified assets and NPAs tends to increase the overall credit risk profile in
comparison to the Peer Group.
RP(R) FINANCIAL, LC.
PAGE 3.13
RP FINANCIAL, LC.
- -----------------
Financial Services Industry Consultants
1700 North Moore Street, Suite 2210
Arlington, Virginia 22209
(703) 528-1700
Table 3.4
Loan Portfolio Composition and Related Information
Comparable Institution Analysis
As of December 31, 2003
Portfolio Composition as a Percent Assets
-----------------------------------------------------------
1-4 Constr. 5+Unit Commerc. RWA/ Serviced Servicing
Institution MBS Family & Land Comm RE Business Consumer Assets For Others Assets
------- -------- -------- --------- ---------- -------- -------- ---------- ---------
(%) (%) (%) (%) (%) (%) (%) ($000) ($000)
Atlantic Coast Financial Corp. 0.26 55.46 6.13 12.83 0.52 13.57 68.97 0 0
All Public Companies 12.09 36.66 4.67 15.62 4.33 4.09 60.31 700,284 7,267
All Public Companies 12.09 36.66 4.67 15.62 4.33 4.09 60.31 700,284 7,267
State of FL 10.22 43.91 10.65 13.74 2.53 4.35 63.99 222,535 2,290
Comparable Group Average 11.15 35.17 1.24 10.81 5.90 4.71 55.76 35,603 183
Comparable Group
- ----------------
ALLB Alliance Bank MHC of PA (20.0) 6.79 21.12 2.92 28.11 1.01 1.50 59.47 0 0
BCSB BCSB Bankcorp MHC of MD (36.0) 19.14 31.73 1.93 8.14 13.20 0.65 51.50 22,195 0
GOV Gouverneur Bcp MHC of NY(42.4) 10.27 51.43 0.21 3.78 9.98 3.56 55.36 0 0
GCBC Green Co Bcrp MHC of NY (43.0) 21.19 39.76 1.00 4.71 1.84 1.99 47.58 0 0
JXSB Jcksnville Bcp MHC of IL(45.6) 0.99 26.26 1.75 7.85 4.89 8.13 54.74 159,542 1,168
ONFC Oneida Fincl MHC of NY (45.7) 8.34 23.15 0.26 7.48 9.42 7.89 60.75 93,055 352
PBHC Pathfinder BC MHC of NY (39.1)(1) 10.64 48.32 2.24 10.04 1.39 6.07 61.91 41,546 225
ROME Rome Bncp Inc MHC of NY (41.6) 1.45 37.87 0.87 20.32 11.34 7.21 65.44 3,001 0
WCFB Wbstr Cty Fed MHC of IA (38.5)(1) 1.70 57.38 0.83 2.86 2.61 0.74 46.70 0 0
WFD Westfield Finl MHC of MA(47.0)(1) 30.97 14.70 0.43 14.80 3.26 9.35 54.17 36,693 82
(1) Financial information is for the quarter ending September 30, 2003.
Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC.
calculations. The information provided in this table has been obtained from sources we believe are reliable, but we
cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2004 by RP Financial, LC.
RP(R) FINANCIAL, LC.
PAGE 3.14
RP FINANCIAL, LC.
- -----------------
Financial Services Industry Consultants
1700 North Moore Street, Suite 2210
Arlington, Virginia 22209
(703) 528-1700
Table 3.5
Credit Risk Measures and Related Information
Comparable Institution Analysis
As of December 31, 2003 or Most Recent Date Available
NPAs & Rsrves/
REO/ 90+Del/ NPLs/ Rsrves/ Rsrves/ NPAs & Net Loan NLCs/
Institution Assets Assets Loans Loans NPLs 90+Del Chargoffs Loans
- ----------- -------- -------- ------- ------- -------- --------- ----------- -------
(%) (%) (%) (%) (%) (%) ($000) (%)
Atlantic Coast Financial Corp. 0.22 1.73 1.71 1.49 87.13 49.02 2,337 0.54
All Public Companies 0.11 0.67 0.78 1.03 205.65 176.36 309 0.18
All Public Companies 0.11 0.67 0.78 1.03 205.65 176.36 309 0.18
State of FL 0.06 0.54 0.60 0.84 281.75 226.08 248 0.06
Comparable Group Average 0.13 0.71 0.82 1.02 226.76 223.33 257 0.37
Comparable Group
- ----------------
ALLB Alliance Bank MHC of PA (20.0) 0.69 2.27 NA 1.28 NA 31.76 996 0.00
BCSB BCSB Bankcorp MHC of MD (36.0) 0.02 0.08 0.12 0.71 599.30 459.36 303 0.34
GOV Gouverneur Bcp MHC of NY(42.4) 0.12 0.90 1.05 0.94 89.35 77.73 17 0.10
GCBC Green Co Bcrp MHC of NY (43.0) 0.00 0.16 0.32 0.85 268.46 268.46 21 0.06
JXSB Jcksnville Bcp MHC of IL(45.6) 0.20 1.46 2.41 1.69 70.04 57.11 863 2.63
ONFC Oneida Fincl MHC of NY (45.7) 0.03 0.06 0.07 1.05 NA 807.25 151 0.31
PBHC Pathfinder BC MHC of NY (39.1)(1) 0.13 0.96 1.24 0.88 70.83 61.55 2 0.00
ROME Rome Bncp Inc MHC of NY (41.6) 0.08 0.61 NA 0.86 NA 112.50 105 0.21
WCFB Wbstr Cty Fed MHC of IA (38.5)(1) 0.05 0.38 NA 0.56 NA 95.04 34 -0.02
WFD Westfield Finl MHC of MA(47.0)(1) 0.00 0.22 0.51 1.33 262.56 262.56 75 0.09
(1) Financial information is for the quarter ending September 30, 2003.
Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC.
calculations. The information provided in this table has been obtained from sources we believe are reliable, but we
cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2004 by RP Financial, LC.
RP(R) FINANCIAL, LC.
PAGE 3.15
INTEREST RATE RISK
Table 3.6 reflects various key ratios highlighting the relative interest
rate risk exposure. From a balance sheet perspective, ACFC's lower
pre-conversion capital position and lower IEA/IBL ratio suggest higher exposure.
On a post-conversion basis, these ratios should improve relative to the Peer
Group. In the absence of comparability in timely interest rate risk reporting
and methodology, we reviewed quarterly changes in the net interest income ratio.
In general, the quarterly fluctuations in the Company's net interest income
ratio have approximated to modestly exceeded the Peer Group average. Moreover,
the Company's net interest income ratio should stabilize to some degree
following the conversion, given the initial expected proceeds reinvestment
strategy (primarily short-to-intermediate term investment securities).
There is one characteristic of the Company's operations which may serve to
increase the Company's interest risk exposure in relation to the Peer Group. In
this regard, the Company prices its deposits in the upper end of the competitive
range with the objective of achieving its growth targets. Thus, its deposits may
potentially be more rate sensitive than deposits which are priced comparably to
the market average.
SUMMARY
Based on the above analysis, RP Financial concluded that the Peer Group
forms a reasonable basis for determining the pro forma market value of ACFC.
Such general characteristics as asset size, capital position, interest-earning
asset composition, funding composition, core earnings measures, loan
composition, credit quality and exposure to interest rate risk all tend to
support the reasonability of the Peer Group from a financial standpoint. Those
areas where differences exist will be addressed in the form of valuation
adjustments to the extent necessary.
RP(R) FINANCIAL, LC.
PAGE 3.16
RP FINANCIAL, LC.
- -----------------
Financial Services Industry Consultants
1700 North Moore Street, Suite 2210
Arlington, Virginia 22209
(703) 528-1700
Table 3.6
Interest Rate Risk Measures and Net Interest Income Volatility
Comparable Institution Analysis
As of December 31, 2003 or Most Recent Date Available
Balance Sheet Measures
----------------------------
Non-Earn. Quarterly Change in Net Interest Income
------------------------------------------------------------
Equity/ IEA/ Assets/
Institution Assets IBL Assets 12/31/03 09/30/03 06/30/03 03/31/03 12/31/02 09/30/02
- ----------- -------- ------- -------- ---------- -------- -------- -------- -------- --------
(%) (%) (%) (change in net interest income is annualized in basis points)
Atlantic Coast Financial Corp. 8.1 104.6 5.0 -9 -13 -24 -5 11 -4
All Public Companies 9.8 107.8 4.4 6 -5 -8 -8 -6 1
All Public Companies 9.8 107.8 4.4 6 -5 -8 -8 -6 1
State of FL 7.8 106.5 4.1 12 -3 -11 4 -4 -4
Comparable Group Average 11.7 110.3 5.0 4 -7 -17 -4 -6 8
COMPARABLE GROUP
ALLB Alliance Bank MHC of PA (20.0) 9.4 105.2 5.5 -3 26 -22 -9 21 -6
BCSB BCSB Bankcorp MHC of MD (36.0) 6.3 103.4 4.4 3 -35 -35 -3 -31 39
GOV Gouverneur Bcp MHC of NY(42.4) 18.8 121.2 4.2 22 1 -16 22 -51 12
GCBC Green Co Bcrp MHC of NY (43.0) 10.8 109.9 2.8 13 1 -11 4 -13 4
JXSB Jcksnville Bcp MHC of IL(45.6) 6.5 103.4 6.0 19 -17 -29 -1 -16 -9
ONFC Oneida Fincl MHC of NY (45.7) 8.9 103.7 9.7 -5 -6 0 -5 6 35
PBHC Pathfinder BC MHC of NY (39.1)(1) 5.8 102.2 6.8 NA -16 -10 6 3 -5
ROME Rome Bncp Inc MHC of NY (41.6) 14.0 113.4 4.2 -17 -5 -14 -16 51 -5
WCFB Wbstr Cty Fed MHC of IA (38.5)(1) 21.2 127.0 1.9 NA -0 -20 -30 -17 20
WFD Westfield Finl MHC of MA(47.0)(1) 15.2 113.5 4.4 NA -17 -14 -12 -15 -3
(1) Financial information is for the quarter ending September 30, 2003. NA=Change is greater than 100 basis points during the
quarter.
Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC.
calculations. The information provided in this table has been obtained from sources we believe are reliable, but we
cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2004 by RP Financial, LC.
RP FINANCIAL, LC.
PAGE 4.1
IV. VALUATION ANALYSIS
INTRODUCTION
This chapter presents the valuation analysis and methodology used to
determine ACFC's estimated pro forma market value for purposes of pricing the
minority stock. The valuation incorporates the appraisal methodology promulgated
by the OTS and adopted in practice by the FDIC for standard conversions and
mutual holding company offerings, particularly regarding selection of the Peer
Group, fundamental analysis on both the Company and the Peer Group, and
determination of the Company's pro forma market value utilizing the market value
approach.
APPRAISAL GUIDELINES
The OTS written appraisal guidelines, originally released in October 1983
and updated in late-1994, specify the market value methodology for estimating
the pro forma market value of an institution. The FDIC, state Companying
agencies and other Federal agencies have endorsed the OTS appraisal guidelines
as the appropriate guidelines involving mutual-to-stock conversions. As
previously noted, the appraisal guidelines for MHC offerings are somewhat
different, particularly in the Peer Group selection process. Specifically, the
regulatory agencies have indicated that the Peer Group should be based on the
pro forma fully-converted pricing characteristics of publicly-traded MHCs,
rather than on already fully-converted publicly-traded stock thrifts, given the
unique differences in stock pricing of MHCs and fully-converted stock thrifts.
Pursuant to this methodology: (1) a peer group of comparable publicly-traded MHC
institutions is selected; (2) a financial and operational comparison of the
subject company to the peer group is conducted to discern key differences; and
(3) the pro forma market value of the subject company is determined based on the
market pricing of the peer group, subject to certain valuation adjustments based
on key differences. In addition, the pricing characteristics of recent
conversions and MHC offerings must be considered.
RP FINANCIAL, LC.
PAGE 4.2
RP FINANCIAL APPROACH TO THE VALUATION
The valuation analysis herein complies with such regulatory approval
guidelines. Accordingly, the valuation incorporates a detailed analysis based on
the Peer Group, discussed in Chapter III, which constitutes "fundamental
analysis" techniques. Additionally, the valuation incorporates a "technical
analysis" of recently completed conversions and stock offerings of comparable
MHCs, including closing pricing and aftermarket trading of such offerings. It
should be noted that these valuation analyses, based on either the Peer Group or
the recent conversions and MHC transactions, cannot possibly fully account for
all the market forces which impact trading activity and pricing characteristics
of a stock on a given day.
The pro forma market value determined herein is a preliminary value for the
Company's to-be-issued stock. Throughout the offering process, RP Financial
will: (1) review changes in the Company's operations and financial condition;
(2) monitor the Company's operations and financial condition relative to the
Peer Group to identify any fundamental changes; (3) monitor the external factors
affecting value including, but not limited to, local and national economic
conditions, interest rates, and the stock market environment, including the
market for thrift stocks; and (4) monitor pending MHC offerings, and to a lesser
extent, standard conversion offerings, both regionally and nationally. If
material changes should occur prior to close of the offering, RP Financial will
evaluate if updated valuation reports should be prepared reflecting such changes
and their related impact on value, if any. RP Financial will also prepare a
final valuation update at the closing of the offering to determine if the
prepared valuation analysis and resulting range of value continues to be
appropriate.
The appraised value determined herein is based on the current market and
operating environment for the Company and for all thrifts. Subsequent changes in
the local and national economy, the legislative and regulatory environment, the
stock market, interest rates, and other external forces (such as natural
disasters or major world events), which may occur from time to time (often with
great unpredictability) may materially impact the market value of all thrift
stocks, including ACFC's value, the market value of the stocks of public MHC
institutions, or ACFC's value alone. To the extent a change in factors impacting
the Company's value can be
RP FINANCIAL, LC.
PAGE 4.3
reasonably anticipated and/or quantified, RP Financial has incorporated the
estimated impact into its analysis.
VALUATION ANALYSIS
A fundamental analysis discussing similarities and differences relative to
the Peer Group was presented in Chapter III. The following sections summarize
the key differences between the Company and the Peer Group and how those
differences affect the pro forma valuation. Emphasis is placed on the specific
strengths and weaknesses of the Company relative to the Peer Group in such key
areas as financial condition, profitability, growth and viability of earnings,
asset growth, primary market area, dividends, liquidity of the shares, marketing
of the issue, management, and the effect of government regulations and/or
regulatory reform. We have also considered the market for thrift stocks, in
particular new issues, to assess the impact on value of ACFC coming to market at
this time.
1. FINANCIAL CONDITION
The financial condition of an institution is an important determinant in
pro forma market value because investors typically look to such factors as
liquidity, capital, asset composition and quality, and funding sources in
assessing investment attractiveness. The similarities and differences in the
Company's and the Peer Group's financial strength are noted as follows:
o OVERALL A/L COMPOSITION. The Company's asset composition includes a higher
proportion of loans overall, with both 1-4 family mortgage loans and high
risk weight loans (including multi-family and commercial mortgage loans,
construction loans and consumer loans), exceeding the Peer Group average.
The Company's higher ratio of loans and the loan portfolio composition
supported the comparatively higher loan yields generated by the Company.
The Peer Group is currently supplementing retail deposits with modestly
lower borrowings utilization, while the Company currently relies more
heavily on borrowed funds. The Company's ratio of IEA/IBL will improve on a
post-offering basis, thereby diminishing its current disadvantage. One
other disadvantage relative to the Peer Group is that balance sheet growth
has been funded with deposits at premium rates which can potentially
increase the sensitivity of the Company's cost of funds to changing
interest rates.
o CREDIT QUALITY. The Company's credit risk profile is less favorable than
the Peer Group based both on the nature of its asset composition and taking
into consideration more
RP FINANCIAL, LC.
PAGE 4.4
objective measures such as key asset quality ratios. In this regard, ACFC
operates with a higher level of NPAs with an adverse trend with regard to
the level of classified assets. Moreover, reserve coverage in comparison to
NPAs is lower than the Peer Group while chargeoffs are higher. The Company
has been subject to regulatory criticism with respect to its income
producing property lending operations and while management believes that it
has addressed the areas perceived to be deficient, the majority of the loan
portfolio was underwritten pursuant to the prior standards. Last, the
limited seasoning of a significant segment of the rapidly growing mortgage
loan portfolio (including the income property lending) and higher
risk-weighted assets ratio are other risk factors in comparison to the Peer
Group.
o BALANCE SHEET LIQUIDITY. The Company currently maintains a lower level of
cash, investments and MBS. Substantially all of the Company's investments
are designated "available for sale" but the balances are limited. The
infusion of the stock proceeds will initially increase the Company's level
of liquid assets pending investment of the proceeds into loans and other
longer-term investments. Both the Company and the Peer Group appear to have
ample borrowing capacity, although ACFC employs borrowed funds to a
slightly greater extent currently.
o EQUITY CAPITAL. The Company's pro forma equity capital ratio will exceed
the Peer Group average, which should support its current growth objectives.
On balance, we have made a slight downward adjustment for the Company's
financial condition on a pro forma basis relative to the Peer Group for a
perceived higher credit risk profile and less earnings power from its balance
sheet despite a higher proportion of assets in loans.
2. PROFITABILITY, GROWTH AND VIABILITY OF EARNINGS
Earnings are a key factor in determining pro forma market value, as the
level and risk characteristics of an institution's earnings stream and the
prospects and ability to generate future earnings heavily influence the multiple
that the investment community will pay for earnings. The major factors
considered in the valuation are described below.
o REPORTED EARNINGS. The Company is more profitable than the Peer Group,
primarily owing to a high level of non-operating income (i.e., gains
on the sale of the credit card portfolio).
o CORE EARNINGS. On a core basis, adjusting for non-operating items for
both, the Company's core profitability falls below the Peer Group
average as ACFC's earnings were supported by a non-operating gain on
the sale of the credit card portfolio while
RP FINANCIAL, LC.
PAGE 4.5
the Peer Group's earnings were largely comprised of recurring
elements. In this regard, the Company reported higher operating
expenses and loan loss provisions which were partially mitigated by
ACFC's favorable level of net interest income and fee income. On a pro
forma basis, the Company's earnings will be enhanced with the
reinvestment of the net offering proceeds, which will be offset by the
expense attributable to the stock benefit plans. Thus, the Company
remains at a comparative profitability disadvantage.
o CREDIT RISK. Loss provisions had a greater impact on the Company's
profitability for the past year and the Company's NPA/assets ratio and
non-performing loans/loans ratio are higher in comparison to the Peer
Group. Moreover, limited seasoning of the Company's growing mortgage
loan portfolio, which includes a higher proportion of 100% risk-weight
multi-family, commercial mortgage and construction loans, and lower
level of loss reserves in comparison to NPAs and nonperforming loans
suggests a higher credit risk profile. Also, the Company has
experienced a higher level of chargeoffs relative to the Peer Group.
o INTEREST RATE RISK. Quarterly changes in the Company's net interest
income to average assets ratios indicated a relatively comparable
degree of volatility associated with the Company's net interest
margin. The Company's interest rate sensitivity may be increased in
comparison to the Peer Group by a deposit generation strategy which is
focused on paying highly competitive rates. Other measures of interest
rate risk, such as capital ratios and IEA/IBL ratios reflected greater
risk exposure for the Company while ACFC maintained a comparable level
of non-interest earning assets. On a pro forma basis, the Company's
capital position and IEA/IBL ratio will be enhanced by the infusion of
stock proceeds, thereby lessening its exposure.
o EARNINGS GROWTH POTENTIAL. Reinvestment of the net proceeds should
result in increases in net interest income over time, especially as
funds are reinvested into whole loans (assuming the Company is able to
limit credit-related losses). The Company's faster historical balance
sheet growth relative to the Peer Group also suggests faster earnings
growth potential. Moreover, targeted growth will be facilitated by the
Company's pro forma capital position. At the same time, earnings
growth may be impacted by the asset quality issues noted above.
o RETURN ON EQUITY. Following the infusion of the Offering proceeds, the
Company's pro forma capital position (consolidated with the holding
company) will exceed the Peer Group's equity-to-assets ratio. Coupled
with the ACFC's lower pro forma ROA, the Company's pro forma core ROE
is anticipated to remain below the Peer Group average over the
intermediate term.
Overall, we concluded that a slight upward valuation adjustment for
profitability, growth and viability of earnings was appropriate. The immediate
negative factors in the Company's earnings profile tended to be offset by the
potential earnings power of the reinvested capital and future leverage
potential.
RP FINANCIAL, LC.
PAGE 4.6
3. ASSET GROWTH
The Company's asset growth was higher than Peer Group's during the period
covered in our comparative analysis (positive 11.5% versus positive 6.7% for the
Peer Group). On a pro forma basis, the Company's equity-to-assets ratio will be
above the Peer Group's ratio, indicating a greater level of leverage capacity
for ACFC. The demographic characteristics of the Company's markets diverged with
ACFC's Jacksonville area markets (Duval County) showing favorable population and
income characteristics while the Waycross area market (Ware County) were less
favorable. Taking into consideration the Company's greater historical growth and
emphasis on achieving future growth in the expanding Jacksonville market, we
have applied a slight upward adjustment for this factor.
4. PRIMARY MARKET AREA
The general condition of an institution's market area has an impact on
value, as future success is in part dependent upon opportunities for profitable
activities in the local market served. The majority of the Company's loans and
deposits are generated in Ware County, Georgia, and Duval County, Florida;
whereas the former has a relatively small population base and limited growth
characteristics, the latter has realized relatively favorable economic and
demographic trends in comparison to the Peer Group.
Overall, the average characteristics of the Peer Group's markets generally
fell within the range reflected for ACFC's principal markets. Specifically, the
Peer Group's markets were moderately sized in terms of total population in
comparison to the relatively small market represented by Ware County and the
relatively large market represented by Duval County. Likewise, growth rates for
the Peer Group's markets fell within the range exhibited by Ware and Duval
Counties. Income levels were above the Peer Group average for Duval County but
below the average for Ware County. Similarly, the Peer Group's deposit market
share and average unemployment rate fell within the range exhibited by ACFC's
principal markets. On balance, we concluded that no adjustment was required for
the Company's market area.
RP FINANCIL, LC.
PAGE 4.7
Table 4.1
Peer Group Market Area Comparative Analysis
Population Proj.
----------- Pop. 2000-2003 2003-2008
Institution County 2000 2003 2008 % Change % Change
- ----------- ------ ---- ---- ---- -------- --------
(000) (000)
Alliance Bank MHC of PA Delaware 551 551 551 0.1% 0.0%
BCSB Bankcorp MHC of MD Baltimore 754 770 795 2.0% 3.2%
Gouverneur Bancorp of NY St. Lawrence 112 111 111 -0.4% -0.8%
Greene Co. Bancorp MHC of NY Greene 48 49 50 1.0% 1.7%
Jacksonville SB MHC of IL Morgan 37 37 37 1.8% -0.1%
Oneida Financial MHC of NY Madison 69 71 72 1.8% 1.7%
Pathfinder Bancorp MHC of NY Oswego 122 122 123 0.0% 0.1%
Rome Bancorp MHC of NY Oneida 235 233 229 -1.1% -1.5%
Westfield Financial Inc of MA Hampden 456 457 458 0.1% 0.4%
Webster City Fed. Bancorp MHC of IA Hamilton 16 16 16 -0.1% 0.3%
AVERAGES: 240 242 244 0.5% 0.5%
MEDIANS: 117 117 117 0.1% 0.2%
ATLANTIC COAST FINANCIAL CORPORATION
WARE COUNTY, GEORGIA 35 35 35 -0.3% -0.3%
DUVAL COUNTY, FLORIDA 779 816 871 1.6% 1.3%
(Continued)
Per Capita Income
------------------------ Deposit
% State Market Unemployment
Amount Average Share(1) Rate
------ ------- -------- ----
Alliance Bank MHC of PA 30,077 121.2% 4.0% 4.7%
BCSB Bankcorp MHC of MD 30,456 103.0% 3.3% 4.8%
Gouverneur Bancorp of NY 17,729 65.2% 4.9% 6.9%
Greene Co. Bancorp MHC of NY 21,243 78.2% 27.8% 3.9%
Jacksonville SB MHC of IL 20,359 78.4% 29.2% 4.8%
Oneida Financial MHC of NY 22,252 81.9% 37.2% 5.4%
Pathfinder Bancorp MHC of NY 18,959 69.8% 22.9% 8.3%
Rome Bancorp MHC of NY 20,966 77.2% 6.3% 4.4%
Westfield Financial Inc of MA 22,870 72.9% 10.9% 6.5%
Webster City Fed. Bancorp MHC of IA 21,593 95.6% 23.7% 4.0%
22,650 84.3% 17.0% 5.4%
21,418 78.3% 16.9% 4.8%
ATLANTIC COAST FINANCIAL CORPORATION
WARE COUNTY, GEORGIA 16,766 69.1% 25.1% 3.9%
DUVAL COUNTY, FLORIDA 23,046 95.6% 1.4% 5.4%
(1) Total institution deposits in headquarters county as percent of total county deposits.
Sources: CACI, SNL Financial
RP FINANCIL, LC.
PAGE 4.8
5. DIVIDENDS
The Company has indicated its intention to pay an annual cash dividend.
However, the amount and timing of any dividends has not yet been determined. The
future declarations of dividends by the Board of Directors will depend upon a
number of factors, including investment opportunities, growth objectives,
financial condition, profitability, tax considerations, minimum capital
requirements, regulatory limitations, stock market characteristics and general
economic conditions.
All 10 of the Peer Group companies pay regular cash dividends, with implied
dividend yields ranging from 0.83% to 4.53%. The average dividend yield on the
stocks of the Peer Group institutions equaled 1.99% as of March 5, 2004 (see
Table 4.4). As of March 5, 2004, approximately 90% of all publicly-traded
thrifts (non-MHC institutions) had adopted cash dividend policies (see Exhibit
IV-1) exhibiting an average yield of 2.07% and an average payout ratio of
38.54%. The dividend paying thrifts generally maintain higher than average
profitability ratios, facilitating their ability to pay cash dividends.
Our valuation adjustment for dividends for ACFC as an MHC also considered
the regulatory policy with regard to waiver of dividends by the MHC. Under
current policy, any waiver of dividends by an FDIC regulated MHC requires that
the minority stockholders' ownership interest be reduced in a second-step
conversion to reflect the cumulative waived dividend account. Comparatively, no
adjustment for waived dividends is required for OTS regulated companies in a
second-step conversion. As an MHC operating under OTS regulation, the Company
will be subject to the same regulatory dividend policy as a large majority of
the Peer Group companies (eight of the Peer Group companies operate under OTS
regulation). Accordingly, we believe that to the extent ACFC's pro forma market
value would be influenced by the OTS' dividend policy regarding MHC
institutions, it has been sufficiently captured in the pricing of the Peer Group
companies.
In light of the Company's stated intention to pay a dividend and given the
Company's capacity to pay a dividend comparable to the Peer Group, based on its
relatively greater pro forma capitalization offset by initially lower level of
pro forma profitability, we concluded that no adjustment was warranted for
purposes of dividends relative to the Peer Group.
RP FINANCIL, LC.
PAGE 4.9
6. LIQUIDITY OF THE SHARES
The Peer Group is by definition composed of companies that are traded in
the public markets. Eight of the Peer Group members trade on the NASDAQ system
and two Peer Group companies trade on the AMEX. Typically, the number of shares
outstanding and market capitalization provides an indication of how much
liquidity there will be in a particular stock. The market capitalization of the
Peer Group companies, based on the shares issued and outstanding to public
shareholders (i.e., excluding the majority ownership interest owned by the
respective MHCs) ranged from $10.9 million to $116.8 million as of March 5,
2004, with average and median market values of $34.9 million and $28.9 million,
respectively. The shares issued and outstanding to the public shareholders of
the Peer Group members ranged from 688,000 to 4.8 million, with average and
median shares outstanding of 1.5 million and 992,000, respectively. The
Company's minority stock offering is expected to result in shares outstanding
and market capitalization that will be above the Peer Group average and median.
Accordingly, we anticipate that the liquidity in the Company's stock will be
modestly greater relative to the Peer Group companies' stocks. Additionally, it
is anticipated that the Company's stock will be listed on NASDAQ, which would
further enhance the liquidity in the Company's stock. Overall, we concluded that
a slight upward adjustment was warranted for this factor.
7. MARKETING OF THE ISSUE
Three separate markets exist for thrift stocks: (1) the after-market for
public companies, both fully-converted stock companies and MHCs, in which
trading activity is regular and investment decisions are made based upon
financial condition, earnings, capital, ROE, dividends and future prospects; (2)
the new issue market in which converting thrifts are evaluated on the basis of
the same factors but on a pro forma basis without the benefit of prior
operations as a publicly-held company and stock trading history; and (3) the
thrift acquisition market. All three of these markets were considered in the
valuation of the Company's to-be-issued stock.
A. THE PUBLIC MARKET
The value of publicly-traded thrift stocks is easily measurable, and
is tracked by most investment houses and related organizations. Exhibit IV-1
provides pricing and
RP FINANCIL, LC.
PAGE 4.10
financial data on all publicly-traded thrifts. In general, thrift stock values
react to market stimuli such as interest rates, inflation, perceived industry
health, projected rates of economic growth, regulatory issues and stock market
conditions in general. Exhibit IV-2 displays historical stock market trends for
various indices and includes historical stock price index values for thrifts and
commercial banks. Exhibit IV-3 displays historical stock price indices for
thrifts only.
In terms of assessing general stock market conditions, the performance
of the overall stock market has been mixed over the past year. War fears and the
uncertain outlook for the economy pulled stocks lower through most of February
2003 and into early-March, as blue chip stocks dropped to a five-month low
during the first week of March. Comparatively, the commencement of war with Iraq
produced a rally in the stock market, amid initial expectations that a conflict
in Iraq would end quickly. However, the rally was not sustained, as stocks
declined at the close of the first quarter on renewed worries about the economy
and fears that the war in Iraq could be longer and more difficult than investors
had initially anticipated.
Stocks rebounded at the start of the second quarter on news of U.S.
war successes in Iraq. As investors shifted their focus from the war to first
quarter earnings, the broader stock market settled into a narrow trading in
mid-April 2003 and then rallied higher through the end of April and into
early-May. Generally better than expected first quarter earnings and increasing
investor optimism that the end of the war with Iraq would lead to a recovery in
the economy and improved corporate profits supported the rally. Technology
stocks posted the strongest gains during the rally, as the NASDAQ Composite
Index ("NASDAQ") moved to a five-month high in early-May. The broader stock
market sustained a positive trend through the second half of May and into
early-June 2003, as the Dow Jones Industrial Average ("DJIA") moved above 9000
on investor optimism that low interest rates, the tax-cut plan and improving
consumer confidence would boost the economy. After experiencing a mild set back
following an earnings warning from Motorola and news of a shake-up in Freddie
Mac's top management due to accounting concerns, the stock market recovered in
mid-June on growing expectations that the Federal Reserve would cut rates
further to stimulate the economy. Stocks eased lower at the close of the second
quarter largely on profit taking.
RP FINANCIL, LC.
PAGE 4.11
The broader stock market surged higher at the beginning of the third
quarter of 2003 on growing optimism about the economy and the sustainability of
the bull market. The NASDAQ posted a 14-month high in early-July, before
declining slightly on profit taking and disappointing economic data related to
an increase in jobless claims. Generally upbeat second quarter earnings and more
signs of an economic upturn provided for a positive trend in the broader stock
market in mid- and late-July, as the DJIA posted its fifth straight monthly
gain. Economic data that showed a strengthening economy, particularly in the
manufacturing sector, sustained the upward momentum in stocks through August and
into-early September, as the DJIA and NASDAQ posted respective 14-month and
16-month highs. Stocks retreated following the release of August employment data
which showed further job losses, but then recovered in mid-September as the
Federal Reserve indicated that it would not raise rates in the near term. Weaker
than expected numbers for consumer confidence and manufacturing activity pulled
the boarder market lower at the close of the third quarter, which ended a streak
of six monthly gains in the DJIA.
Comparatively, at the start of the fourth quarter stocks showed
renewed strength, as optimism about third quarter earnings and employment data
for September provided a boost to stocks. In mid-October, the DJIA and the
NASDAQ hit 16- and 19-month highs, respectively, primarily on the basis of some
favorable third quarter earnings reports. The broader stock market rally cooled
in mid-October, as the result of profit taking and the posting of some less
favorable third quarter earnings by some of the bellwether technology and
manufacturing stocks. Indications that the economic recovery was gaining
momentum, including an annualized GDP growth rate of 8.2% in the third quarter,
as well as the Federal Reserve's statement that it would not raise its target
interest rates for a considerable period, supported a stock market rally during
late-October and into early-November. Despite upbeat economic news, including
employment data that showed the size of the U.S. workforce increased in October,
stocks edged lower in mid-November on profit taking and concerns over increased
terrorism in the Middle East. In late-November and early-December 2003, positive
economic news such as improved third quarter corporate profits and a strong
start to the Christmas shopping season provided a boost to stocks. Stocks
continued to move higher at the close of 2003, as key sectors of the economy
continued to show signs of strengthening.
RP FINANCIL, LC.
PAGE 4.12
Year end momentum in the stock market was sustained at the beginning
of 2004, reflecting generally favorable fourth quarter earnings and an increase
in consumer confidence. Profit taking and slower than expected GDP growth in the
fourth quarter of 2003 caused stocks to falter in late-January. However, aided
by January employment data that showed jobs were added and a decline in the
national unemployment rate to 5.6%, the broader stock market moved higher during
the first half of February. Stocks generally declined during the balance of
February and into early-March, reflecting valuation concerns following a year of
strong gains and weaker than expected job growth during February. As an
indication of the general trends in the nation's stock markets over the past
year, as of March 5, 2004, the DJIA closed at 10595.55, an increase of 36.9%
from one year ago and the NASDAQ closed at 2047.63, an increase of 56.9% from
one year ago. The Standard & Poors 500 Index closed at 1156.86 on March 5, 2004,
an increase of 39.6% from one year ago.
The market for thrift stocks has been mixed during the past twelve
months, but, in general, thrift stocks have appreciated in conjunction with the
broader market. Thrift issues traded in a narrow range throughout February 2003
and into mid-March, thereby outperforming the broader market. The stronger
performance exhibited by thrift stocks continued to be supported by the
relatively low risk characteristics associated with residential lenders, as well
as the general earnings benefit of operating in a low interest rate environment
with a relatively steep yield curve. Thrift stocks remained fairly stable at
close of the first quarter, exhibiting far less volatility compared to the
boarder stock market that produced dramatic day-to-day swings as investors
reacted to the most recent news on the war's direction.
Financial stocks eased higher at the beginning of the second quarter,
as positive news on the war with Iraq lifted stocks in general. First quarter
earnings that were generally in-line with expectations sustained the positive
trend in thrift issues through early-May, as thrift stocks participated in the
broader stock market rally. With the exception of acquisition-related price
movements, thrift stocks settled into a narrow trading range in mid-May. Thrift
stocks participated in the broader stock market rally in late-May and the first
half of June 2003, largely on the basis of recent deal activity in the thrift
sector and some favorable economic data. Freddie Mac's management shake-up had a
negative ripple effect throughout the thrift sector, but the pullback was only
temporary as thrift issues recovered in conjunction with the broader stock
RP FINANCIL, LC.
PAGE 4.13
market. Profit taking pulled the thrift sector lower in late-June. However,
thrift issues recovered modestly at the close of the second quarter, which was
supported by merger speculation following New York Community Bancorp's announced
acquisition of Roslyn Bancorp.
The rally in the broader stock market combined with acquisition
speculation in certain regional markets lifted thrift issues higher at the
beginning of the third quarter of 2003. Thrift issues traded in a narrow range
through most of July, reflecting mixed earnings in the sector. Higher mortgage
rates and strength in technology stocks pushed thrift stocks lower in
early-August, as investors rotated into sectors that were expected to benefit
from an economic recovery. After edging higher in mid-August, thrift stocks
eased lower at the end of August on expectations that interest rates would
continue to move higher as the economic recovery gained momentum. Merger
activity and acquisition speculation in the thrift sector provided a boost to
thrift prices in early-September. After easing lower into mid-September on data
that showed a slow down in refinancing activity, thrift stocks strengthened
following the Federal Reserve's decision to leave interest rates unchanged at
its mid-September meeting.
After following the broader stock market lower in late-September 2003,
thrift issues posted solid gains at the beginning of the fourth quarter. A rally
in the broader stock market and acquisition activity were noteworthy factors
that supported the positive trend in thrift stocks. Following a two week run-up,
thrift stocks declined in mid-October on profit taking and a pullback in the
broader market. Merger activity, most notably Bank America's announced
acquisition of FleetBoston Financial Corp., along with strength in the broader
market, provided for gains in the thrift sector during late-October. The
positive trend in thrift stocks carried into early-November, reflecting
expectations of improving net interest margins and more consolidation of
thrifts. Thrifts stocks eased lower in mid-November in conjunction with the
decline in the broader market. In late-November and early-December 2003, thrift
stocks followed the broader market higher and then stabilized at the close of
the fourth quarter.
After trading in a narrow range at the beginning of 2004, thrift
issues trended higher in late-January and the first half of February. The
positive trend was supported by further consolidation in the thrift sector,
including GreenPoint Financial's agreement to sell to North Fork Bancorp, as
well as generally favorable fourth quarter earnings. Indications that interest
RP FINANCIL, LC.
PAGE 4.14
rates would continue to remain low provided further support to thrift prices.
Thrift stocks followed the broader market lower in mid-February, before
recovering in late-February following a dip in long term Treasury yields. On
March 5, 2004, the SNL Index for all publicly-traded thrifts closed at 1,621.5,
an increase of 49.4% from one year ago.
B. THE NEW ISSUE MARKET
In addition to thrift stock market conditions in general, the new
issue market for converting thrifts is also an important consideration in
determining the Company's pro forma market value. The new issue market is
separate and distinct from the market for seasoned stock thrifts in that the
pricing ratios for converting issues are computed on a pro forma basis,
specifically: (1) the numerator and denominator are both impacted by the
conversion offering amount, unlike existing stock issues in which price change
affects only the numerator; and (2) the pro forma pricing ratio incorporates
assumptions regarding source and use of proceeds, effective tax rates, stock
plan purchases, etc. which impact pro forma financials, whereas pricing for
existing issues are based on reported financials. The distinction between
pricing of converting and existing issues is perhaps no clearer than in the case
of the price/book ("P/B") ratio in that the P/B ratio of a converting thrift is
at a discount to book value whereas in the current market for existing thrifts
the P/B ratio often reflects a premium to book value. Therefore, it is
appropriate to also consider the market for new issues, both at the time of the
conversion and in the aftermarket.
Thrift offerings completed in 2003 and in the first quarter of 2004
have generally been well received, although the total number of offerings
completed have been somewhat limited. As shown in Table 4.2, two second-step
conversion offerings and two mutual holding company offering were completed
during the past three months. The second-step conversion offerings are
considered to be less relevant for our analysis. In general, second-step
conversions tend to be priced (and trade in the aftermarket) at a higher P/B
ratio than standard conversions. We believe investors take into consideration
the generally more leveraged pro forma balance sheets of second-step companies,
their track records as public companies prior to conversion, and their generally
higher pro forma ROE measures relative to standard conversions in pricing their
common stocks.
RP FINANCIL, LC.
PAGE 4.15
Cheviot Financial completed its minority stock issuance on January 6,
2004. Cheviot Financial's fully-converted pro forma price/tangible book ratio at
closing equaled 81.9% and pro forma core price/earnings ratio equaled 42.1
times. Cheviot Financial traded up by 33.5% after the first week of trading and
based on its closing market price as of March 5, 2004, it was trading at 179.4%
P/TB on a reported basis and had a fully converted P/TB ratio equal to 97.0%.
Clifton Saving Bancorp completed its minority stock issuance on March
4, 2004. Clifton Savings Bancorp's fully-converted pro forma price/tangible book
ratio at closing equaled 90.5% and pro forma core price/earnings ratio equaled
64.5 times. Clifton Savings Bancorp traded up by 29.6% after the first two
trading days through the March 5, 2004, valuation date. Based on its closing
market price as of March 5, 2004, it was trading at 209.0% P/TB on a reported
basis and had a fully converted P/TB ratio equal to 105.1%.
C. THE ACQUISITION MARKET
Also considered in the valuation was the potential impact on the
Company's stock price of recently completed and pending acquisitions of other
savings institutions operating in Florida and Georgia. As shown in Exhibit IV-5,
there have been 6 acquisitions of Florida and Georgia-based savings institutions
completed or announced between the beginning of 2002 through year-to-date 2004
(and many more bank acquisitions). We also considered the acquisition prospects
for the Company including the acquisition prospects following a second step
conversion as well as the potential for a remutualization within current
regulatory guidelines. In this regard, we believe that remutualization
transactions have positively impacted the pricing of all mutual holding
companies (including the Peer Group) and that the Company's pro forma pricing
would be similarly impacted by the potential for a remutualization transaction.
However, the Company's current plan is to remain independent.
RP FINANCIL, LC.
PAGE 4.16
- ------------------------------------------------------------------------------------------------------------------------------------
Institutional Information Pre-Conversion Data Offering Information Contribution
Financial Info. Asset Quality Charitable Found
- ------------------------------------------------------------------------------------------------------------------------------------
Conversion Equity NPAs/ Res. Gross % % of Exp./ % of
Institution State Date Ticker Assets Assets Assets Cov. Proc. Offered Mid. Proc. Form Offering
($Mil) (%) (%) (%) ($Mil.) (%) (%) (%) (%)
- ------------------------------------------------------------------------------------------------------------------------------------
STANDARD CONVERSIONS
- --------------------
SECOND STEP CONVERSION
- ----------------------
KNBT Bancorp, Inc.* (w/Acq.) PA 11/3/2003 KNBT-NASDAQ $1,748 11.57% 0.23% 152% $ 202.0 100% 132% 1.9% Stock 8.0%
Synergy Financial Group, Inc NJ 1/21/2004 SYNF-NASDAQ $ 591 6.64% 0.07% 733% $ 70.4 57% 132% 1.6% N.A N.A
Provident Bancorp, Inc.* NY 1/15/2004 PBCP-NASDAQ $1,544 10.25% 0.28% 236% $195.7 56% 132% 1.7% C/S 4.0%
AVERAGES - SECOND STEP CONVERSIONS: $1,068 8.45% 0.18% 484% $133.0 56% 132% 1.6% NA NA
MEDIANS - SECOND STEP CONVERSIONS: $1,068 8.45% 0.18% 484% $133.0 56% 132% 1.6% NA NA
MUTUAL HOLDING COMPANY CONVERSIONS
- ----------------------------------
Clifton Savings Bancorp, Inc. NJ 3/4/2004 CSBK-NASDAQ $ 636 11.93% 0.00% NM $137.4 45% 132% 2.3% N.A N.A
Cheviot Financial Corp.* OH 1/6/2004 CHEV-NASDAQ $ 246 15.11% 0.03% 900% $ 43.9 45% 132% 3.5% C/S 1.0%
AVERAGES - MUTUAL HOLDING COMPANY CONVERSIONS: $ 441 l3.52% 0.02% 900% $ 90.6 45% 132% 2.9% NA NA
MEDIANS - MUTUAL HOLDING COMPANY CONVERSIONS: $ 441 13.52% 0.02% 900% $ 90.6 45% 132% 2.9% NA NA
AVERAGES - ALL CONVERSIONS: $ 754 10.98% 0.10% 623% $111.8 51% 132% 2.3% NA NA
Medians - ALL CONVERSIONS: $ 614 11.09% 0.05% 733% $103.9 50% 132% 2.0% NA NA
(Continued)
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Insider Purchases Pro Forma Data Post-IPO Pricing Trends
Pricing Ratios(3) Financial Charac. Closing Price:
Benefit Plans Initial First After After
Recog Mgmt.& Dividend Core Core Core IPO Trading % First % First %
ESOP Plans Dirs. Yield P/TB P/E P/A ROA TE/A ROE Price Day Change Week(4) Change Month(5) Change
(%) (%) (%)(2) (%) (%) (x) (%) (%) (%) (%) ($) ($) (%) ($) (%) ($) (%)
- ------------------------------------------------------------------------------------------------------------------------------------
8.0% 4.0% 0.1% 0.00% 124.3% 42.5x 19.1% 0.5% 15.4% 2.9% $10.00 $10.81 8.1% $10.80 8.0% $10.79 7.9%
5.0% 4.0% 1.6% 1.40% 150.0% 34.6x 23.0% 0.7% 15.4% 4.3% $10.00 $11.50 15.0% $11.15 11.5% $11.51 15.1%
6.5% 4.0% 0.9% 0.70% 137.2% 38.5x 21.1% 0.6% 15.4% 3.6% $10.00 $11.16 11.6% $10.98 9.8% $11.15 11.5%
6.5% 4.0% 0.9% 0.70% 137.2% 38.5x 21.1% 0.6% 15.4% 3.6% $10.00 $11.16 11.6% $10.98 9.8% $11.15 11.5%
8.0% 7.2% 0.4% 0.00% 90.5% 64.5x 34.0% 0.5% 25.3% 1.9% $10.00 $12.25 22.5% $12.96 29.6% $12.96 29.6%
8.0% 4.0% 3.2% 2.00% 81.9% 42.1x 30.1% 0.7% 36.7% 2.0% $10.00 $13.32 33.2% $13.35 33.5% $13.42 34.2%
8.0% 5.6% 1.8% 1.00% 86.2% 53.3x 32.0% 0.6% 31.0% 1.9% $10.00 $12.79 27.9% $13.16 31.6% $13.19 31.9%
8.0% 5.6% 1.8% 1.00% 86.2% 53.3x 32.0% 0.6% 31.0% 1.9% $10.00 $12.79 27.9% $13.16 31.6% $13.19 31.9%
7.3% 4.8% 1.3% 0.85% 111.7% 45.9x 26.6% 0.6% 23.2% 2.8% $10.00 $11.97 19.7% $12.07 20.7% $12.17 21.7%
8.0% 4.0% 1.0% 0.70% 107.4% 42.3x 26.6% 0.6% 20.3% 2.4% $10.00 $11.88 18.8% $12.06 20.6% $12.24 22.4%
Note: * - Appraisal performed by RP Financial; "NT" - Not Traded; "NA" - Not Applicable, Not Available.
(1) Non-OTS regulated thrift. (5) Latest price if offering is more than one week but less
(2) As a percent of MHC offering for MHC transactions. than one month old.
(3) Does not take into account the adoption of SOP 93-6. (6) Mutual holding company pro forma data on full conversion
(4) Latest price if offering is less than one week old. basis.
(7) Simultaneously converted to commercial bank charter.
(8) Converted to a commercial bank charter.
March 5, 2004
- ------------------------------------------------------------------------------------------------------------------------------------
RP FINANCIL, LC.
PAGE 4.17
* * * * * * * * * * *
In determining our valuation adjustment for marketing of the issue, we
considered trends in both the overall thrift market, the new issue market
including the new issue market for MHC shares and the local acquisition market
for thrift stocks. We also considered the potential for a remutualization
transaction within the current regulatory guidelines. Taking all these factors
and trends into account, RP Financial concluded that a moderate upward
adjustment was appropriate in the valuation analysis for purposes of marketing
of the issue.
8. MANAGEMENT
ACFC's management team appears to have experience and expertise in all of
the key areas of the Company's operations. Exhibit IV-5 provides summary resumes
of ACFC's Board of Directors and senior management. The Company, given its asset
size, has been effective in implementing an operating strategy that can be well
managed by the Company's present organizational structure as indicated by the
financial characteristics of the Company. ACFC currently does not have any
executive management positions that are vacant; the Company has recently
bolstered the lending staff as it sought to conform to the terms of the
Resolution.
Similarly, the returns, capital positions and other operating measures of
the Peer Group companies are indicative of well-managed financial institutions,
which have Boards and management teams that have been effective in implementing
competitive operating strategies. Therefore, on balance, we concluded no
valuation adjustment relative to the Peer Group was appropriate for this factor.
9. EFFECT OF GOVERNMENT REGULATION AND REGULATORY REFORM
In summary, as a federally-insured savings bank operating in the MHC form
of ownership, ACFC will operate in substantially the same regulatory environment
as the Peer Group members -- all of whom are adequately capitalized institutions
and are operating with no apparent restrictions. The one apparent difference
between the Company and the Peer Group is the additional scrutiny of the
Company's lending operations which were a source of criticism in the most recent
regulatory safety and soundness examination. The other small difference noted
between ACFC and the small minority of Peer Group companies that operate as FDIC
regulated institutions was in the area of regulatory policy regarding dividend
waivers (see the discussion above for "Dividends"). However, this factor was
already accounted for in the "Dividends" section of this appraisal. On balance,
we believe that a slight downward adjustment for this factor is appropriate to
account for the increased regulatory scrutiny which the Company operates under
which led to the adoption of the Resolution by the Board.
SUMMARY OF ADJUSTMENTS
Overall, based on the factors discussed above, we concluded that the
Company's pro forma market value should reflect the following valuation
adjustments relative to the Peer Group:
Key Valuation Parameters: Valuation Adjustment
------------------------- --------------------
Financial Condition Slight Downward
Profitability, Growth and Viability of Earnings Slight Upward
Asset Growth Slight Upward
Primary Market Area No Adjustment
Dividends No Adjustment
Liquidity of the Shares Slight Upward
Marketing of the Issue Moderate Upward
Management No Adjustment
Effect of Government Regulations and Regulatory Reform Slight Downward
BASIS OF VALUATION - FULLY-CONVERTED PRICING RATIOS
As indicated in Chapter III, the valuation analysis included in this
section places the Peer Group institutions on equal footing by restating their
financial data and pricing ratios on a "fully-converted" basis. We believe there
are a number of characteristics of MHC shares that make them different from the
shares of fully-converted companies. These factors include: (1) lower
aftermarket liquidity in the MHC shares since less than 50% of the shares are
available for trading; (2) no opportunity for public shareholders to exercise
voting control, thus limiting the potential for acquisition speculation in the
stock price; (3) the potential pro forma impact of second-step conversions on
the pricing of MHC institutions; (4) the regulatory policies regarding
RP FINANCIAL, LC
PAGE 4.19
the dividend waiver policy by MHC institutions; and (5) the middle-tier
structure maintained by certain MHCs which facilitates the ability for stock
repurchases. The above characteristics of MHC shares have provided MHC shares
with different trading characteristics versus fully-converted companies. To
account for the unique trading characteristics of MHC shares, RP Financial has
placed the financial data and pricing ratios of the Peer Group on a
fully-converted basis to make them comparable for valuation purposes. Using the
per share and pricing information of the Peer Group on a fully-converted basis
accomplishes a number of objectives. First, such figures eliminate distortions
that result when trying to compare institutions that have different public
ownership interests outstanding. Secondly, such an analysis provides ratios that
are comparable to the pricing information of fully-converted public companies,
and more importantly, are directly applicable to determining the pro forma
market value range of the 100% ownership interest in ACFC as an MHC. Lastly,
such an analysis allows for consideration of the potential dilutive impact of
dividend waiver policies adopted by the Federal agencies. This technique is
validated by the investment community's evaluation of MHC pricing, which also
incorporates the pro forma impact of a second-step conversion based on the
current market price.
To calculate the fully-converted pricing information for MHCs, the reported
financial information for the public MHCs must incorporate the following
assumptions, based on completed second step conversions to date: (1) all shares
owned by the MHC are assumed to be sold at the current trading price in a second
step-conversion; (2) the gross proceeds from such a sale were adjusted to
reflect reasonable offering expenses and standard stock based benefit plan
parameters that would be factored into a second-step conversion of MHC
institutions; (3) net proceeds are assumed to be reinvested at market rates on
an after-tax basis; and (4) for FDIC-regulated institutions, the public
ownership interest is adjusted to reflect the pro forma impact of the waived
dividends pursuant to applicable regulatory policy. Book value per share and
earnings per share figures for the public MHCs were adjusted by the impact of
the assumed second step conversion, resulting in an estimation of book value per
share and earnings per share figures on a fully-converted basis. Table 4.3 on
the following page shows the calculation of per share financial data
(fully-converted basis) for each of the 10 public MHC institutions that form the
Peer Group.
RP FINANCIAL, LC
PAGE 4.20
Calulation of Implied Per Share Date -- Incorporating MHC Second Step Conversion
Comparable Institution Analysis
For the Twelve Months Emded September 30, 2003
Current Ownership Current Per Share Data (MHC Ratios)
------------------------- -------------------------------------
Total Public MHC Core Book Tang.
Shares Shares Shares EPS EPS Value Book Assets
------ ------ ------ --- --- ----- ---- ------
(000) (000) (000) ($) ($) ($) ($) ($)
Publicly-Traded MHC Institutions
- --------------------------------
ALLB Alliance Bank MHC of PA (20.0) 3,441 688 2,753 0.63 0.63 10.21 10.21 108.80
BCSB BCSB Bankcorp MHC of MD (36.0) 5,899 2,112 3,787 0.18 0.12 7.50 7.05 111.93
CFFN Capitol Fd Fn MHC of KS (30.0) 73,393 22,277 51,116 0.37 0.36 13.04 13.04 114.23
CHEV Cheviot Financl Corp MHC of OH 9,919 4,463 5,456 0.24 0.23 7.42 7.42 28.47
CHFN Charter Fincl MHC of GA (20.0) 19,570 3,964 15,606 0.28 0.14 12.71 12.40 52.67
CSBK Clifton Svgs Bcrp MHC of NJ 30,530 13,739 16,791 0.12 0.12 6.20 6.20 24.54
GCBC Green Co Bcrp MHC of NY (43.0) 2,043 870 1,173 1.20 1.20 14.41 14.41 133.05
GOV Gouverneur Bcp MHC of NY(42.4) 2,279 966 1,313 0.31 0.29 7.82 7.82 41.61
HCBK Hudson Cty Bcp MHC of NJ(38.8) 189,836 37,254 152,582 1.09 1.01 7.00 7.00 89.73
JXSB Jcksnville Bcp MHC of IL(45.6) 1,942 871 1,071 0.43 0.23 10.32 8.73 134.82
NWSB Northwest Bcrp MHC of PA(25.4) 47,789 12,141 35,648 0.93 0.85 10.25 7.23 120.88
ONFC Oneida Fincl MHC of NY (45.7) 7,640 2,179 5,461 0.41 0.31 6.65 4.98 56.05
PBCT Peoples Bank, MHC of CT (40.8) 62,000 25,150 36,850 1.03 0.88 16.16 14.33 188.25
PBHC Pathfinder BC MHC of NY (39.1) 2,433 1,020 1,413 0.55 0.40 8.79 6.83 118.16
ROME Rome Bncp Inc MHC of NY (41.6) 4,285 1,174 3,111 0.36 0.50 8.55 8.55 61.13
WCFB Wbstr Cty Fed MHC of IA (38.5) 3,772 723 3,049 0.32 0.32 6.00 5.97 28.15
WFD Westfield Finl MHC of MA(47.0) 9,988 4,834 5,154 0.28 0.33 12.44 12.44 81.72
(Continued)
Pro Forma
Impact of Second Step Conversion(4) Per Share Data (Fully-Converted)(4) Pro Forma(5)
--------------------------------------- ----------------------------------- -----------------
Share Gross Net Incr. Net Incr. Core Book Tang. Public
Price Procds(1) (Capital(2) Income(3) EPS EPS Value Book Assets Pct. Dilution
----- -------- ----------- --------- --- --- ----- ---- ------ ---- --------
($) ($000) ($000) ($000) ($) ($) ($) ($) ($) (%) (
Publicly-Traded MHC Institutions
- --------------------------------
ALLB Alliance Bank MHC of PA (20.0) $29.09 $86,756 $80,864 $952 0.54 $0.54 $31.58 $31.58 $126.81 18.7% -1.2%
ALLB Alliance Bank MHC of PA (20.0) 39.00 113,927 104,231 1,205 0.93 0.93 38.61 38.61 132.61 19.1 -0.9
BCSB BCSB Bankcorp MHC of MD (36.0) 20.00 75,740 65,136 705 0.30 0.24 18.54 18.09 122.97 35.8 0.0
CFFN Capitol Fd Fn MHC of KS (30.0) 36.93 1,887,714 1,623,434 17,567 0.61 0.60 35.16 35.16 136.35 30.4 0.0
CHEV Cheviot Financl Corp MHC of OH 13.31 72,619 62,453 676 0.31 0.30 13.72 13.72 34.77 45.0 0.0
CHFN Charter Fincl MHC of GA (20.0) 39.60 617,998 531,478 5,751 0.57 0.43 39.87 39.56 79.83 20.3 0.0
CSBK Clifton Svgs Bcrp MHC of NJ 12.96 217,611 187,146 2,025 0.19 0.19 12.33 12.33 30.67 45.0 0.0
GCBC Green Co Bcrp MHC of NY (43.0) 35.49 41,630 35,802 387 1.39 1.39 31.93 31.93 150.57 42.6 0.0
GOV Gouverneur Bcp MHC of NY(42.4) 13.68 17,962 15,447 167 0.38 0.36 14.60 14.60 48.39 42.4 0.0
HCBK Hudson Cty Bcp MHC of NJ(38.8) 39.28 5,993,421 5,154,342 55,775 1.38 1.30 34.15 34.15 116.88 19.6 0.0
JXSB Jcksnville Bcp MHC of IL(45.6) 19.99 21,409 18,412 199 0.53 0.33 19.80 18.21 144.30 44.9 0.0
NWSB Northwest Bcrp MHC of PA(25.4) 25.41 905,816 779,001 8,430 1.11 1.03 26.55 23.53 137.18 25.4 0.0
ONFC Oneida Fincl MHC of NY (45.7) 14.60 79,731 68,568 742 0.51 0.41 15.62 13.95 65.02 28.5 0.0
PBCT Peoples Bank, MHC of CT (40.8) 45.23 2,954,386 2,546,022 27,615 1.01 0.91 39.22 37.96 157.15 27.8 -12.8
PBHC Pathfinder BC MHC of NY (39.1) 19.81 27,992 24,073 260 0.66 0.51 18.68 16.72 128.05 41.9 0.0
ROME Rome Bncp Inc MHC of NY (41.6) 33.29 103,565 89,066 964 0.58 0.72 29.34 29.34 81.92 27.4 0.0
WCFB Wbstr Cty Fed MHC of IA (38.5) 15.00 45,735 39,332 426 0.43 0.43 16.43 16.40 38.58 19.2 0.0
WFD Westfield Finl MHC of MA(47.0) 24.16 124,521 107,088 1,159 0.40 0.45 23.16 23.16 92.44 48.4 0.0
(1) Gross proceeds calculated as stock price multiplied by the number of shares owned by the mutual holding company (i.e.,
non-public shares).
(2) Net increase in capital reflects gross proceeds less offering expenses, contra-equity account for leveraged ESOP and
deferred compensation account for restricted stock plan. For institutions with assets at the MHC level, the net increase in
capital also includes consolidation of MHC assets with the capital of the institution concurrent with hypothetical second step.
Offering expense percent 2.00
ESOP percent purchase 8.00
Recognition plan percent 4.00
(3) Net increase in earnings reflects after-tax reinvestment income (assumes ESOP and recognition plan do not generate reinvestment
income), less after-tax ESOP amortization and recognition plan vesting:
After-tax reinvestment 2.31
ESOP loan term (years) 10
Recog. plan vesting (yrs) 5
Effective tax rate 34.00
(4) Figures reflect adjustments to "non-grandfathered" companies to reflect dilutive impact of cumulative dividends waived by
the MHC (reflect FDIC policy regarding waived dividends).
(5) Reflects pro forma ownership position of minority stockholders after taking into account the OTS and FDIC policies regarding
waived dividends assuming a hypothetical second step. For OTS "grandfathered" companies, dilution reflects excess waived
dividends and MHC assets. For all other companies, dilution reflects all waived dividends and MHC assets.
Source: Audited and unaudited financial statements, corporate reports and offering circulars, and RP Financial, LC. calculations.
The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the
accuracy or completeness of such information.
Copyright (c) 2004 by RP Financial, LC.
RP FINANCIAL, LC.
PAGE 4.21
VALUATION APPROACHES: FULLY-CONVERTED BASIS
In applying the accepted valuation methodology promulgated by the OTS and
adopted by the FDIC, i.e., the pro forma market value approach, including the
fully-converted analysis described above, we considered the three key pricing
ratios in valuing ACFC's to-be-issued stock -- price/earnings ("P/E"),
price/book ("P/B"), and price/assets ("P/A") approaches -- all performed on a
pro forma basis including the effects of the stock proceeds. In computing the
pro forma impact of the conversion and the related pricing ratios, we have
incorporated the valuation parameters disclosed in ACFC's prospectus for
reinvestment rate, effective tax rate and stock benefit plan assumptions
(summarized in Exhibits IV-7 and IV-8). Pursuant to the minority stock offering,
we have also incorporated the valuation parameters disclosed in ACFC's
prospectus for offering expenses. The assumptions utilized in the pro forma
analysis in calculating the Company's full conversion value are described more
fully below.
o CONVERSION EXPENSES. Offering expenses have been assumed to equal 3.0%
of the gross proceeds, which is typical of the level of offering
expenses recorded in offerings that were comparable to the Company's
full conversion value.
o EFFECTIVE TAX RATE. The Company has determined the marginal effective
tax rate on the net reinvestment benefit of the conversion proceeds to
be 38.00%.
o REINVESTMENT RATE. The pro forma section in the prospectus
incorporates a 1.26% reinvestment rate, equivalent to the average of
the prevailing yield for a U.S. Treasury bills with a one year
maturity as of December 31, 2003.
o STOCK BENEFIT PLANS. The assumptions for the stock benefit plans,
i.e., the ESOP and Recognition Plan, are consistent with the structure
as approved by the Company's Board and the disclosure in the pro forma
section of the prospectus. Specifically, the ESOP is assumed to
purchase 8.0% of the stock in conversion at the initial public
offering price, with the Company funded ESOP loan amortized on a
straight-line basis over 10 years. The Recognition Plan is assumed to
purchase 4.0% of the stock in the aftermarket at a price equivalent to
the initial public offering price and will be amortized on a
straight-line basis over five years.
In our estimate of value, we assessed the relationship of the pro forma
pricing ratios relative to the Peer Group, recent conversions and MHC offerings.
RP Financial's valuation placed an emphasis on the following:
RP FINANCIAL, LC.
PAGE 4.22
o P/E APPROACH. The P/E approach is generally the best indicator of
long-term value for a stock. Given the similarities between the
Company's and the Peer Group's earnings composition and overall
financial condition, the P/E approach was carefully considered in this
valuation. At the same time, recognizing that (1) the earnings
multiples will be evaluated on a pro forma fully-converted basis for
the Company as well as for the Peer Group and (2) the Peer Group on
average has had the opportunity to realize the benefit of reinvesting
the minority offering proceeds, we also gave weight to the other
valuation approaches.
o P/B APPROACH. P/B ratios have generally served as a useful benchmark
in the valuation of thrift stocks, particularly in the context of an
initial public offering, as the earnings approach involves assumptions
regarding the use of proceeds. RP Financial considered the P/B
approach to be a valuable indicator of pro forma value taking into
account the pricing ratios under the P/E and P/A approaches. We have
also modified the P/B approach to exclude the impact of intangible
assets (i.e., price/tangible book value or "P/TB"), in that the
investment community frequently makes this adjustment in its
evaluation of this pricing approach.
o P/A APPROACH. P/A ratios are generally a less reliable indicator of
market value, as investors typically assign less weight to assets and
attribute greater weight to book value and earnings. Furthermore, this
approach as set forth in the regulatory valuation guidelines does not
take into account the amount of stock purchases funded by deposit
withdrawals, thus understating the pro forma P/A ratio. At the same
time, the P/A ratio is an indicator of franchise value, and, in the
case of highly capitalized institutions, high P/A ratios may limit the
investment community's willingness to pay market multiples for
earnings or book value when ROE is expected to be low.
The Company will adopt Statement of Position ("SOP") 93-6, which will cause
earnings per share computations to be based on shares issued and outstanding
excluding unreleased ESOP shares. For purposes of preparing the pro forma
pricing analyses, we have reflected all shares issued in the offering, including
all ESOP shares, to capture the full dilutive impact, particularly since the
ESOP shares are economically dilutive, receive dividends and can be voted.
However, we did consider the impact of the adoption of SOP 93-6 in the
valuation.
Based on the application of the three valuation approaches, taking into
consideration the valuation adjustments discussed above, RP Financial concluded
that as of March 5, 2004 the pro forma market value of ACFC's full conversion
offering equaled $120,000,000 at the midpoint, equal to 12,000,000 shares at
$10.00 per share.
RP FINANCIAL, LC.
PAGE 4.23
1. PRICE-TO-EARNINGS ("P/E"). The application of the P/E valuation method
requires calculating the Company's pro forma market value by applying a
valuation P/E multiple (fully-converted basis) to the pro forma earnings base.
In applying this technique, we considered both reported earnings and a recurring
earnings base, that is, earnings adjusted to exclude any one-time non-operating
items, plus the estimated after-tax earnings benefit of the reinvestment of the
net proceeds. The Company's reported earnings equaled $4,417,000 for the 12
months ended December 31, 2003. In deriving ACFC's core earnings, there were
three adjustments made to reported earnings was to eliminate non-recurring gains
on the sale of loans and AFS investments, net of losses on foreclosed assets. As
shown below, on a tax effected basis, assuming an effective marginal tax rate of
38.00% for the gains eliminated, the Company's core earnings were determined to
equal $2,780,000 for the 12 months ended December 31, 2003 (Note: see Exhibit
IV-9 for the adjustments applied to the Peer Group's earnings in the calculation
of core earnings).
Amount
------
($000)
Net income $4,417,000
Adjustment for non-recurring items(1) (1,637,000)
----------
Core earnings estimate $2,780,000
(1) Net non-recurring income of $2,640,000, tax effected at 38.00%.
Based on ACFC's reported and estimated core earnings, and incorporating the
impact of the pro forma assumptions discussed previously, the Company's pro
forma reported and core P/E multiples (fully-converted basis) at the $120.0
million midpoint value equaled 29.83 times and 50.28 times, respectively,
indicating a discount of 11.03% relative to the Peer Group's average reported
P/E multiple (fully-converted basis) of 33.53 times and a premium of 34.8%
relative to the Peer Group's core P/E multiple (see Table 4.4). At the
supermaximum of the valuation range, the Company's pro forma reported and core
P/E multiples (fully-converted basis) equaled 40.73 times and 70.24 times,
respectively, indicating premiums of 21.5% and 88.4% relative to the comparative
Peer Group average multiples. The implied discounts or premiums reflected in the
Company's pro forma P/E multiples take into consideration the Company's pro
forma P/B
RP FINANCIAL, LC.
PAGE 4.24
and P/A ratios. On a reported basis, the Company's pro forma P/E multiples based
on reported and core earnings equaled 28.17 and 45.74 times at the midpoint,
respectively (see Table 4.5). At the supermaximum of the range, the Company's
reported and core earnings multiples based on the minority stock offering
equaled 37.67 and 61.62 times, respectively. In comparison, the Peer Group
average multiples based on reported and core earnings equaled 39.78 and 44.05
times, respectively.
2. PRICE-TO-BOOK ("P/B"). The application of the P/B valuation method
requires calculating the Company's pro forma market value by applying a
valuation P/B ratio, as derived from the Peer Group's P/B ratio (fully-converted
basis), to ACFC's pro forma book value (fully-converted basis). Based on the
$120.0 million midpoint valuation, ACFC's pro forma P/B and P/TB ratios equaled
82.63% and 84.18%, respectively. In comparison to the average fully converted
P/B and P/TB ratios for the Peer Group of 102.33% and 105.86%, the Company's
ratios reflected a discount of 19.3% on a P/B basis and a discount of 20.5% on a
P/TB basis. On a reported basis, the Company's pro forma P/TB ratio of 147.28%
was discounted by 46.1% relative to the Peer Group average. At the supermaximum
of the offering range the pro forma P/TB ratio on a reported basis (167.10%) was
discounted by 38.9% relative to the Peer Group average. RP Financial considered
the discounts under the P/B approach to be reasonable, in light of the
previously referenced valuation adjustments, the nature of the calculation of
the P/B ratio which mathematically results in a ratio discounted to book value
and the resulting pricing ratios indicated under the earnings approach.
RP FINANCIAL, LC.
PAGE 4.25
Price/ Price/
Book Tangible
I. FULLY CONVERTED BASIS (see Table 4.4) Value Book Value
------------------------- ------- ----------
ACFC Midpoint 82.63% 84.18%
ACFC Supermaximum 89.10 90.45
Peer Group (At 3/05/2004)
Average 102.33% 105.86%
Median 102.67% 107.22%
ACFC Midpoint Discount Relative to
Peer Group Average 19.25% 20.48%
Peer Group Median 19.52% 21.49%
ACFC Supermaximum Discount Relative to
Peer Group Average 12.93% 14.56%
Peer Group Median 13.22% 15.64%
II. REPORTED BASIS (see Table 4.5)
------------------
ACFC Midpoint 142.62% 147.28%
ACFC Supermaximum 162.54% 167.10%
Peer Group (At 3/05/2004)
Average 254.21% 273.39%
Median 235.83% 267.48%
ACFC Midpoint Discount Relative to
Peer Group Average 43.90% 46.13%
Peer Group Median 39.52% 44.94%
ACFC Supermaximum Discount Relative to
Peer Group Average 36.06% 38.88%
Peer Group Median 31.08% 37.53%
3. PRICE-TO-ASSETS ("P/A"). The P/A valuation methodology determines
market value by applying a valuation P/A ratio (fully-converted basis) to the
Company's pro forma asset base, conservatively assuming no deposit withdrawals
are made to fund stock purchases. In all likelihood there will be deposit
withdrawals, which results in understating the pro forma P/A ratio which is
computed herein. At the midpoint of the valuation range, ACFC's full conversion
RP FINANCIAL, LC.
PAGE 4.26
value equaled 19.97% of pro forma assets. Comparatively, the Peer Group
companies exhibited an average P/A ratio (fully-converted basis) of 25.49%,
which implies a discount of 21.66% for the Company's pro forma P/A ratio
(fully-converted basis). On a reported basis, the Peer Group companies exhibited
an average P/A ratio of 30.82%, which implies a discount of 27.90% for the
Company's pro forma P/A ratio.
COMPARISON TO RECENT CONVERSIONS AND MHC OFFERINGS
As indicated at the beginning of this chapter, RP Financial's analysis of
recent conversion and MHC offering pricing characteristics at closing and in the
aftermarket has been limited to a "technical" analysis and, thus, the pricing
characteristics of recent conversions and MHC offerings is not the primary
determinate of value herein. Particular focus was placed on the P/TB approach in
this analysis, since the P/E multiples do not reflect the actual impact of
reinvestment and the source of the stock proceeds (i.e., external funds vs.
deposit withdrawals). The two mutual holding company transactions completed in
2004 had an average pro forma P/B equal to 86.2% on a fully-converted basis and
53.3 times pro forma fully-converted earnings. In the current market (based on
prices as of March 5, 2004), Cheviot Financial is priced at a fully-converted
pro forma P/TB equal to 97.01% and Clifton Savings Bancorp is priced at a
fully-converted pro forma P/TB equal to 105.11%.
VALUATION CONCLUSION
Based on the foregoing, it is our opinion that, as of March 5, 2004, the
estimated aggregate pro forma market value of the shares to be issued
immediately following the conversion, including the shares issued publicly, as
well as to the MHC, equaled $120,000,000 at the midpoint, equal to 12,000,000
shares offered at a per share value of $10.00. Pursuant to conversion
guidelines, the 15% offering range indicates a minimum value of $102.0 million
and a maximum value of $138.0 million. Based on the $10.00 per share offering
price determined by the Board, this valuation range equates to total shares
outstanding of 10.2 million at the minimum and 13.8 million at the maximum. In
the event the appraised value is subject to an increase, the aggregate pro forma
market value may be increased up to a supermaximum value of
RP FINANCIAL, LC.
PAGE 4.27
$158.7 million without a resolicitation. Based on the $10.00 per share offering
price, the supermaximum value would result in total shares outstanding of 15.87
million. The Board of Directors has established a public offering range such
that the public ownership of the Company will constitute a 40.0% ownership
interest. Accordingly, the offering to the public of the minority stock, will
equal $40.8 million at the minimum, $48.0 million at the midpoint, $55.2 million
at the maximum and $63.5 million at the supermaximum of the valuation range. The
pro forma valuation calculations relative to the Peer Group (fully-converted
basis) are shown in Table 4.4 and are detailed in Exhibit IV-7 and Exhibit IV-8;
the pro forma valuation calculations relative to the Peer Group based on
reported financials are shown in Table 4.5 and are detailed in Exhibits IV-10
and IV-11.
RP FINANCIAL, LC.
PAGE 4.28
Table 4.4
MHC Institutions -- Implied Pricing Ratios, Full Conversion Basis
Atlantic Coast Financial Corp. and the Comparables
As of March 5, 2004
Fully Converted
Implied Value Per Share(8)
---------------- ------------------------
Pricing Ratios(3)
Price/ Market Core 12 Mo. Book Value ---------------------------------------
Financial Institution Share(1) Value EPS(2) Share P/E P/B P/A P/TB P/Core
- --------------------- -------- ----- ------ ----- --- --- --- ---- ------
($) ($Mil) ($) ($) (x) (%) (%) (%) (x)
ATLANTIC COAST FINANICAL CORPORATION
Superrange $10.00 $158.70 $0.14 $11.22 40.73 89.10 25.03 90.45 70.24
Maximum $10.00 $138.00 $0.17 $11.63 34.81 85.97 22.39 87.42 59.29
Midpoint $10.00 $120.00 $0.20 $12.10 29.83 82.63 19.97 84.18 50.28
Minimum $10.00 $102.00 $0.24 $12.74 24.98 78.51 17.41 80.15 41.71
ALL PUBLIC COMPANIES(7)
Averages 24.24 446.86 0.92 14.53 18.08 167.69 18.37 180.29 20.65
Medians --- --- --- --- 17.05 156.46 16.31 167.01 19.64
ALL NON-MHC STATE OF FL(7)
Averages 22.04 275.97 0.79 14.10 18.23 162.37 16.97 173.80 21.26
Medians --- --- --- --- 17.67 150.40 15.62 163.49 21.06
PUBLICLY-TRADED MHC INSTITUTIONS,
FULL CONVERSION BASIS
Averages $23.50 $100.15 $0.58 $22.67 33.53x 102.33 25.49 105.86 37.29x
Medians -- -- -- -- 34.88x 102.67 24.86 107.22 38.00x
PUBLICLY-TRADED MHC INSTITUTIONS,
FULL CONVERSION BASIS
ALLB Alliance Bank MHC of PA (20.0) 39.00 140.75 0.93 38.61 41.94 101.01 29.41 101.01 41.94
BCSB BCSB Bankcorp MHC of MD (36.0) 20.00 117.98 0.24 18.54 N.M. 107.87 16.26 110.56 N.M.
GOV Gouverneur Bcp MHC of NY(42.4) 13.68 31.18 0.36 14.60 36.00 93.70 28.27 93.70 38.00
GCBC Green Co Bcrp MHC of NY (43.0) 35.49 72.51 1.39 31.93 25.53 111.15 23.57 111.15 25.53
JXSB Jcksnville Bcp MHC of IL(45.6) 19.99 38.82 0.33 19.80 37.72 100.96 13.85 109.77 N.M.
ONFC Oneida Fincl MHC of NY (45.7) 14.60 111.54 0.41 15.62 28.63 93.47 22.45 104.66 35.61
PBHC Pathfinder BC MHC of NY (39.1) 19.81 48.20 0.51 18.68 30.02 106.05 15.47 118.48 38.84
ROME Rome Bncp Inc MHC of NY (41.6) 33.29 142.65 0.72 29.34 N.M. 113.46 40.64 113.46 46.24
WCFB Wbstr Cty Fed MHC of IA (38.5) 15.00 56.58 0.43 16.43 34.88 91.30 38.88 91.46 34.88
WFD Westfield Finl MHC of MA(47.0) 24.16 241.31 0.45 23.16 N.M. 104.32 26.14 104.32 N.M.
(Continued)
Dividends(4) Financial Characteristics(6)
------------------------ -------------------------------------------------
Reported Core
Amount/ Payout Total Equity NPAs/ -------------------------
Financial Institution Share Yield Ratio(5) Assets Assets Assets ROA ROE ROA ROE
- --------------------- ----- ----- -------- ------ ------ ------ --- --- --- ---
($) (%) (%) ($Mil) (%) (%) (%) (%) (%) (%)
ATLANTIC COAST FINANICAL CORPORATION
Superrange $0.00 0.00% 0.00% $634 28.10 1.36 0.61 2.19 0.36 1.27
Maximum $0.00 0.00% 0.00% $616 26.04 1.40 0.64 2.47 0.38 1.45
Midpoint $0.00 0.00% 0.00% $601 24.16 1.44 0.67 2.77 0.40 1.64
Minimum $0.00 0.00% 0.00% $586 22.18 1.48 0.70 3.14 0.42 1.88
ALL PUBLIC COMPANIES(7)
Averages 0.47 1.97 34.78 2,489 10.78 0.67 0.85 8.95 0.66 6.79
Medians --- --- --- --- --- --- --- --- --- ---
ALL NON-MHC STATE OF FL(7)
Averages 0.46 2.07 38.54 1,577 10.76 0.66 0.85 8.76 0.62 6.44
Medians --- --- --- --- --- --- --- --- --- ---
PUBLICLY-TRADED MHC INSTITUTIONS,
FULL CONVERSION BASIS
Averages 0.42 1.99 50.64 413 25.14 0.71 0.67 2.68 0.65 2.46
Medians -- -- -- -- -- -- -- -- -- --
PUBLICLY-TRADED MHC INSTITUTIONS,
FULL CONVERSION BASIS
ALLB Alliance Bank MHC of PA (20.0) 0.36 0.92 38.71 479 29.12 2.27 0.70 2.41 0.70 2.41
BCSB BCSB Bankcorp MHC of MD (36.0) 0.50 2.50 NM 725 15.08 0.08 0.25 1.60 0.20 1.28
GOV Gouverneur Bcp MHC of NY(42.4) 0.26 1.90 72.22 110 30.17 0.90 0.83 2.62 0.78 2.49
GCBC Green Co Bcrp MHC of NY (43.0) 0.80 2.25 57.55 308 21.21 0.16 0.98 4.40 0.98 4.40
JXSB Jcksnville Bcp MHC of IL(45.6) 0.30 1.50 NM 280 13.72 1.46 0.37 2.66 0.23 1.66
ONFC Oneida Fincl MHC of NY (45.7) 0.37 2.53 NM 497 24.02 0.06 0.79 3.31 0.64 2.66
PBHC Pathfinder BC MHC of NY (39.1) 0.40 2.02 NM 312 14.59 0.96 0.53 3.48 0.41 2.69
ROME Rome Bncp Inc MHC of NY (41.6) 0.29 0.87 40.28 351 35.82 0.61 0.71 1.98 0.89 2.46
WCFB Wbstr Cty Fed MHC of IA (38.5) 0.68 4.53 NM 146 42.59 0.38 1.13 2.63 1.13 2.63
WFD Westfield Finl MHC of MA(47.0) 0.20 0.83 44.44 923 25.05 0.22 0.44 1.72 0.49 1.94
(1) Current stock price of minority stock. Average of High/Low or Bid/Ask price per share.
(2) EPS (estimated core earnings) is based on reported trailing 12 month data, adjusted to omit non-operating gains and
losses on a tax-effected basis. Public MHC data reflects additional earnings from reinvestment of proceeds of second step
conversion.
(3) P/E = Price to Earnings; P/B = Price to Book; P/A = Price to Assets; P/TB = Price to Tangible Book; and P/Core = Price to
Core Earnings. Ratios are pro forma assuming a second step conversion to full stock form.
(4) Indicated 12 month dividend, based on last quarterly dividend declared.
(5) Indicated 12 month dividend as a percent of trailing 12 month estimated core earnings (earnings adjusted to reflect second
step conversion).
(6) ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing 12 month earnings and average equity
and assets balances.
(7) Excludes from averages and medians those companies the subject of actual or rumored acquisition activities or unusual
operating characteristics.
(8) Figures estimated by RP Financial to reflect a second step conversion of the MHC to full stock form.
Source: Corporate reports, offering circulars, and RP(R) Financial, LC. calculations. The information provided in this report has
been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such
information.
Copyright (c) 2003 by RP(R) Financial, LC.
RP FINANCIL, LC.
PAGE 4.29
Table 4.5
Public Market Pricing
Atlantic Coast Federal Corporation and the Comparables
As of March 5, 2004
MHC Pricing - 40% Minority Stock Issuance
Market Per Share Data
Capitalization -------------- Dividend(4)
--------------- Core Book Pricing Ratios(3) -----------------------
Price/ Market 12 Month Value/ ---------------------------------- Amount/ Payout
Financial Institution Share(1) Value EPS(2) Share P/E P/B P/A P/TB P/Core Share Yield Ratio(5)
- --------------------- -------- ----- ------ ----- --- --- --- ---- ------ ----- ----- --------
($) ($Mil) ($) ($) (x) (%) (%) (%) (x) ($) (%) (%)
Atlantic Coast Federal Corporaiton
- ----------------------------------
Superrange $10.00 $158.70 $0.16 $6.15 37.67 162.54x 28.67 167.10 61.62 - 0.00% 0.00%
Maximum $10.00 $138.00 $0.19 $6.55 32.56 152.63x 25.26 157.25 53.05 - 0.00% 0.00%
Midpoint $10.00 $120.00 $0.22 $7.01 28.17 142.62x 22.22 147.28 45.74 - 0.00% 0.00%
Minimum $10.00 $102.00 $0.26 $7.63 23.82 131.00x 19.11 135.63 38.55 - 0.00% 0.00%
All Public Companies(7)
- -----------------------
Averages 24.24 446.86 0.92 14.53 18.08 167.69 18.37 180.29 20.65 0.47 1.97 34.78
Medians -- -- -- -- 17.05 156.46 16.31 167.01 19.64 -- -- --
All Non-MHC State of CA(7)
- --------------------------
Averages 22.04 275.97 0.79 14.10 18.23 162.37 16.97 173.80 21.26 0.46 2.07 38.54
Medians -- -- -- -- 17.67 150.40 15.62 163.49 21.06 -- -- --
Comparable Group Averages
- -------------------------
Averages $23.50 $34.93 $0.43 $9.27 39.78x 254.21 30.82 273.39 44.05x $0.42 1.99 21.26
Medians -- -- -- -- 40.07x 235.83 28.12 267.48 47.10x -- -- --
Comparable Group
- ----------------
ALLB Alliance Bank MHC of PA (20.0) 39.00 26.83 0.63 10.21 N.M. 381.98 35.85 381.98 N.M. 0.36 0.92 11.43
BCSB BCSB Bankcorp MHC of MD (36.0) 20.00 42.24 0.12 7.50 N.M. 266.67 17.87 283.69 N.M. 0.50 2.50 NM
GOV Gouverneur Bcp MHC of NY(42.4) 13.68 13.21 0.29 7.82 44.13 174.94 32.88 174.94 47.17 0.26 1.90 NM
GCBC Green Co Bcrp MHC of NY (43.0) 35.49 30.88 1.20 14.41 29.58 246.29 26.67 246.29 29.58 0.80 2.25 28.39
JXSB Jcksnville Bcp MHC of IL(45.6) 19.99 17.41 0.23 10.32 46.49 193.70 14.83 228.98 N.M. 0.30 1.50 NM
ONFC Oneida Fincl MHC of NY (45.7) 14.60 31.81 0.31 6.65 35.61 219.55 26.05 293.17 47.10 0.37 2.53 NM
PBHC Pathfinder BC MHC of NY (39.1) 19.81 20.21 0.40 8.79 36.02 225.37 16.77 290.04 49.53 0.40 2.02 NM
ROME Rome Bncp Inc MHC of NY (41.6) 33.29 39.08 0.50 8.55 N.M. 389.36 54.46 389.36 N.M. 0.29 0.87 15.89
WCFB Wbstr Cty Fed MHC of IA (38.5) 15.00 10.85 0.32 6.00 46.88 250.00 53.29 251.26 46.88 0.68 4.53 NM
WFD Westfield Finl MHC of MA(47.0) 24.16 116.79 0.33 12.44 N.M. 194.21 29.56 194.21 N.M. 0.20 0.83 29.33
(CONTINUED)
Financial Characteristics(6)
-------------------------------------------------
Reported Core
Total Equity/ NPAs/ --------- --------- Offering
Financial Institution Assets Assets Assets ROA ROE ROA ROE Size
- --------------------- ------ ------ ------ --- --- --- --- ----
($Mil) (%) (%) (%) (%) (%) (%) ($Mil)
Atlantic Coast Federal Corporaiton
- ----------------------------------
Superrange 553 17.64 1.56 0.76 4.31 0.47 2.64 $63.5
Maximum 546 16.55 1.58 0.78 4.69 0.48 2.88 $55.2
Midpoint 540 15.58 1.60 0.79 5.06 0.49 3.12 $48.0
Minimum 534 14.59 1.62 0.80 5.50 0.50 3.40 $40.8
All Public Companies(7)
- -----------------------
Averages 2,489 10.78 0.67 0.85 8.95 0.66 6.79
Medians -- -- -- -- -- -- --
All Non-MHC State of CA(7)
- --------------------------
Averages 1,577 10.76 0.66 0.85 8.76 0.62 6.44
Medians -- -- -- -- -- -- --
Comparable Group Averages
- -------------------------
Averages 356 12.32 0.71 0.62 4.95 0.59 4.54
Medians -- -- -- -- -- -- --
MHC Per Share Data
------------------------
Earnings Book ValueTBV
Comparable Group
- ----------------
ALLB Alliance Bank MHC of PA (20.0) 374 9.38 2.27 0.58 6.19 0.58 6.19 $0.63 $0.63
BCSB BCSB Bankcorp MHC of MD (36.0) 660 6.70 0.08 0.17 2.34 0.11 1.56 $0.18 $0.12
GOV Gouverneur Bcp MHC of NY(42.4) 95 18.79 0.90 0.79 4.03 0.74 3.77 $0.31 $0.29
GCBC Green Co Bcrp MHC of NY (43.0) 272 10.83 0.16 0.97 8.53 0.97 8.53 $1.20 $1.20
JXSB Jcksnville Bcp MHC of IL(45.6) 262 7.65 1.46 0.32 4.11 0.17 2.20 $0.43 $0.23
ONFC Oneida Fincl MHC of NY (45.7) 428 11.86 0.06 0.74 6.36 0.56 4.81 $0.41 $0.31
PBHC Pathfinder BC MHC of NY (39.1) 287 7.44 0.96 0.48 6.07 0.35 4.42 $0.55 $0.40
ROME Rome Bncp Inc MHC of NY (41.6) 262 13.99 0.61 0.60 4.24 0.83 5.89 $0.36 $0.50
WCFB Wbstr Cty Fed MHC of IA (38.5) 106 21.31 0.38 1.16 5.39 1.16 5.39 $0.32 $0.32
WFD Westfield Finl MHC of MA(47.0) 816 15.22 0.22 0.35 2.24 0.41 2.64 $0.28 $0.33
(1) Average of High/Low or Bid/Ask price per share.
(2) EPS (estimate core basis) is based on actual trailing 12 month data, adjusted to omit non-operating items (including the SAIF
assessment) on a tax-effected basis, and is shown on a pro forma basis where appropriate.
(3) P/E = Price to earnings; P/B = Price to book; P/A = Price to assets; P/TB = Price to tangible book value; and P/Core = Price to
core earnings.
(4) Indicated 12 month dividend, based on last quarterly dividend declared.
(5) Indicated 12 month dividend as a percent of trailing 12 month estimated core earnings.
(6) ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing 12 month common earnings and average
common equity and total assets balances.
(7) Excludes from averages and medians those companies the subject of actual or rumored acquisition activities or unusual operating
characteristics.
Source: Corporate reports, offering circulars, and RP Financial, LC. calculations. The information provided in this report has been
obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2003 by RP(R) Financial, LC.