sched13da.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________

SCHEDULE 13D

Under the Securities Exchange Act of 1934

(Amendment No. 2)*

Atlantic Coast Financial Corporation

(Name of Issuer)

Common Stock, $0.001 par value per share

(Title of Class of Securities)

048426100

(CUSIP Number)

Jay S. Sidhu

511 Granada Drive

Palm Coast, FL 32137

(610) 301-6476

(Name, Address and Telephone Number of Person Authorized to

Receive Notices and Communications)

April 10, 2013

(Date of Event with Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of §§ 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g) check the following box .

Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See § 240.13d-7 for other parties to whom copies are to be sent.

* The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter the disclosures provided in a prior cover page.

The information required in the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

CUSIP No. 048426100

13D

Page 1 of 4 Pages

This Amendment No. 2 to Schedule 13D amends the Statement on Schedule 13D initially filed on February 15, 2013 and subsequently amended on March 27, 2013 (such filing, as amended herein, the “Statement”) with respect to the common stock, par value $0.001 per share (the “Common Stock”) of Atlantic Coast Financial Corporation, a Maryland corporation (the “Issuer”). Amendment No. 2 is filed to amend Item 4 and Item 7 of the Statement, as set forth herein.

Item 4. Purpose of Transaction.

Item 4 is hereby amended to replace the original Item 4 disclosure with the following:

On February 13, 2013, Messrs. Sidhu and Choudhrie delivered a notice (the “Director Nomination Notice”), to the Secretary of the Issuer in accordance with the Issuer’s bylaws nominating three persons for election to the Board of Directors of the Issuer (the “Board of Directors”) at the 2013 Annual Meeting of Stockholders of the Issuer (the “Annual Meeting”). In connection with the Director Nomination Notice, the nominees, John J. Dolan, Kevin G. Champagne and Dave Bhasin (the “Nominees”) provided affidavits to the Issuer indicating, among other things, the Nominees’ willingness to serve as directors of the Issuer if elected at the Annual Meeting.

In a Form 8-K filed on February 26, 2013, the Issuer publicly announced that on February 25, 2013 the Issuer and its savings bank subsidiary, Atlantic Coast Bank (the “Bank”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Bond Street Holdings, Inc. (“Bond Street”) and its bank subsidiary, Florida Community Bank, N.A. (“Florida Community Bank”). Pursuant to the Merger Agreement, the Issuer will be merged with and into Bond Street (the “Merger”) and the Bank will then merge with and into Florida Community Bank. The publicly announced terms of the Merger included a guaranteed payment of $3.00 per share in cash to the Issuer’s stockholders at the closing of the transaction plus an additional $2.00 per share to be held in an escrow to indemnify the Issuer, Bond Street and others for losses from Issuer stockholder claims, whether related to the transactions contemplated by the Merger Agreement or otherwise. The escrow reportedly will continue for one year following the closing of the Merger or until the final resolution of any such stockholder claims, if later, with any remaining proceeds of the escrow distributed to stockholders. Additional details of the holdback arrangement and escrow were not provided in the Form 8-K, nor was the form of escrow agreement provided with the exhibits filed along with the Form 8-K; the only other information regarding the holdback and escrow is included in a “Summary Terms of Escrow Agreement” attached to the Merger Agreement.

The Form 8-K outlined certain other matters relating to the Merger and Merger Agreement, noting that the Merger Agreement and the transactions contemplated thereby are subject to the approval of the Issuer’s stockholders, regulatory approvals and other customary closing conditions and that closing of the Merger is expected to occur by the end of the second quarter of 2013. The Form 8-K also noted the restrictions on the Issuer’s ability to solicit proposals relating to alternative transaction and (with exceptions) enter into discussions or agreements concerning, or provide confidential information in connection with, any proposals for alternative transactions. In addition, the Form 8-K summarized the circumstances in which the Issuer would be obligated to pay Bond Street a $650,000 termination fee if the Merger does not go forward.

On March 26, 2013, Messrs. Sidhu and Choudhrie delivered a letter to the Board of Directors, a copy of which is attached as Exhibit 99.2 hereto. Messrs. Sidhu and Choudhrie indicated in that letter that they intend to vote the shares they own of the Issuer against the Merger when it is brought to a stockholder vote. In that letter, Messrs. Sidhu and Choudhrie also described their concerns regarding the Merger, the fairness of the consideration being offered to the Issuer’s stockholders, the process undertaken by the Board of Directors in considering and approving the Merger and Merger Agreement and related matters. In addition, Messrs. Sidhu and Choudhrie expressed their belief that a recapitalized Issuer would provide better value to the Issuer’s stockholders than the Merger and that the changes in the Board of Directors and implementation of other initiatives that have been proposed over the past year would provide the Issuer’s stockholders with much better options in the future, either through a sale on better terms than the Merger or by operating the Issuer as an independent public company.

CUSIP No. 048426100

13D

Page 2 of 4 Pages

On March 27, 2013, the Issuer filed preliminary proxy materials with the Commission with respect to the solicitation of proxies in connection with a special meeting of stockholders to consider, among other matters, the proposed Bond Street transaction. On March 29, 2013, the Issuer filed additional soliciting materials with the Commission, which the Issuer characterized as a response to the March 26, 2013 letter from Messrs. Sidhu and Choudhrie.

On April 10, 2013, Messrs. Sidhu and Choudhrie delivered an additional letter to the Board of Directors, a copy of which is attached as Exhibit 99.3 hereto. In that letter, Messrs. Sidhu and Choudhrie reiterated their concerns regarding the Merger, and provided additional details in support of their belief that the consideration being offered to the Issuer’s stockholders is inadequate and the process undertaken by the Board of Directors in considering and approving the Merger and Merger Agreement, including its failure to adequately consider a recapitalization alternative, was fundamentally flawed. Messrs. Sidhu and Choudhrie also expressed concerns about the adequacy and accuracy of the disclosures included in the March 27 preliminary proxy materials.

Messrs. Sidhu and Choudhrie, who also serve as directors of the Issuer, purchased the shares of Common Stock of the Issuer based on their belief that the shares represented an attractive investment opportunity. They submitted the Director Nomination Notice because of their concerns with the direction of the Issuer under the stewardship of the current Board of Directors and the Issuer’s current Chief Executive Officer, and submitted the Letter because of their belief that the Merger is not in the best interest of stockholders, the financial terms of the Merger are unfair and the process undertaken by the Board of Directors in considering and approving the Merger and Merger Agreement was lacking. Messrs. Sidhu and Choudhrie believe that the Board of Directors has consistently failed to act to mitigate or significantly reduce the risks facing the Issuer and follow prudent safety and sound banking practices, in spite of several plans put forward by certain directors. With respect to the Issuer’s management, they believe that a change in the Board of Directors is necessary and that each of the Nominees possesses the energy, commitment and skill set necessary to ensure that the Issuer evaluates, with an open mind and a keen sense of urgency, all alternative strategies to determine the best path forward to maximize value for all shareholders of the Issuer. In the event the Board of Directors fails to nominate the Nominees for election at the 2013 Annual Meeting, the Reporting Persons may take additional action to cause the election of the Nominees, including voting their shares in favor of the Nominees and potentially soliciting proxies for the Nominees’ election. With respect to the Merger, they believe that other alternatives are a better option for the stockholders than the proposed Merger with Bond Street, that their proposals for recapitalizing the Issuer should be fully considered and pursued by the Board, and in the event that the Board submits the Merger and Merger Agreement to a stockholder vote, the Reporting Persons intend to vote against the proposal and will consider taking additional action with respect to the Merger, possibly including soliciting proxies from other stockholders to vote against the proposal.

The Reporting Persons intend to review their respective investments in the Issuer on a continuing basis and engage in discussions with the Issuer’s management, Board of Directors, stockholders and other stakeholders concerning the business, operations and future plans of the Issuer as a means of maximizing stockholder value. Based on a variety of factors including, without limitation, the Issuer’s financial position, the market price of the shares of Common Stock, conditions in the securities markets and general economic and industry conditions, the Reporting Persons may in the future take such actions with respect to their respective investments in the Issuer as they deem appropriate including, without limitation, seeking additional representation on the Board of Directors, supporting or opposing proposed transactions (including the Merger), making proposals to the Issuer concerning changes to the capitalization, ownership structure or operations of the Issuer, purchasing additional shares, disposing of some or all of their shares, or (to the extent permitted by applicable law) engaging in the short selling of, or any hedging or similar transaction with respect to, the shares of Common Stock. Any purchase or sale of shares may be on the open market, in block trades, private transactions or otherwise, on such terms and at such times as the Reporting Persons may deem advisable.

CUSIP No. 048426100

13D

Page 3 of 4 Pages

No Reporting Person has any present plan or proposal which would relate to or result in any of the matters set forth in paragraphs (a) through (j) of Item 4 of Schedule 13D except as set forth herein or such as would occur upon completion of any of the actions discussed herein. However, the Reporting Persons may exercise any and all of their rights as stockholders of the Issuer in a manner consistent with their ownership interests and investment objectives. The Reporting Persons reserve the right to formulate other plans and/or make other proposals, and take such actions with respect to the shares of Common Stock they own of record and/or beneficially, including any or all of the actions set forth in paragraphs (a) through (j) of Item 4 of Schedule 13D and any other actions as the Reporting Persons may determine.

Item 7. Material to be Filed as Exhibits.

The following documents are filed as exhibits:

Exhibit No.	Exhibit Name
99.1	Joint Filing Agreement, dated as of February 14, 2013, by and between Jay S. Sidhu, Bhanu Choudhrie, Emblem Capital Limited and Emblem Investments LLC (incorporated by reference to Exhibit 99.1 to Schedule 13D filed on February 15, 2013)
99.2	Notice of Director Nomination, dated as of February 13, 2013, with respect to the 2013 Annual Meeting of Stockholders of Atlantic Coast Financial Corporation (incorporated by reference to Exhibit 99.2 to Schedule 13D filed on February 15, 2013)
99.3	Letter to Atlantic Coast Financial Corporation Board of Directors dated March 26, 2013 (incorporated by reference to Exhibit 99.3 to Schedule 13D filed on February 15, 2013)
99.4	Letter to Atlantic Coast Financial Corporation Board of Directors dated April 10, 2013

CUSIP No. 048426100

13D

Page 4 of 4 Pages

SIGNATURE

After reasonable inquiry and to the best of each of the undersigned’s knowledge and belief, each of the undersigned certifies that the information set forth in this Statement is true, complete and correct.

Date: April 11, 2013

	JAY S. SIDHU


	/s/ Jay S. Sidhu
	Jay S. Sidhu


	BHANU CHOUDHRIE


	/s/ Bhanu Choudhrie
	Bhanu Choudhrie


	EMBLEM CAPITAL LIMITED


	By: H.T.M. Services Ltd.
	President

	/s/ Howard Berke
	By: Howard Berke



	EMBLEM INVESTMENTS LLC


	By: Lexiserve LLC
	President and Manager

	/s/ Howard Berke
	By: Howard Berke

April 11, 2013

ATLANTIC COAST FINANCIAL CORPORATION

10151 Deerwood Park Boulevard

Building 200, Suite 100

Jacksonville, Florida 32256

Attention: Board of Directors

As before, I am writing this letter on behalf of myself and my fellow director and fellow ACFC stockholder Bhanu Choudhrie. We are writing to you to reiterate our serious concerns regarding the proposed merger with Bond Street Holdings. In addition, we now have had the opportunity to fully review the proxy materials ACFC filed with the SEC, and we also have serious concerns as to the accuracy and completeness of that document. As you know, when the Board moved to approve the proxy statement and its filing with the SEC, we did note vote in favor of that action, as we were not given adequate time to review drafts prior to the time the Board insisted on voting and even after only a limited review we informed you that we believed the filing was not accurate or complete in a number of significant ways.

We continue to believe that the proposed merger grossly undervalues ACFC and, as a result, we expect that ACFC stockholders will not approve the transaction. We note yesterday’s Schedule 13D filing by The Allbury Investment Partnership, et. al., which indicates that this group intends to vote its shares – representing almost 10% of the outstanding shares – against the merger. So now almost 17% of the outstanding shares have publicly expressed opposition to the Bond Street transaction, and we fully expect other stockholders to do the same. Under these circumstances, we believe that continuing to pursue the transaction is a waste of time and valuable resources for everyone involved. We also believe that soliciting stockholder approval using inadequate proxy materials is inconsistent not only with SEC rules, but also is inconsistent with the Board’s duty of candor under Maryland law. We again call on you to immediately move forward in calling ACFC’s 2013 annual meeting so ACFC stockholders may elect new directors, move forward with a recapitalization and avoid further jeopardizing the company’s value and future. At the very least, the special meeting should also include a separate proposal to elect directors who will serve on the company’s Board when the Bond Street transaction fails to be approved.

The Board’s Failure to Adequately Consider Alternatives

We noted ACFC’s filing with the SEC on March 29, 2013 that appears to have been in response to our March 27, 2013 letter to you. What your response, ACFC’s preliminary proxy materials and your other public statements fail to address is our contention that the proposed terms of the Bond Street Holdings merger significantly undervalue the ACFC franchise and, therefore, the financial consideration being offered to ACFC’s shareholders is not fair. As highlighted in our March 27 letter, we believe that a recapitalization of ACFC is in the best interest of ACFC’s shareholders and that relative to the Bond Street Holdings offer, ACFC’s shareholders stand to gain most value if the company remains independent.

We also noted the disclosures in various places in the preliminary proxy materials regarding the Board’s consideration of recapitalization alternatives. Your attempt to make it appear as if the Strategic Alternatives Committee and the full Board gave due consideration to our recapitalization proposal falls far short of providing ACFC stockholders with a true picture of the directors’ deliberative process. As you know, we first brought up the option of recapitalization in September 2012 and repeated our proposal on a number of occasions all the way into January 2013. You took few, if any, steps to explore the viability of such a transaction and your stated conclusions for refusing fully explore this alternative – particularly that it “presented too much execution risk due to the ability of such stand-by investors to be approved by regulators in a timely manner” – ring hollow. In the absence of any “change of control,” why would regulatory approvals be required for any investor, whether current stockholders or “stand-by” investors? You represented to us that ACFC counsel, based on discussions with the Federal Reserve, believed that there was significant timing risk regarding investor approval. However, our counsel discussed the terms of the recapitalization proposal and the same issues with the same regulator and was not told that regulatory approval would be an impediment to the transaction we were proposing. We informed you of that and you apparently chose just ignore it. Your assertions that you gave due consideration to all strategic options is absolutely inaccurate and a material misstatement of facts. If the Strategic Alternatives Committee and the full Board had properly investigated the alternative of a capital raising transaction on the terms we put forth and had sought definitive guidance from ACFC’s regulators, we believe that you would have concluded that the alternative would generate significant stockholder value immediately and would allow ACFC to meet its regulatory obligations and to grow without having to pursue a merger that would effectively end ACFC shareholders’ investment in the company at a depressed valuation.

In spite of your efforts to move forward with Bond Street to the exclusion of all other alternatives, we continued to provide you with analyses designed to illustrate the benefits of a recapitalization and the likelihood of completion in a timely manner. In December 2012 we provided a detailed analysis that illustrated the anticipated financial impact of a recapitalization transaction. Our proposal contemplated a total $25 million capital raise of which approximately 60% would come from existing investors in the form of a rights offering, thereby minimizing the potential dilution to existing ACFC stockholders and the execution risk associated with such an offering. As we discussed with you, a rights offering would have significantly strengthened the bank’s capital ratios. In addition, our analysis also contemplated the sale of non-performing assets, taking into account loss estimates provided by the bank’s Chief Credit Officer. Even after factoring in an estimated loss of $10 million on an asset sale of approximately $26 million, capital ratios pro forma for the capital raise remained strong.

Most importantly, the capital raise would have allowed ACFC to remain independent, return to profitability and allow stockholders to participate in the company’s recovery and future growth. As you know, $3 is far below what many of ACFC’s current stockholders paid to become ACFC stockholders in the recent past and their expectation certainly could not have been that the Board would agree to sell the company at such a depressed price and not take all reasonable steps to fix the bank’s problems and increase stockholder value back to earlier levels, if not even greater levels. Looking forward, we expect that credit costs in the medium term would return to normalized levels, ACFC could take reasonable measures to improve its cost structure and through normal course runoffs, reduce its reliance on expensive borrowing, and additional steps could be taken to put the bank on solid footing. Once ACFC was able to demonstrate consistent profitability, the bank would be able to reverse the reserve against its deferred tax assets, thereby improving book equity by approximately $27.7 million (as of 12/31/2012) or approximately $11.00 per share based on current shares outstanding and approximately $2.55 per share based on a pro forma basis assuming $25 million of new capital raised at $3.00 per share (that is, 8.33 million new common shares issued). Our analysis also demonstrated that the capital raise could be executed in a manner to avoid a “change of control” for taxation purposes and not impose a section 382 limitation on the deferred tax asset carry-forward. We note that none of these details of our proposal and analysis are included in any ACFC SEC filing and/or public statement or correspondence with ACFC’s stockholders.

Despite the merits of a capital raise alternative, neither the Strategic Alternatives Committee nor the full Board gave due consideration to the proposal and, as such, refused to support our proposal, instead choosing to move forward with the contemplated merger with Bond Street. Throughout our discussions, the Board relied on the advice from its external financial advisor, KBW. The analysis presented by KBW did not address the positive financial impact of the capital raise and was biased towards an outright sale as a more financially attractive alternative. As noted above, we also believe that the full details of our proposal were not discussed with ACFC’s regulators and that no definitive position was taken by the regulators. We believe that the Strategic Alternatives Committee and the full Board failed to adequately pursue this alternative with ACFC’s regulators and, therefore, could not have possibly been adequately informed about this alternative to the proposed merger. Any suggestion in ACFC’s disclosures that the regulators provided definitive guidance to the company would be misleading. Furthermore, we do not understand why a transaction funded 60% by existing ACFC stockholders, with the remaining being funded by retail or institutional investors who would remain minority stockholders, would face any regulatory approval hurdles.

It is our belief that the Board, consistent with its fiduciary duties, should have explored both potential alternatives in parallel, so that our proposal was considered in a timely fashion and adequate time was provided to pursue our alternative. As you know, that is not how events progressed, with the Board failing to consider a parallel path until January 2013, after a merger application had already been filed with the Federal Reserve Bank of Atlanta for the Bond Street transaction.

Fairness Opinion provided by KBW

We have reviewed the fairness opinion provided by KBW and question the various assumptions that have been used to arrive to the conclusion in the opinion. In the analysis we presented to the Board, we analyzed precedent transactions which involved banks acquired in the Southeastern United States between 1/1/2010 to 11/1/2012 with asset size range of $500 million to $2.0 billion (19 transactions in total). Our analysis demonstrated that on an unadjusted basis, the consideration paid to the acquired bank’s shareholders, the median implied Price to Tangible Book Value (P/TBV) multiple paid was approximately 0.70x and the median implied Price to Adjusted Tangible Book Value was approximately 1.50x (Adjusted Tangible Book Value defined as Tangible Book Value less announced credit mark net of reserves on an after tax basis assuming a tax rate of 35%). In stark contrast, Bond Street’s offer values ACFC at 0.33x Price to Tangible Book Value.

Using an unadjusted P/TBV median multiple of 0.70x and ACFC’s tangible book per share of $15.31 per share (as of 12/31/2012), the implied valuation for the bank is $10.72 per share. Based on our discussions with the Chief Credit Officer of ACFC, the credit mark is estimated at $30 million which translates into a net credit mark of $4.97 per share (based on reserves of $10.9 million and an assumed tax rate of 35%), implying an adjusted tangible book value per share of $10.34 per share. Using an adjusted P/TBV median multiple of 1.50x and ACFC’s adjusted tangible book per share of $10.34 per share, the implied valuation for the bank is $15.51 per share.

We also understand that KBW valued ACFC’s intrinsic value by performing a discounted cash flow (DCF) analysis based on projections provided by ACFC’s management. We do not understand the justification for the 15-19% discount rates assumption used in the KBW analysis. These discount rates are not representative of ACFC’s risk profile and unduly penalize ACFC’s projected cash flows. In addition, a Tangible Common Equity / Tangible Asset ratio assumption of 9.00% is very high and for the purposes of a five year DCF is, in our view, an incorrect assumption as it would imply that ACFC would retain earnings a much higher levels than what is currently the norm in the industry.

As we indicated in our prior letters to the Board, we would like to reiterate our belief that ACFC can be made profitable over the next few quarters, credit can be expected to experience continued, gradual improvement, risks can be effectively managed, capital can be raised at market price, some or possibly all of the deferred tax asset can be realized over a period of time and stockholder value can be created either through a sale at a future date at a reasonable price or the company can continue to operate independently and grow in the Jacksonville area. We strongly believe that the Bond Street transaction significantly undervalues the ACFC franchise and is not fair to the stockholders.

	Sincerely,


	/s/ Jay S. Sidhu
	Jay S. Sidhu





Cc: Bhanu Choudhrie