PROSPECTUS
Filed pursuant to Rule 424(b)(3)
Registration No. 333-74637
[LOGO]
First Deposit Bancshares, Inc.
(Proposed Holding Company for
Douglas Federal Bank,
a Federal Savings Bank)
1,449,000 Shares of Common Stock
$10.00 Per Share
Douglas Federal Bank, a Federal Savings Bank, is converting from the mutual form
of organization to the stock form of organization.
================================================================================
THE OFFERING
Proposed Trading Symbol:
OTC BULLETIN BOARD -- FDBI
Minimum Midpoint Maximum
----------- ----------- -----------
Number of shares:............................................... 1,071,000 1,260,000 1,449,000
Gross offering proceeds:........................................ $10,710,000 $12,600,000 $14,490,000
Estimated underwriting commissions and other offering expenses: $ 655,000 $ 684,000 $ 713,000
Estimated net proceeds:......................................... $10,055,000 $11,916,000 $13,777,000
Estimated net proceeds per share:............................... $ 9.39 $ 9.46 $ 9.51
With the approval of the Office of Thrift Supervision, First Deposit may
increase the maximum number of shares by up to 15.0% to 1,666,350 shares.
================================================================================
Please refer to Risk Factors beginning on page 9 of this document for a
discussion of certain risks that you should consider before purchasing the
common stock.
These securities are not deposits or accounts and are not, and will not be,
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
federal or state governmental agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities commission has approved or disapproved of
these securities, or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
First Deposit must sell at least 1,071,000 shares of common stock if any are
sold. Trident Securities is required to use only its best efforts in assisting
First Deposit to sell the number of shares offered. Trident Securities intends
to make a market in the common stock.
The offering expires at 12:00 Noon, Eastern Time, on June 22, 1999. We may
terminate the offering after the subscription period at any time without notice.
We will place funds for stock purchases in a segregated savings account at
Douglas Federal until completion or termination of the offering. We will pay
interest at our regular passbook rate on funds received for the period the funds
are held until the completion or termination of the offering.
For information on how to subscribe, call the stock information center at
(770) 489-5126.
TRIDENT SECURITIES
May 14, 1999
[Inside front cover of Prospectus]
TABLE OF CONTENTS
Summary............................................................................... 1
Risk Factors.......................................................................... 9
Stock Pricing......................................................................... 15
Procedure For Purchasing Shares....................................................... 18
Selected Consolidated Financial Information and Other Data............................ 20
Summary of Recent Developments........................................................ 22
Proposed Management Purchases......................................................... 26
Use of Proceeds....................................................................... 27
Dividend Policy....................................................................... 29
Market for the Common Stock........................................................... 30
Capitalization........................................................................ 31
Regulatory Capital Compliance......................................................... 33
Pro Forma Data........................................................................ 35
The Conversion........................................................................ 38
First Deposit......................................................................... 53
Management's Discussion and Analysis of Financial Condition and Results of Operations. 54
Business of Douglas Federal........................................................... 68
Management of First Deposit........................................................... 85
Management of Douglas Federal......................................................... 86
Federal and State Taxation............................................................ 96
Regulation and Supervision............................................................ 98
Restrictions on Acquiring Douglas Federal or First Deposit............................ 107
Description of the Capital Stock of First Deposit..................................... 114
Description of the Capital Stock of Douglas Federal................................... 116
Transfer Agent and Registrar.......................................................... 117
Experts............................................................................... 117
Legal and Tax Opinions................................................................ 117
Where You Can Find More Information................................................... 117
Index to Financial Statements......................................................... F-1
Map of Georgia Showing the Borders
of Douglas and Paulding Counties Highlighted as
the Market Area of Douglas Federal Bank and
Shown in Relation to Atlanta, Georgia
SUMMARY
Because this is a summary, it does not contain all the information
about the conversion and us. You should read the entire prospectus carefully
before you decide to invest. For assistance, please contact the stock
information center at (770) 489-5126.
The Companies
First Deposit Bancshares, Inc.
8458 Campbellton Street
Douglasville, Georgia 30134-1803
(770) 942-5108
We formed First Deposit to be the holding company for Douglas Federal. To date,
First Deposit has only conducted organizational activities. After the
conversion, it will own all of our capital stock and will direct, plan and
coordinate our business activities. After the conversion, First Deposit may
become an operating company or acquire or organize other operating subsidiaries,
including other financial institutions, although it currently has no specific
plans or agreements to do so.
Douglas Federal Bank, a Federal Savings Bank
8458 Campbellton Street
Douglasville, Georgia 30134-1803
(770) 942-5108
We are a community-oriented financial institution that operates out of two
offices in western Georgia located in or around the towns of Douglasville and
Lithia Springs, both located in Douglas County. Our principal business is
attracting deposits from the general public and using those funds to originate
residential mortgage loans and, to a much lesser extent, loans for real estate
development. At December 31, 1998, we had total assets of approximately $100.9
million, deposits of approximately $85.7 million and total retained earnings of
approximately $9.7 million.
For a discussion of our business strategy and recent results of operations, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." For a discussion of our business activities, see "Business of
Douglas Federal."
The Conversion
What is the Conversion (page 38)
The conversion is a change in our legal form
1
of organization. As a mutual savings bank, we currently have no stock or
shareholders. Instead, we operate for the mutual benefit of our depositors and
borrowers, who elect our directors and vote on other important matters. Through
the conversion we will become a stock savings bank and will be owned and
controlled by our sole shareholder, First Deposit. The right to vote for matters
affecting First Deposit will belong to its shareholders.
Purposes for the Conversion (page 39)
By converting to the stock form of organization, we will be structured in the
form that commercial banks, most business entities and a large number of savings
institutions use. The conversion will be important to our future growth and
performance by:
. providing us with a larger capital base from which we can operate;
. enhancing our ability to attract and retain qualified management
through stock-based compensation plans;
. enhancing our ability to diversify into other financial services
related activities; and
. expanding our ability to serve the public.
Presently, we do not have any specific plans or arrangements for diversification
or expansion.
Benefits of the Conversion to Management (page 88)
We intend to adopt the following benefit plans and employment agreements that
will benefit our management:
. Employment Agreements. We intend to enter into three-year employment
agreements with our Chief Executive Officer, President, Senior Vice
President and Controller, Vice President and Secretary, under which
these individuals will receive the following annual salaries and
severance benefits if the executive's employment is terminated
following
2
a change in control of Douglas Federal or First Deposit:
Annual Severance
Position Salary Payment
-------- ------ -------
President............................. $86,900 $43,450
Senior Vice President
and Controller....................... 75,000 37,500
Chief Executive
Officer.............................. 58,300 29,150
Vice President........................ 50,000 25,000
Vice President and
Secretary............................ 46,900 23,450
The severance payments under these employment agreements will equal the average
monthly compensation for the remaining term of each agreement. The example above
assumes that six months remained under the term of each employment agreement at
such termination.
. Stock Option Plan. Under the stock option plan, First Deposit may award
stock options to key employees and directors. Management believes that
there are approximately 34 persons that would qualify for options under
the stock option plan. The number of options available under this plan
will be equal to 10.0% of the number of shares sold in the conversion.
This would range from 107,100 shares, assuming 1,071,000 shares are
issued in the conversion, to 144,900 shares, assuming 1,449,000 shares
are issued in the conversion. This plan will require shareholder
approval.
. Restricted Stock Program. Under the restricted stock program, First
Deposit may award shares of restricted stock to key employees and
directors at no cost to the recipient. Management believes that there
are approximately 34 persons that will be eligible for stock awards
under the restricted stock program. The number of shares available
under this program will equal 4.0% of the number of shares sold in the
conversion. This would range from 42,840 shares, assuming 1,071,000
shares are issued in the conversion, to 57,960 shares, assuming
1,449,000 shares are issued in the conversion. This program will
require shareholder approval.
The following table summarizes the total number and dollar value of the shares
of
3
common stock, assuming 1,449,000 shares are issued in the conversion, which the
employee stock ownership plan would acquire and the total value of all shares
available for award under the stock option plan and the restricted stock
program. The table assumes the value of the shares is $10.00 per share. The
table does not include a value for the options because their value would be
equal to the fair market value of the common stock on the day that the options
are granted. First Deposit plans to adopt the stock option plan and the
restricted stock program after the first anniversary of this offering. First
Deposit's Board of Directors has not determined the amount of awards that will
be received by management under the stock option plan and the stock program and
therefore cannot determine whether any of these plans will give voting control
to management.
Percentage
of Shares
Number Estimated Issued
of Value in the
Shares of Shares Conversion
------ --------- ----------
Employee stock
ownership plan.................. 115,920 $1,159,200 8.0%
Restricted
stock program................... 57,960 579,600 4.0
Stock options................... 144,900 - 10.0
------- ---------- ------
Total...................... 318,780 $1,738,800 22.0%
======= ========== ======
For a discussion of certain risks associated with these plans and agreements,
see "Risk Factors - Implementation of our stock benefit plans will increase
future compensation expense and may lower our net income" and " - Employment
agreements with our executive officers contain substantial termination benefits
which may discourage acquisitions of control."
The Offering
Purchase Price (page 15)
The purchase price is $10.00 per share. This purchase price was based on market
conditions generally and not on the common stock's pro forma price to book value
ratio. You will not pay a commission to buy any shares in the subscription
offering or community offering
4
Number of Shares to be Sold (page 41)
First Deposit will sell between 1,071,000 and 1,449,000 shares of its common
stock in this offering. With regulatory approval, First Deposit may increase the
number of shares to 1,666,350 without giving you further notice.
Subscription Offering (page 42)
Important: Subscription rights are not transferable, and persons with
subscription rights may not subscribe for shares for the benefit of any other
person. If you violate this prohibition, you may lose your right to purchase
shares and may face criminal prosecution and/or other sanctions.
We have granted subscription rights in the following order of priority to:
1. Persons with $50 or more on deposit with us on December 31, 1997.
2. Our employee stock ownership plan.
3. Persons with $50 or more on deposit with us on March 31, 1999.
4. Our depositors on May 1, 1999 and our borrowers on January 1, 1990 whose
loans continue to be outstanding on May 1, 1999.
The subscription offering will end at 12:00 Noon, Eastern Time, on June 22,
1999.
Community Offering (page 45)
First Deposit may offer shares not sold in the subscription offering to the
general public in a community offering, with preference given to residents of
Douglas and Paulding Counties, Georgia. If, after filling those community
orders, shares are available, First Deposit may offer shares to the general
public. First Deposit may begin the community offering during the subscription
offering.
First Deposit may reject orders received in the community offering either in
whole or in part. If your order is rejected in part, you cannot cancel the
remainder of your order.
Purchase Limitations (page 47)
The minimum purchase is 25 shares.
The maximum purchase in the subscription offering by any person or group of
persons through a single deposit account is $350,000
5
of common stock, which equals 35,000 shares. The maximum purchase by any person
in the community offering is $350,000 of common stock, which equals 35,000
shares.
The maximum purchase in the subscription offering and community offering
combined by any person, related persons or persons acting together is $700,000
of common stock, which equals 70,000 shares.
How to Purchase Common Stock (page 18)
Important: After we receive your order, you cannot cancel or change it without
our consent. If First Deposit intends to sell fewer than 1,071,000 shares or
more than 1,666,350 shares, all subscribers will be notified and given the
opportunity to change or cancel their orders. If you do not respond to this
notice, First Deposit will return your funds promptly with interest.
If you want to subscribe for shares, you must complete a stock order form and
send or deliver it to either branch of Douglas Federal, together with full
payment to us in the postage-paid envelope provided. You must sign the
certification that is part of the stock order form. We must receive your stock
order form on or before June 22, 1999.
You may pay for shares of common stock in cash, by check, or by withdrawal from
an account with Douglas Federal.
Use of Proceeds (page 27)
First Deposit will pay us 50.0% of the net offering proceeds, or $6,885,500 if
the maximum number of shares are sold. We will use these funds to originate and
purchase loans and purchase investments similar to the kinds we currently hold.
First Deposit will also loan an amount equal to 8.0% of the gross proceeds of
the offering, or $1,159,200 if the maximum number of shares are sold, to our
employee stock ownership plan to fund its purchase of common stock.
First Deposit will keep the remainder of the net proceeds for general corporate
purposes.
Purchases by Directors and Executive Officers (page 26)
Our directors and executive officers intend to subscribe for up to 380,000
shares. This number equals approximately 26.2% of the 1,449,000 shares that
would be issued at the
6
maximum of the offering range. Directors and executive officers will pay the
same $10.00 per share as everyone else who purchases shares in the conversion.
Market for Common Stock (page 30)
First Deposit anticipates that the common stock will be quoted on the OTC
Bulletin Board operated by the National Association of Securities Dealers, Inc.
under the symbol "FDBI." Trident Securities intends to be a market maker in the
common stock. First Deposit cannot assure you that there will be an active
trading market for the common stock. See "Risk Factors - The common stock's
price and liquidity may suffer because there is no established market for it."
Dividends (page 29)
First Deposit intends to pay a quarterly cash dividend, but has not yet
determined the amount of such dividend.
7
RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in deciding whether to invest in
the common stock.
Our high levels of fixed rate loans may lead to decreased profitability if
interest rates rise
An increase in market interest rates could adversely affect our
earnings. We have become increasingly subject to the risk that our loans will
provide below-market rates of return if interest rates rise, due to the
substantial levels of fixed rate loans that we have originated in response to
the high customer demand for such products in our market area. Significant
increases in market interest rates also may adversely affect the fair market
value of our securities and other interest-earning assets. Generally, the value
of fixed-rate instruments fluctuates inversely with changes in interest rates.
As a result, increases in interest rates could result in decreases in the market
value of interest-earning assets. The loss of value realized on the sale of such
assets generating below-market returns could adversely affect our results of
operations. The retention of assets generating below-market returns and
classified as available-for-sale could adversely affect our retained earnings.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We make loans that involve a higher degree of credit risk than residential
mortgage loans
Non-residential real estate loans, construction and development loans,
land and land development loans and consumer loans generally involve a higher
degree of credit risk than residential mortgage lending. At December 31, 1998,
these loans totaled $11.4 million or 13.6% of our total loans. Of this amount,
$6.0 million or 7.2% consisted of construction and development loans, $3.1
million or 3.7% consisted of non-residential real estate loans, $416,000 or less
than 0.5% consisted of land and land development loans, and $1.9 million or 2.3%
consisted of consumer loans. In addition, unlike residential mortgage loans,
commercial loans and commercial real estate loans depend on the cash flow from
the property or the business to service the debt. General economic conditions
may significantly affect cash flow. Consumer lending is riskier than residential
mortgage lending because consumer loans are either unsecured or secured by
assets that depreciate in value. See "Business of Douglas Federal."
Our income will depend on our ability to originate one-to four-family
residential mortgage loans
Approximately 86% of our total loans are comprised of one- to
four-family residential mortgage loans. The market for one- to four-family
residential mortgage loans is highly volatile and an increase in interest rates
could have a material adverse effect on non-interest income, interest income and
the growth of our residential mortgage loan operations.
In addition, a substantial portion of our other income derives from
gains on the sale of mortgage loans, proceeds from the sale of servicing rights,
loan origination fees and discount points. Any decrease in the demand for
mortgage loan originations could reduce the income we receive from such
activities, thereby lowering our net income.
Our real estate development activities involve increased risk
We engage in residential real estate development activities which
involve a higher degree of risk than traditional residential mortgage lending.
Our inability to successfully develop, subdivide and sell the lots which
comprise these real estate developments, or a downturn in the residential real
estate
8
market generally, would adversely affect our earnings. In addition, we make
construction loans to certain builders who purchase the lots in these
developments, increasing our involvement in, and the risks associated with, our
real estate development activities. See "Business of Douglas Federal -
Subsidiary."
Lower return on equity may result in a decreased market price for the common
stock
Following the conversion, our return on equity is expected to be below
our historical return on equity. Return on equity is determined by dividing net
income by average equity. Many investors use return on equity to compare the
performance of a financial institution to its peers. Such investors may
misinterpret our short-term decreased return on equity as a negative reflection
of our operations, which misinterpretation may lower the market price of the
common stock. As a result of the conversion, our equity will increase
substantially. Our expenses also will increase due to added expense associated
with our employee stock ownership plan and, later on, our restricted stock
program, as well as with the costs of being a public company. Because of the
increases in our equity and expenses, until we are able to increase our balance
sheet by adding loans and deposits, thereby increasing net interest income, we
expect our return on equity to decrease as compared to our performance in
previous years. See "Pro Forma Data."
Management's failure to invest the proceeds of this offering effectively may
adversely affect profitability
Management's failure to invest the net proceeds of this offering
effectively in long-term, high-yield investments could adversely affect First
Deposit's future profitability and return on equity. Investing the net proceeds
could be a lengthy process, during which the net proceeds may be invested in
short-term investments with a low rate of return. See "Use of Proceeds" for
additional information. Industry competition for interest-bearing assets, such
as loans and securities, will significantly affect our ability to transfer the
proceeds of this offering out of such short-term investments.
The economic condition of Douglas and Paulding Counties is heavily dependent on
the economy of Atlanta, Georgia
A decline in the local economy and the Atlanta, Georgia economy could
result in an increase in the level of defaults of existing loans and could
suppress the demand for new loans. Despite recent development, the economy in
Douglas and Paulding Counties continues to be heavily dependent on the economy
of the Atlanta, Georgia metropolitan area. Similarly, a decline in the local
community could result in a decline in deposits.
Adverse changes in the local economy may result in increased loan delinquencies
and loan losses
We estimate that more than 90.0% of our loans come from our market area
of Douglas and Paulding Counties, located in western Georgia. A concentration of
loans secured by properties in any single area presents the risk that any
adverse change in the local economic or employment conditions may result in
increased loan delinquencies and loan losses.
9
Losses on a small number of our larger loans could disproportionately affect the
performance of our entire loan portfolio
At December 31, 1998, our ten largest lending relationships ranged in
size from approximately $550,000 to approximately $1.3 million. Losses incurred
on loans to a small number of these borrowers could have more of a material
adverse impact on our income and financial condition than on institutions with
fewer large loans outstanding.
Strong competition within Douglas and Paulding Counties has hurt our net
interest income
We face intense competition both in making loans and attracting
deposits. This competition has made it more difficult for us to make new loans
and has forced us to offer among the highest deposit rates in our market area.
This competition for loans and deposits has contributed to a narrow interest
rate spread, which has hurt net interest income. We expect that the competition
for loans and deposits will continue to be intense.
We compete with commercial banks, credit unions, finance companies,
mutual funds, insurance companies, mortgage companies and brokerage and
investment banking firms. In our market area, we compete primarily with
national, regional and local financial institutions, most of whom have a
state-wide or regional presence. Most of these competitors have substantially
greater resources and lending limits than we have and may offer certain services
that we do not or cannot provide.
Our Charter and Bylaws contain anti-takeover provisions that could discourage
acquisitions of control
Provisions of First Deposit's Articles of Incorporation and Bylaws,
Douglas Federal's Charter and Bylaws, the Georgia Business Corporations Code,
and certain federal regulations may make it difficult and expensive to pursue a
tender offer, change in control or takeover attempt that our Board of Directors
opposes. As a result, you may not have an opportunity to participate in such a
transaction. Such provisions will also make removing our current Board of
Directors or management more difficult. In addition, these provisions may reduce
the trading price of First Deposit's stock. See "Restrictions on Acquiring
Douglas Federal or First Deposit."
Employment agreements with our executive officers contain substantial
termination benefits which may discourage acquisitions of control
We intend to enter into employment agreements with our Chief Executive
Officer, President, Senior Vice President and Controller, Vice President and
Secretary that provide for benefits and cash payments in the event of their
involuntary or, in certain circumstances, voluntary termination following a
change in control of First Deposit or Douglas Federal. Such severance benefits
equal the average monthly compensation for the remaining term of each agreement.
Therefore, the amount of each severance payment depends on the amount of the
term under the employment agreement remaining after termination. These
provisions may have the effect of increasing the cost of acquiring Douglas
Federal or First Deposit and would therefore discourage future takeover
attempts. See "Management of Douglas Federal - Employment Agreements."
Possible voting control by our directors and officers may make takeover attempts
difficult to achieve
10
The proposed purchases of common stock by our directors and officers,
the employee stock ownership plan and the restricted stock program, if
implemented, could make it difficult to obtain majority support for shareholder
proposals that management opposes. In addition, voting those shares may enable
management to block transactions requiring approval of shareholders holding
80.0% of the common stock.
Our directors and executive officers expect to purchase between
approximately 34% and 26.2% of the common stock to be issued in the conversion,
based upon the minimum and maximum range of the offering. In addition, as a
result of shares that may be attributable to our officers and directors through
the employee stock ownership plan, the restricted stock program and the stock
option plan, our officers and directors could potentially control approximately
49.0% of the common stock, assuming that 1,449,000 shares are sold in the
offering. See "Restrictions on Acquiring Douglas Federal or First Deposit."
Implementation of our stock benefit plans will increase future compensation
expense and may lower our net income
If shares of common stock purchased by, or awarded under, our stock
benefit plans appreciate in value over time, compensation expense relating to
such stock benefit plans may increase, lowering our net income. We anticipate
that our employee stock ownership plan will purchase 8.0% of the common stock
issued in the conversion with funds borrowed from First Deposit. The cost of
acquiring the employee stock ownership plan shares will be between $856,800 and
$1,159,200. We will record annual employee stock ownership plan expenses in an
amount equal to the fair market value of shares committed to be released to
employees. In addition, First Deposit may implement a restricted stock program,
under which it may award officers and directors of Douglas Federal or First
Deposit restricted stock up to an aggregate of 4.0% of the shares issued in the
conversion at no cost to such individuals. Assuming the shares awarded under the
restricted stock program cost $10.00 per share, the reduction to shareholders'
equity of funding the restricted stock program would be between $428,400 and
$579,600.
Issuance of shares for stock benefit plans may dilute your ownership interest
If we complete the conversion and the shareholders of First Deposit
subsequently approve a restricted stock program, our issuance of the shares for
such program from our authorized but unissued stock could dilute your ownership
percentage by up to 4.0% and reduce the trading price of the stock.
Following the conversion, First Deposit also intends to implement the
stock option plan. The stock option plan will provide directors and selected
employees with stock options to purchase authorized but unissued shares in an
amount equal to 10.0% of the common stock issued in the conversion. If all of
the stock options First Deposit intends to grant were to be exercised using
authorized but unissued common stock and if First Deposit funded the stock
option plan with authorized but unissued shares, such exercise would dilute the
voting interests of existing shareholders by approximately 10.0%. See "Pro Forma
Data."
You should not rely on our appraisal as an indication of the common stock's
future price
If you purchase common stock in the offering for $10.00 per share, you
may not be able to sell it at or above that price at a later date. An
independent appraisal will determine the final aggregate purchase price of the
common stock in the conversion. The appraisal is not a recommendation of any
kind as to the advisability of purchasing shares of common stock. The valuation
is based on estimates and projections of a number of matters, all of which may
change from time to time. See "Stock Pricing."
11
Net earnings per share may decrease if we increase the number of shares issued
The number of shares to be issued in the conversion may increase as a
result of an increase in the estimated price range of up to 15.0% to reflect
changes in market and financial conditions following the commencement of the
subscription and community offerings. In the event that the estimated price
range so increases, we expect that First Deposit will sell up to 1,666,350
shares of common stock at $10.00 per share for an aggregate purchase price of up
to $16,663,500. An increase in the number of shares issued will decrease your
estimated net earnings per share and shareholders' equity per share and will
increase First Deposit's estimated consolidated shareholders' equity and net
earnings. Such an increase will also increase the purchase price as a percentage
of estimated equity per share and net earnings per share.
You may have to wait a considerable amount of time before you either receive
your common stock or have your subscription funds returned to you
Orders submitted in the subscription offering and community offering
are irrevocable. We expect to complete the conversion within the time periods
indicated in this prospectus. Nevertheless, it is possible that several factors,
including, but not limited to, a delay in receiving regulatory approval of the
final updated appraisal prepared by Ferguson & Company, a delay in processing
orders in the event the offering is oversubscribed or a delay caused by actions
taken in connection with the conversion could significantly delay the completion
of the conversion. You will have no access to subscription funds or shares of
common stock until the conversion is completed or terminated. In the event the
conversion is terminated, we will refund your subscription funds together with
interest at the rate equal to the interest rate we pay on regular passbook
accounts, or we will terminate your withdrawal authorization. See "The
Conversion."
The common stock's price and liquidity may suffer because there is no
established market for it
First Deposit has never issued capital stock, and there is no
established market for the common stock at this time. First Deposit anticipates
that its common stock will be listed on the OTC Bulletin Board. The trading
markets for securities quoted on the OTC Bulletin Board typically lack the
depth, liquidity and orderliness necessary to maintain an active market in the
trading of such securities. The absence or discontinuance of an active market
for the common stock may adversely impact both the price and liquidity of the
common stock. Trident Securities advised First Deposit that it will act as a
market maker for the common stock, but it is under no obligation to do so. It is
uncertain how many market makers will exist for the common stock, and an active
and liquid trading market for the common stock may not develop, or if developed,
may not continue. See "Market for the Common Stock."
Common stock issued in recent conversions such as ours has been subject to
substantial market price volatility
Due to possible investor perception of the market for common stock of
thrift institutions and other factors, First Deposit's common stock may trade at
or below the $10.00 per share initial offering price. These market fluctuations
may be unrelated to our operating performance. In certain recent cases, common
stock issued by recently converted financial institutions has traded at a price
below that which such shares were sold in the initial offerings of those
institutions. After First Deposit's shares begin trading, the marketplace will
determine their trading price. The marketplace may be influenced by many
factors, including prevailing interest rates, investor perceptions of First
Deposit and general industry and economic conditions.
12
Trident Securities has not given an opinion or recommendation that the common
stock is a good investment
We have engaged Trident Securities to consult with and advise us with
respect to the conversion and to assist, on a best-efforts basis, in connection
with the solicitation of subscriptions and purchase orders for shares of common
stock in the offering. Trident Securities has not prepared or delivered any
opinion or recommendation with respect to the suitability of the common stock as
an investment or the appropriateness of the amount of common stock to be issued
in the conversion.
We may be unable to upgrade our technology to match our competition
Our industry is experiencing rapid changes in technology.
Technology-driven products and services are frequently introduced. In addition
to improving customer services, using technology effectively increases
efficiency and enables financial institutions to reduce costs. Our future
success will thus depend partly on our ability to address our customers' needs
by using technology. Many of our competitors have far greater resources to
invest in technology than we have. We may not be able to develop new
technology-driven products and services effectively or be successful in
marketing these products to our customers.
Year 2000 data processing problems could interrupt and hurt our operations
Our operations are dependent on computers and computer systems, whether
maintained internally or by a third party. Systems not properly recognizing the
Year 2000 could produce faulty data or cause a system to fail. Such failures may
include, among other things, the inability to process and underwrite loan
applications, to credit deposits and debit withdrawals from customer accounts,
to credit loan payments or track delinquencies, to reconcile and record daily
activity properly or to engage in similar normal banking activities.
Additionally, if our commercial customers are not Year 2000 compliant and suffer
adverse effects on their operations as a result, their ability to meet their
obligations to us may be adversely affected. We and our customers or our third
party providers may not be successful in making all necessary changes to avoid
computer system failures related to the year 2000. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Year 2000
Issues."
Banking reform legislation significantly limiting the powers of unitary savings
and loan holding companies will negatively affect us
The U.S. Congress is considering legislation intended to modernize the
financial services industry. Under the proposed legislation, newly-formed
unitary savings and loan holding companies would not be permitted to exercise
the broad powers currently available to these companies. Douglas Federal is a
federal savings bank and First Deposit, upon completion of the conversion, will
be a unitary savings and loan holding company. Federal legislation may be
enacted that affects our federal savings bank charter or First Deposit's status
as a unitary savings and loan holding company. Accordingly, we cannot predict
what effect, if any, banking reform legislation would have on our activities and
operations.
13
STOCK PRICING
The plan of conversion provides that the aggregate purchase price of
the common stock must be consistent with the estimated consolidated pro forma
market value of Douglas Federal and First Deposit, as determined on the basis of
an independent valuation. We have retained Ferguson & Company to make such
valuation. For its services in making such appraisal, Ferguson & Company will
receive a fee of up to $25,000, excluding out-of-pocket expenses. We have agreed
to indemnify Ferguson & Company and its employees and affiliates against certain
losses arising out of its services as appraiser, except where Ferguson &
Company's liability results from its negligence, willful misconduct or bad
faith.
In preparing its appraisal, Ferguson & Company relied on the
information in this prospectus, including our consolidated financial statements.
Ferguson & Company also considered the following factors, among others:
. our present and projected operating results and financial
condition and the economic and demographic conditions in our
market area;
. historical, financial and other information;
. a comparative evaluation of our operating and financial
statistics with those of other similarly situated savings
institutions located in Georgia and other regions of the United
States;
. the aggregate size of the offering of common stock;
. the effect of the conversion on the net worth and earnings
potential of Douglas Federal and First Deposit; and
. the trading market for securities of comparable institutions and
general securities market conditions.
On the basis of the foregoing, Ferguson & Company has advised us that
in its opinion dated February 22, 1999, our estimated pro forma market value
ranged from a minimum of $10,710,000 to a maximum of $14,490,000, with a
midpoint of $12,600,000. First Deposit expects to sell between 1,071,000 and
1,449,000 shares of its common stock. We have reviewed the appraisal of Ferguson
& Company and in determining the reasonableness and adequacy of such appraisal
consistent with the regulations and policies of our federal regulators, have
reviewed the methodology and reasonableness of the assumptions utilized by
Ferguson & Company in the preparation of the appraisal. We may amend the
estimated price range with the approval of the Office of Thrift Supervision, if
subsequent developments in our financial condition or market conditions
generally necessitate an amendment. The $10.00 per share price for the common
stock was based on the consideration of a number of factors, including the
potential after-market liquidity of the stock and other marketing
considerations.
You should not construe the appraisal as a recommendation of any kind
regarding the advisability of purchasing common stock in the offering. Ferguson
& Company did not independently verify our consolidated financial statements and
other information we provided. Ferguson & Company did not independently value
our assets or liabilities. The appraisal considers us as a going concern and
should not be considered as an indication of our liquidation value. Moreover,
the appraisal is based
14
necessarily upon estimates and projections of a number of matters, all of which
may change. You may not be able to sell common stock at prices at or above the
purchase price following the offering. See "Risk Factors-- The common stock's
price and liquidity may suffer because there is no established market for it."
Following commencement of the subscription offering, the maximum of the
estimated price range may be increased up to 15.0% and the number of shares of
common stock to be sold in the conversion may be increased to 1,666,350 shares
due to regulatory considerations, changes in the market and general financial
and economic conditions, without the resolicitation of subscribers. See "The
Conversion-- Limitations on Stock Purchases" as to the method of distribution
and allocation of additional shares that First Deposit may issue in the event of
an increase in the estimated price range to fill unfilled orders in the
subscription offering.
If the pro forma market value of the common stock is either more than
15.0% above the maximum of the estimated price range or less than the minimum of
the estimated price range, we may terminate the plan of conversion and return
all funds promptly with interest at our regular passbook rate of interest on
payments made by check or money order. We also may extend or hold a new
subscription offering and/or community offering, establish a new estimated price
range, begin a resolicitation of subscribers or take such other actions as
permitted by the Office of Thrift Supervision in order to complete the
conversion. In the event we commence a resolicitation, we will promptly return
all funds to investors as described above unless we receive an affirmative
response within a reasonable period of time. A resolicitation, if any, following
the conclusion of the subscription offering would not exceed 45 days unless
further extended by the Office of Thrift Supervision for periods of up to 90
days not to extend beyond June 25, 2001.
No sale of shares of common stock may be consummated unless, before
such consummation, Ferguson & Company confirms to us and the Office of Thrift
Supervision that, to the best of its knowledge, nothing of a material nature has
occurred which, taking into account all relevant factors, would cause Ferguson &
Company to conclude that the aggregate value of the common stock at the purchase
price is incompatible with its estimate of the pro forma market value of the
common stock. Any change which would result in an aggregate purchase price which
is below $10,710,000 or more than 15.0% above $14,490,000 must be approved by
the Office of Thrift Supervision. If such confirmation is not received, we may
extend the conversion, extend, reopen or begin a new subscription offering or
community offering, establish a new estimated price range and begin a
resolicitation of all subscribers with the approval of the Office of Thrift
Supervision or take such other actions as permitted by the Office of Thrift
Supervision in order to complete the conversion, or terminate the plan and
cancel the subscription and community offerings.
Copies of Ferguson & Company's appraisal report, including any
amendments, are available for your review at our main office.
Our price to book value ratio will be 66.8%, assuming that 1,449,000
shares are sold in this offering. The $10 per share stock price is based on
market conditions generally and is not tied specifically to the price to book
value ratio. Most thrift conversions in recent months have been completed at $10
per share. In using the table below, the pro forma price to earnings ratios for
us should be compared to all of the groups. However, comparison of our pro forma
price to book ratio is most relevant to recent conversions. The comparative
group includes twelve publicly-traded thrifts with similar size and operating
characteristics. Two are from North Carolina, one is from West Virginia, one is
from New Mexico, and the other eight are from throughout the Midwest, the region
that contains the
15
most thrifts with comparable characteristics and size. The Georgia group
includes the four publicly-traded thrifts in Georgia. The Southeast group
includes the 33 publicly-traded thrifts located in the Southeast region. The
following information is offered to help you compare the common stock offered in
this offering to that of a comparative group of other thrift institutions on a
pro forma basis.
- ---------------------------------------------------------------------------------------------------------------------------
Market Value Price to Price to Tangible Book
(Dollars in Earnings Value
----------
Millions) Ratio(1) Ratio (%)
-------- ------- --------
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Douglas Federal Bank
- --------------------
- ---------------------------------------------------------------------------------------------------------------------------
Pro Forma Supermaximum........................... 16.66 18.1 70.7
- ---------------------------------------------------------------------------------------------------------------------------
Pro Forma Maximum................................ 14.49 16.3 66.8
- ---------------------------------------------------------------------------------------------------------------------------
Pro Forma Midpoint............................... 12.60 14.7 62.8
- ---------------------------------------------------------------------------------------------------------------------------
Pro Forma Minimum................................ 10.71 12.9 58.1
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Comparative Group
- -----------------
- ---------------------------------------------------------------------------------------------------------------------------
Averages......................................... 16.21 16.9 100.7
- ---------------------------------------------------------------------------------------------------------------------------
Medians.......................................... 15.71 15.7 93.5
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Georgia Public Thrifts
- ----------------------
- ---------------------------------------------------------------------------------------------------------------------------
Averages......................................... 120.20 15.5 192.7
- ---------------------------------------------------------------------------------------------------------------------------
Medians.......................................... 95.90 15.4 189.3
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Southeast Region Public Thrifts
- -------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Averages......................................... 76.26 16.5 129.3
- ---------------------------------------------------------------------------------------------------------------------------
Medians.......................................... 37.48 16.2 118.0
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
All Public Thrifts
- ------------------
- ---------------------------------------------------------------------------------------------------------------------------
Averages......................................... 284.70 16.1 134.9
- ---------------------------------------------------------------------------------------------------------------------------
Medians.......................................... 42.37 15.3 121.9
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Recent Thrift Conversions(2)
- -------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Averages......................................... 63.77 18.2 65.3
- ---------------------------------------------------------------------------------------------------------------------------
Medians.......................................... 60.31 15.3 66.4
- ---------------------------------------------------------------------------------------------------------------------------
(1) Pro forma price to earnings ratios shown above for First Deposit are
based on appraisal earnings, which factors out nonrecurring income and
expense.
(2) Recent thrift conversions are standard mutual to stock conversions of
thrift stock listed on major stock exchanges that were completed
between July 31, 1998 and February 22, 1999.
16
PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a prospectus at least 48 hours
before the expiration date in accordance with Rule 15c2-8 of the Securities
Exchange Act of 1934, we will not mail a prospectus any later than five days
before such date nor hand deliver any prospectus later than two days before such
date. Each eligible account holder, supplemental eligible account holder or
other member will receive a proxy and order form, regardless of whether two or
more eligible account holders, supplemental eligible account holders or other
members reside at the same address. Your execution of the stock order form will
confirm receipt or delivery in accordance with Rule 15c2-8. Each order form will
be preceded by or accompanied by a prospectus.
To purchase shares in the offering, we must physically receive an
executed stock order form and certification form with the required payment for
each share subscribed for, or with appropriate authorization for withdrawal from
your deposit account with us, which may be given by completing the appropriate
blanks in the stock order form, at any of our offices by 12:00 noon, Eastern
Time, on the expiration date, which date will not be less than 20 days after
First Deposit mails the order form.
We are not required to accept stock order forms we do not receive by
such time or which are executed defectively or which we receive without full
payment or appropriate withdrawal instructions, except in the case of
institutional investors in the community offering. In addition, we are not
obligated to accept orders submitted on photocopied or facsimiled stock order
forms. Once received, you may not modify, amend or rescind an executed stock
order form without our consent unless the conversion has not been completed
within 45 days after the end of the subscription offering, unless such period
has been extended.
To ensure that your subscription rights are properly identified, you
must list all qualifying deposit accounts and loans, as of the respective
qualifying dates on the stock order form. If you do not list all your qualifying
deposit accounts and loans, your order may be reduced or rejected.
In order to ensure that eligible account holders, supplemental eligible
account holders and other members are properly identified as to their stock
purchase priorities, depositors as of December 31, 1997 and/or as of March 31,
1999 and/or May 1, 1999 must list all accounts on the stock order form giving
all names in each account and the account number.
Payment for subscriptions may be made:
. in cash if delivered in person at any of our branch offices;
. by check or money order; or
. by authorization of withdrawal from deposit accounts
maintained with us, including a certificate of deposit.
We will not accept wire transfers in any account for stock purchases.
Third-party checks will not be accepted. We will pay interest on payments made
by cash, check or money order at our regular passbook rate of interest from the
date payment is received until the completion or termination of the conversion.
If you make payment by authorization of withdrawal from deposit accounts, the
funds authorized to be withdrawn from a deposit account will continue to accrue
interest at the contractual rates until completion or termination of the
conversion. We will place a hold on such funds to make them unavailable to the
depositor until completion or termination of the conversion.
17
If a subscriber authorizes us to withdraw the amount of the purchase
price from his or her deposit account, we will do so as of the effective date of
the conversion. We will waive any applicable penalties for early withdrawal from
certificate accounts. If the remaining balance in a certificate account is
reduced below the applicable minimum balance requirement at the time that the
funds actually are transferred under the authorization, the certificate will be
canceled at the time of the withdrawal, without penalty, and the remaining
balance will earn interest at our regular passbook rate.
If the employee stock ownership plan subscribes for shares during the
subscription offering, the employee stock ownership plan will not be required to
pay for the shares subscribed for at the time it subscribes, but rather, may pay
for such shares of common stock subscribed for at the purchase price upon
consummation of the subscription offering, if all shares are sold, or upon
consummation of the community offering if shares remain to be sold in such
offering.
Owners of self-directed individual retirement accounts and qualified
plans may use the assets of their individual retirement accounts and qualified
plans to purchase shares of common stock in the subscription offering and/or
community offering, provided that such individual retirement account funds are
first transferred to an independent trustee. Persons with self-directed
individual retirement accounts and qualified retirement plans maintained with us
must have their accounts transferred to an unaffiliated institution or broker to
purchase shares of common stock in the subscription offering and/or community
offering. In addition, federal regulations require that our officers and
directors who use self-directed individual retirement account funds and
qualified retirement plans to purchase shares of common stock in the
subscription offering and/or community offering, make such purchases for the
exclusive benefit of the individual retirement accounts and qualified plans.
Certificates representing shares of common stock purchased will be
mailed to purchasers at the address specified in properly completed stock order
forms, as soon as practicable following consummation of the sale of all shares
of common stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
18
SELECTED CONSOLIDATED FINANCIAL INFORMATION
AND OTHER DATA
We are providing the following financial information to aid you in your
analysis of financial aspects of the offering. The following summary of
consolidated financial information is derived from our audited consolidated
financial statements at the dates and for each of the fiscal years shown below.
The following information is only a summary and you should read it in
conjunction with our financial statements and the notes to our financial
statements, which you can find beginning on page F-1 of this prospectus.
Selected Financial Condition Data:
At December 31,
------------------
1998 1997 1996
------------------ ---------------- ---------------
(In thousands)
Total assets.................................................. $100,892 $91,600 $78,900
Loans receivable, net......................................... 83,189 74,049 68,609
Loans held for sale, at lower of cost or fair value........... 188 381 306
Cash and cash equivalents..................................... 7,557 5,663 2,207
Securities:
Available for sale............................. 3,707 2,666 713
Held to maturity............................... 1,042 4,374 4,505
Deposits...................................................... 85,686 75,877 69,454
Federal Home Loan Bank advances............................... 5,000 6,000 750
Total retained earnings....................................... 9,662 8,910 8,203
Selected Operating Data:
Year ended
December 31,
------------------
1998 1997 1996
------------------ ---------------- ---------------
(In thousands)
Total interest income......................................... $7,162 $ 6,687 $ 6,011
Total interest expense........................................ 4,226 3,783 3,276
------ ------- -------
Net interest income........................................... 2,936 2,904 2,735
Provision for loan losses..................................... 108 60 110
------ ------- -------
Net interest income after provision for loan losses........... 2,828 2,844 2,625
Other income.................................................. 764 412 660
Operating expenses............................................ 2,408 2,221 2,412(1)
Income before income taxes.................................... 1,184 1,035 873
Income taxes.................................................. 405 386 315
------ ------- -------
Net income.................................................... $ 779 $ 649 $ 558
====== ======= =======
(1) Includes a one-time assessment of $396,910 in 1996 to recapitalize the
Savings Association Insurance Fund.
19
Selected Financial Ratios:
At or for the Year Ended December 31,
----------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
Performance Ratios:
Return on average assets(1)...................................... 0.81% 0.75% 0.74%
Return on average retained earnings(2)........................... 8.43 7.54 7.03
Interest rate spread(3).......................................... 2.67 2.86 3.35
Net interest margin(4)........................................... 3.21 3.41 3.54
Ratio of average interest-earning assets to
average interest-bearing liabilities....................... 111.79 112.44 108.00
Ratio of operating expenses to average
total assets............................................... 2.52 2.55 3.13
Asset Quality Ratios:
Nonperforming assets to total assets at
end of period.............................................. 1.20 1.57 1.35
Nonperforming loans to total loans at
end of period.............................................. 1.16 1.44 1.17
Allowance for loan losses to net loans
at end of period........................................... 1.18 1.15 1.12
Allowance for loan losses to
nonperforming loans at end of period....................... 101.73 80.00 96.14
Net recoveries (charge-offs) to average
loans outstanding.......................................... 0.03 0.03 (.15)
Capital Ratios:
Retained earnings to total assets at end of period............... 9.58 9.73 10.40
Average retained earnings to average assets...................... 9.66 9.91 10.51
At December 31,
--------------
1998 1997 1996
-------------- ----------------- -----------------
Selected Other Data:
Loans outstanding................................................ 1,729 1,714 1,793
Deposit accounts................................................. 8,598 8,507 8,439
Offices open..................................................... 2 2 2
__________________
(1) Net income divided by average total assets.
(2) Net income divided by average retained earnings.
(3) Combined weighted average interest rate earned less combined weighted
average interest rate cost.
(4) Net interest income divided by average interest-earning assets.
20
SUMMARY OF RECENT DEVELOPMENTS
The following selected financial and operating data presented below at
March 31, 1999 and for the three month periods ended March 31, 1999 and 1998 are
derived from unaudited financial data, but, in the opinion of management reflect
all adjustments (consisting of only recurring adjustments) which are necessary
to present fairly the results for such interim periods. The results of
operations for the three months ended March 31, 1999 are not necessarily
indicative of the results of operations that may be expected for the year ended
December 31, 1999.
At At
March 31, December 31,
1999 1998
---- ----
(Unaudited)
(In Thousands)
Selected Financial Data:
Total assets.......................................... $100,555 $100,892
Loans receivable, net................................. 84,855 83,377
Securities available for sale......................... 3,353 3,707
Securities held to maturity........................... 998 1,042
Deposits.............................................. 85,571 85,686
Federal Home Loan Bank advances....................... 5,000 5,000
Total retained earnings............................... 9,838 9,662
For the Three Months
Ended March 31,
1999 1998
---- ----
(Unaudited)
(In Thousands)
Selected Operating Data:
Total interest income................................. $ 1,814 $ 1,731
Total interest expense................................ 1,054 1,011
----- -----
Net interest income.......................... 760 720
Provision for loan losses............................. 15 15
----- -----
Net interest income after
provision for loan losses................... 745 705
Total noninterest income.............................. 102 86
Total noninterest expense............................. 591 541
----- -----
Income before income tax..................... 256 250
Provision for income tax.............................. 81 99
----- -----
Net income................................... $ 175 $ 151
======== ========
21
At or For the
Three Months Ended
March 31,
--------------------------------
1998 1999
--------------- ----------------
Key Financial Ratios (1):
Performance Ratios: % %
Return on average assets(2)..................................................... 0.71 0.67
Return on average equity(3)..................................................... 7.14 6.66
Interest rate spread(4)......................................................... 3.29 3.26
Net interest margin(5).......................................................... 3.34 3.42
Noninterest expense as a percent of average assets.............................. 2.39 2.41
Average interest-bearing assets to interest-bearing liabilities................. 100.89 103.27
Capital Ratios:
Tangible........................................................................ 8.05 8.16
Core............................................................................ 8.05 8.16
Risk-based...................................................................... 15.36 15.49
Average equity as a percent of average assets................................... 9.96 10.10
Asset Quality Ratios:
Nonperforming loans as a percent of loans receivable, net(6).................... 1.04 1.46
Nonperforming assets as a percent of total assets(7)............................ 0.96 1.54
Allowance for loan losses as a percent of gross loans receivable................ 1.18 1.14
Allowance for loan losses as a percent of nonperforming loans................... 115.14 78.93
Net charge-offs as a percent of average outstanding loans....................... - -
__________________________
(1) Annualized where appropriate.
(2) Net income divided by average assets.
(3) Net income divided by average equity.
(4) Difference between average yield on interest-earning assets and average
cost of interest-bearing liabilities.
(5) Net interest income as a percentage of average-earning assets.
(6) Nonperforming loans consist of loans accounted for on a nonaccrual basis.
(7) Nonperforming assets consist of nonaccrual loans.
Regulatory Capital
The table below sets forth our capital position relative to its Office of
Thrift Supervision capital requirements at the date indicated. For a discussion
of our regulatory capital requirements, see "Regulation and Supervision- Federal
Regulation of Savings Institutions-Capital Requirements ."
22
At March 31, 1999
--------------------------------
Percent of
Adjusted Total
Amount(1) Assets
--------------- -------------
(Dollars in thousands)
Tangible capital............................................................... 7,945 8.05
Tangible capital requirement................................................... 1,480 1.50
--------------- -------------
Excess......................................................................... 6,465 6.55
Core capital................................................................... 7,945 8.05
Core capital requirement(2).................................................... 2,960 3.00
---------------- -------------
Excess......................................................................... 4,985 5.05
Risk-based capital(3).......................................................... 8,653 15.36
Risk-based capital requirement(3).............................................. 4,506 8.00
---------------- -------------
Excess......................................................................... 4,147 7.36
- ------------------------------
(1) Based on total tangible assets of $98.66 million for purposes of the
tangible capital requirement and the core capital requirement, and on risk-
weighted assets of $56.32 million for purposes of the risk-based capital
requirement.
(2) The current Office of Thrift Supervision core capital requirement for
savings associations is 3% of total adjusted assets.
(3) Supervision has proposed core capital requirements that would require
a core capital ratio of 3% of total adjusted assets for thrifts that receive the
highest supervisory rating for safety and soundness and a core capital ratio of
4% to 5% for all other thrifts.
(3) Percentage represents total core and supplementary capital divided by
total risk-weighted assets.
Nonperforming Assets and Delinquencies
At March 31, 1999, we had $879,000 of loans accounted for on a nonaccrual
basis, compared to $983,000 at December 31, 1998. Nonaccrual loans at March 31,
1999 consisted of $444,000 in residential real estate loans and $435,000 in
commercial real estate loans. At March 31, 1999, we had no accruing loans
contractually past due 90 days or more, no restructured loans and $90,000 of
foreclosed real estate.
The allowance for loan loss was $1,012,000 at March 31, 1999. There
were $5,000 in charge-offs and $3,000 in recoveries for the three months ended
March 31, 1999, compared to no charge-offs and $11,000 in recoveries for the
three months ended March 31, 1998.
The following table sets forth the breakdown of the allowance for loan losses by
category at March 31, 1999:
Percent of
Allowance to Total
Amount Allowance
------ ---------
(Dollars in thousands)
Real Estate Mortgage Loans:
One- to four-family(1) $ 633 62.55%
Commercial real estate 169 16.70
Construction and development 118 11.66
Land and land development 36 3.56
Consumer loans 56 5.53
Total allowance $1,012 100.00%
======= ========
Comparison of Financial Condition at March 31, 1999 and December 31, 1998
23
At March 31, 1999, total assets were $100.6 million compared to $100.9
million at December 31, 1998. Loans receivable, net increased to $84.9 million
at March 31, 1999, from $83.4 million at December 31, 1999. Securities available
for sale decreased as a result of maturities and prepayments exceeding
purchases. At March 31, 1999, deposits were $85.6 million compared to $85.7
million at December 31, 1998. Total retained earnings increased to $9.8 million
at March 31, 1999 from $9.6 million at December 31, 1998. The slight decrease in
total assets and total deposits is not attributable to any specific trend or
item.
Comparison of Operating Results for the Three Months ended March 31, 1999 and
1998
Net Income. Net income was $175,000 in the 1999 quarter compared to
$151,000 in the 1998 quarter. This increase is primarily the result of an
increase in interest-earning assets.
Net Interest Income. Net interest income was $760,000 in the 1999 quarter
compared to $720,000 in the 19 98 quarter. This increase is primarily the result
of a lower cost of funds for the 1999 quarter.
Provision for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in our loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses on loans which are deemed probable and estimable based on
information currently known to management. The allowance is based upon a number
of factors, including economic conditions, actual loss experience and industry
trends. The provision for loan losses for both quarters was $15,000. Management
deemed such allowance as adequate at both dates. The provision for loan losses
was $108,000 for the year ended December 31, 1998. We will continue to monitor
and modify our allowances for loan losses as conditions dictate. While
management believes our allowance for loan losses is sufficient to cover losses
inherent in our loan portfolio at this time, no assurances can be given that our
level of allowance for loan losses will be sufficient to cover loan losses
incurred by us or that future adjustments to the allowance for loan losses will
not be necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the allowance for loan losses.
Noninterest Income. Noninterest income increased from $86,000 in the
1998 quarter to $102,000 in the 1999 quarter, primarily as a result of increased
service charge income.
Noninterest Expense. Noninterest expense increased from $541,000 in the
1998 quarter to $591,000 in the 1999 quarter. This increase is not attributable
to any one item, but represents normal increases in other expenses.
24
PROPOSED MANAGEMENT PURCHASES
The following table indicates the approximate purchases of common stock
by each director and executive officer and their associates. The table does not
include purchases of common stock by the employee stock ownership plan. The
table assumes that 1,449,000 shares of the common stock, the maximum of the
estimated valuation range, will be sold at $10.00 per share and that sufficient
shares will be available to satisfy subscriptions in all categories.
Aggregate
Purchase
Percent Price of
Total of Total Proposed
Name and Position with First Deposit Shares Outstanding Purchases
- --------------------------------------------------------- ------ ----------- ---------
Danny A. Belyeu, Chairman of the Board (3)............... 70,000 4.8% $700,000
Alpha A. Fowler, Jr., Vice Chairman of the Board (2).... 35,000 2.4 350,000
J. David Higgins, President, Chief Executive Officer
and Treasurer (3)........................................ 50,000 3.4 500,000
John L. King, Senior Vice President and Chief Financial
Officer.................................................. 25,000 1.7 250,000
Patricia Owen, Vice President and Secretary.............. 10,000 * 100,000
Michael Coggin, Vice President (1)....................... 25,000 1.7 250,000
Mac C. Abercrombie, Jr., Director(3)..................... 40,000 2.8 400,000
Carlton H. Boyd, Director................................ 20,000 1.4 200,000
Joseph H. Fowler, Director (2)........................... 35,000 2.4 350,000
John B. Zellars, Director(3)............................. 70,000 4.8 700,000
------- ----- ----------
All directors and executive officers, as a group (10
persons) and their associates............................ 380,000 26.2% $3,800,000
======= ===== ==========
* Less than 1.0%
(1) Mr. Coggin is the Vice President of Douglas Federal but is not an
officer of First Deposit.
(2) Alpha A. Fowler, Jr. is the father of Joseph H. Fowler
(3) Includes the person named and his associates.
25
USE OF PROCEEDS
The following table presents the estimated net proceeds of the
offering, the amount to be retained by First Deposit, the amount to be
contributed to us, and the amount of First Deposit's loan to the employee stock
ownership plan. See "Pro Forma Data" for the assumptions used to arrive at these
amounts. The Office of Thrift Supervision must approve the issuance of more than
1,449,000 shares in the conversion.
1,071,000 1,260,000 1,449,000 1,666,350
Shares at Shares at Shares at Shares at
$10.00 $10.00 $10.00 $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In thousands)
Gross proceeds...................................... $ 10,710 $ 12,600 $14,490 $ 16,664
Less: estimated underwriting commissions and other
offering expenses................................... (655) (684) (713) (746)
-------- -------- -------- --------
Net proceeds........................................ $ 10,055 $ 11,916 $13,777 $ 15,918
======== ======== ======== ========
Net proceeds to be retained by First Deposit........ $ 5,028 $ 5,958 $ 6,889 $ 7,959
Net proceeds to be contributed to Douglas Federal... $ 5,027 $ 5,958 $ 6,888 $ 7,959
Amount of loan by First Deposit to employee stock
ownership plan...................................... $ 857 $ 1,008 $ 1,159 $ 1,333
First Deposit has received conditional Office of Thrift Supervision
approval to purchase all of our capital stock to be used in the conversion in
exchange for 50.0% of the net proceeds of the stock offering. The portion of net
proceeds we receive from First Deposit will be added to our general funds to
permit us to expand our lending and investment activities and to enhance
customer services. We currently intend to utilize the net proceeds we receive
for general corporate purposes, including investment in loans and securities, as
well as the possible construction of a new main office and the possible
expansion of our facilities and operations through marketing, business
development, or the acquisition or establishment of branch offices. We have no
current arrangements, understandings or agreements regarding any of these
possible transactions. We anticipate that we will initially invest the net
proceeds we receive in overnight funds and short-term investments with
maturities of up to three years. To the extent that the stock-based benefit
programs that we intend to adopt after the conversion are not funded with First
Deposit's authorized but unissued common stock, First Deposit may use net
proceeds from conversion to fund the purchase of stock on the open market to be
awarded under these stock benefit programs. We have not yet determined the
approximate amount of net proceeds to be used for any of the purposes mentioned
above. See "Management of Douglas Federal -- Benefit Plans."
Our capital position substantially exceeds all regulatory requirements.
Our primary purpose in converting is not to raise capital. Rather, one of the
principal purposes for the conversion is to change our structure to the stock
form used in the United States by all commercial banks, most major business
corporations and most savings institutions.
First Deposit intends to loan the employee stock ownership plan the
amount necessary to purchase 8.0% of the shares sold in the conversion.
Accordingly, the employee stock ownership plan purchases would range between
85,680 shares at the minimum of the offering range and 115,920 shares at the
maximum of the offering range. At the midpoint of the offering range, the
employee stock ownership plan would purchase 100,800 shares. It is anticipated
that the employee stock ownership plan loan will have a 10-year term with
interest payable at the prime rate as published in The Wall Street Journal on
the closing date of the conversion. The loan will be repaid principally from our
contributions to the employee stock ownership plan and from any dividends paid
on shares of common stock held by the employee stock ownership plan.
26
Ultimately, First Deposit may also use the net proceeds it retains to
support the future expansion of operations through branch acquisitions, the
establishment of branch offices, the acquisition of savings associations and
commercial banks or their assets or diversification into other banking related
businesses. We have no current arrangements, understandings or agreements
regarding any such transactions. First Deposit may also use a portion of the net
proceeds it retains to engage in real estate development activities in its
market area. Upon the conversion, First Deposit will be a unitary savings and
loan holding company and will not be restricted in the types of business
activities in which it may engage. See "Regulation and Supervision -- Holding
Company Regulations" for a description of certain regulations applicable to
First Deposit. First Deposit may also determine to pay dividends, repurchase
common stock and fund the restricted stock program. See "Dividend Policy."
In addition, under current policies, the Office of Thrift Supervision
may allow repurchases in the first year following conversion and in amounts
greater than 5.0% in the second and third years following conversion if there
are valid and compelling business reasons for such repurchases.
Based upon facts and circumstances following the conversion and in
compliance with applicable regulatory requirements, First Deposit's Board of
Directors may repurchase stock in the future. Such facts and circumstances may
include but not be limited to:
. economic factors such as the price at which the common stock is trading
in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk
involved in the investment, the ability to increase the book value
and/or earnings per share of the remaining outstanding shares, and the
opportunity to improve First Deposit's return on equity;
. the avoidance of dilution to shareholders by not having to issue
additional shares to cover the exercise of stock options or to fund
employee stock benefit plans; and
. any other circumstances in which repurchases would be in our best
interest or the best interest of our shareholders.
In the event First Deposit repurchases stock, such repurchases may be
made at market prices which may be in excess of the purchase price in the
conversion and in excess of the per share book value. To the extent that First
Deposit repurchases stock at market prices in excess of the per share book
value, such repurchases may have a dilutive effect upon the interests of
existing shareholders. Any stock repurchases will be subject to the Board of
Directors' determination that we will be capitalized in excess of all applicable
regulatory requirements after any such repurchases and that such capital will be
adequate, taking into account, among other things, the level of non-performing
and other risk assets, our current and projected results of operations and
assets/liability structure, the economic environment, tax and other
considerations. See "The Conversion -- Restrictions on Purchase or Transfer of
Shares after Conversion."
DIVIDEND POLICY
The payment of cash dividends on the common stock will be subject to
the requirements of applicable law. In addition, the Board of Directors will
determine whether to pay dividends. The Board will take into account, among
other things, First Deposit's net income, capital and financial condition,
27
industry trends and general economic conditions. First Deposit intends to
establish a quarterly cash dividend in the first quarter following the
conversion. The amount of such dividend will be determined by First Deposit at a
later time and will be limited by applicable state law. Assuming that (i) First
Deposit sells 1,449,000 shares in the conversion; (ii) the net proceeds are
allocated as described in "Use of Proceeds"; and (iii) First Deposit has no
significant outstanding liabilities or debts at the time of the dividend, the
maximum annual dividend First Deposit could pay following the conversion would
be approximately $3.94 per share. This dollar amount is a maximum amount and
First Deposit does not intend to adopt a dividend policy of this magnitude. In
addition, from time to time, in an effort to manage capital to a reasonable
level, the Board may pay periodic special cash dividends. Periodic special cash
dividends, if paid, may be paid in addition to, or in lieu of, regular cash
dividends. Regular cash dividends or periodic special cash dividends may not be
paid or, if paid, may not continue to be paid.
Douglas Federal will not be permitted to pay dividends to First Deposit
on our capital stock if our shareholders' equity would be reduced below the
amount required for the liquidation account. See "The Conversion--Liquidation
Rights." For information concerning applicable federal regulations in
determining the amount of proceeds which First Deposit may retain and regarding
a savings institution's ability to make capital distributions, including payment
of dividends to its holding company, see "Regulation and Supervision -- Federal
Savings Institution Regulation--Limitation on Capital Distributions."
First Deposit and Douglas Federal have committed to the Office of
Thrift Supervision that during the one year period following the conversion,
First Deposit will not take any action to further the payment of an
extraordinary dividend to shareholders that would be treated by recipients as a
tax-free return of capital for federal income tax purposes.
First Deposit's payment of dividends to its shareholders is not
controlled by federal regulatory restrictions. The source of dividends will
depend on the net proceeds First Deposit retains and earnings on such proceeds
and may be dependent, in part, upon dividends from us. First Deposit is subject,
however, to the requirements of Georgia law. Georgia law generally permits a
Georgia corporation to make distributions to its shareholders unless, after
giving effect to the distribution, the corporation would not be able to pay its
debts as they become due in the usual course of business, or the corporation's
total assets would be less than the sum of its total liabilities plus the amount
that would be needed, if the corporation were to dissolve at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution.
28
MARKET FOR THE COMMON STOCK
First Deposit has never issued capital stock to the public.
Consequently, there is no established market for the common stock. We anticipate
that the common stock will be quoted on the OTC Bulletin Board operated by the
National Association of Securities Dealers, Inc. under the symbol "FDBI."
Trident Securities has advised us that it will act as a market maker for the
common stock, and we expect to identify additional market makers. Making a
market includes maintaining bid and ask quotations and being able, as principal,
to effect transactions in reasonable quantities at those quoted prices, subject
to various securities laws and other regulatory requirements. It is impossible
to ascertain whether other broker-dealers will make a market in the common
stock. The development of a liquid public market depends on the existence of
willing buyers and sellers. The presence of willing buyers and sellers is not
within our control nor assured by inclusion of the common stock in the OTC
Bulletin Board. The number of active buyers and sellers of the common stock at
any particular time may be limited. You could have difficulty disposing of your
shares and should view the common stock as a long-term investment. We cannot
assure you that an active and liquid trading market for the common stock will
develop, or, if developed, will continue. You may not be able to sell your
shares at or above the $10.00 purchase price.
29
CAPITALIZATION
The following table sets forth our historical capitalization, including
deposits, at December 31, 1998, and our estimated consolidated capitalization
assuming the sale of the common stock in the offering based upon the assumptions
in the section entitled "Pro Forma Data" and below. We may not consummate the
conversion without a resolicitation of subscribers and other purchasers if the
aggregate purchase price of the common stock sold in the conversion is more than
1,666,350 shares or less than 1,071,000 shares. The issuance of 1,666,350 shares
would require the approval of the Office of Thrift Supervision. A change in the
number of shares to be issued in the conversion may materially affect First
Deposit's estimated capitalization. See "Pro Forma Data."
Pro Forma Consolidated Capitalization of
First Deposit Based on the Sale of
-----------------------------------------
1,071,000 1,260,000 1,449,000 1,666,350
Capitalization Shares Shares Shares Shares
of Douglas at $10.00 at $10.00 at $10.00 at $10.00
Federal Per Share Per Share Per Share Per Share
--------- ----------- ----------- ----------- -----------
(In thousands)
Deposits(1).............................. $ 85,686 $ 85,686 $ 85,686 $ 85,686 $ 85,686
Federal Home Loan Board advances......... 5,000 5,000 5,000 5,000 5,000
-------- -------- -------- -------- --------
Total deposits and borrowed funds....... $ 90,686 $ 90,686 $ 90,686 $ 90,686 $ 90,686
======== ======== ======== ======== ========
Capital stock(2)
Preferred stock, no par value per share:
authorized - 10,000,000 shares;
assumed outstanding - none............ $ - $ - $ - $ - $ -
Common stock, no par value per share:
authorized - 10,000,000 shares; shares
to be outstanding - as shown.......... - - - - -
Paid-in capital(2)....................... - $ 10,055 $ 11,916 $ 13,777 $ 15,918
Less: common stock acquired by employee
stock ownership plan(3).......... - (857) (1,008) (1,159) (1,333)
common stock acquired by restricted
stock program(4).................. - (428) (504) (580) (667)
Retained earnings(5)..................... 9,632 9,632 9,632 9,632 9,632
Accumulated other comprehensive
income.................................. 30 30 30 30 30
-------- -------- -------- -------- --------
Total shareholders' equity............. $ 9,662 $ 18,432 $ 20,066 $ 21,700 $ 23,580
======== ======== ======== ======== ========
(1) Withdrawals from savings accounts for the purchase of stock have not been
reflected in these adjustments. Any withdrawals will reduce estimated
capitalization by the amount of such withdrawals.
(2) Based upon the estimated net proceeds from the sale of capital stock.
Estimated offering expenses are $655,000; $684,000; $713,000; and $746,000
at the minimum, midpoint, maximum and maximum, as adjusted, of the
estimated valuation range. Does not reflect additional shares of common
stock that possibly could be purchased by participants in the stock option
plan, if implemented, under which directors, executive officers and other
employees could be granted options to purchase an aggregate of up to 10.0%
of the shares of common stock issued in the conversion at exercise prices
equal to the market price of the common stock on the date of grant.
Implementation of the stock option plan within one year after the
conversion will require regulatory and shareholder approval. See
"Management of Douglas Federal --Benefit Plans -- Stock Option Plan."
(3) Assumes 8.0% of the shares of common stock to be sold in the offering are
purchased by the employee stock ownership plan and that the funds used to
purchase such shares are borrowed from First Deposit. See "Pro Forma Data"
for additional details.
(4) Assumes that a number of shares equal to 4.0% of the number of shares sold
in the offering will be acquired in the open market at the purchase price
per share $10.00 for the restricted stock program following implementation
of such program. If the restricted stock program were funded by authorized
but unissued shares, your interests would be diluted by approximately 4.0%.
Implementation of the restricted stock program within one year of the
conversion would require regulatory and shareholder approval at a meeting
of our shareholders to be held no earlier than six months after the
conversion. See "Management of Douglas Federal -- Benefit Plans --
Restricted Stock Program."
30
(5) Our retained earnings are substantially restricted. All of our capital
distributions must comply with regulatory restrictions tied to our
regulatory capital level. In addition, after the conversion, we will be
prohibited from paying any dividend that would reduce our regulatory
capital below the amount in the liquidation account to be provided for the
benefit of our eligible account holders and supplemental eligible account
holders at the time of the conversion and adjusted downward after the
conversion. See "Regulation and Supervision -- Federal Savings Institution
Regulation --Limitations on Capital Distributions."
31
REGULATORY CAPITAL COMPLIANCE
At December 31, 1998, we exceeded all regulatory capital requirements.
The following is a summary of our compliance with the Office of Thrift
Supervision capital standards as of December 31, 1998, on a historical and
estimated basis assuming that the indicated number of shares were sold as of
December 31, 1998 and that we receive 50.0% of the net proceeds. For purposes of
the table below, the amount the employee stock ownership plan expects to borrow
and the cost of the shares the restricted stock program expects to acquire are
deducted from our estimated regulatory capital.
32
Our Historical Capital
at December 31, 1998 Our Pro Forma Capital as of December 31, 1998 Based on the Sale of (3):
---------------------- ------------------------------------------------------------------------
1,071,000 Shares 1,260,000 Shares
at $10.00 at $10.00
Per Share Per Share
--------- ---------
% of % of
Amount Assets(2) Amount Assets(2) Amount
------ ----- ------ ------ ------
Capital under generally
accepted accounting
principles....................... $9,662 9.58% $13,404 12.81% $14,108
====== ======= =======
Tangible Capital:
Capital Level................. $7,804 7.88% $11,546 11.23% $12,250
Requirement(4)............ 1,485 1.50 1,542 1.50 1,552
------ ----- ------- ----- -------
Excess.................... $6,319 6.38% $10,004 9.73% $10,698
====== ===== ======= ===== =======
Core Capital:
Capital Level(5)(7).............. $7,804 7.88% $11,546 11.23% $12,250
Requirement(4)................... 2,971 3.00 3,083 3.00 3,104
------ ----- ------- ------ -------
Excess.................... $4,833 4.88% $ 8,463 8.23% $ 9,146
====== ===== ======= ====== =======
Risk-Based Capital(6):
Capital Level(5)(7)......... $8,513 15.08% $12,255 20.92% $12,959
Requirement(4).............. 4,515 8.00 4,686 8.00 4,718
------ ----- ------- ----- -------
Excess...................... $3,998 7.08% $ 7,569 12.92% $ 8,241
====== ===== ======= ===== =======
1,449,000 Shares 1,666,350 Shares
at $10.00 at $10.00
Per Share Per Share (1)
---------- --------------
% of % of % of
Assets(2) Amount Assets(2) Amount Assets(2)
------ ------ ------ ------ ------
Capital under generally accepted
accounting principles............ 13.39% $14,812 13.97% $15,621 14.62%
======= =======
Tangible Capital:
Capital Level................. 11.84% $12,954 12.43% $13,763 13.11%
Requirement(4)............ 1.50 1,563 1.50 1,575 1.50
----- ------- ----- ------- -----
Excess.................... 10.34% $11,391 10.93% $12,188 11.61%
======= ===== ======= =====
Core Capital:
Capital Level(5)(7).............. 11.84% $12,954 12.43% $13,763 13.11%
Requirement(4)................... 3.00 3,125 3.00 3,150 3.00
----- ------- ----- ------- -----
Excess.................... 8.84% $ 9,829 9.43% $10,613 10.11%
===== ======= ===== ======= =====
Risk-Based Capital(6):
Capital Level(5)(7)......... 21.97% $13,663 23.01% $14,472 24.19%
Requirement(4).............. 8.00 4,750 8.00 4,787 8.00
----- ------- ----- ------- -----
Excess...................... 13.97% $ 8,913 15.01% $ 9,685 16.19%
===== ======= ===== ======= =====
(1) Adjusted to give effect to an increase in the number of shares sold to
1,666,350 as a result of changes in market or general financial or
economic conditions following the commencement of the subscription and
community offerings.
(2) Tangible capital levels are shown as a percentage of total adjusted
assets of $99.0 million. Core capital levels are shown as a percentage
of total adjusted assets of $99.0 million. Risk-based capital levels
are calculated on the basis of a percentage of risk-weighted assets of
$56.4 million.
(3) Pro forma capital levels assume our receipt of 50.0% of the net
proceeds from the shares of common stock sold at the minimum, midpoint
and maximum of the estimated price range. These levels also assume
funding by us of the restricted stock program equal to 4.0% of the
common stock issued and repayment of First Deposit's loan to the
employee stock ownership plan to enable the employee stock ownership
plan to purchase 8.0% of the common stock issued valued at the minimum,
midpoint and maximum of the estimated price range. See "Management of
Douglas Federal -- Benefit Plans" for a discussion of the restricted
stock program and employee stock ownership plan.
(4) The current Office of Thrift Supervision core capital requirement for
savings associations is 3.0% of total adjusted assets. The Office of
Thrift Supervision has proposed core capital requirements which would
require a core capital ratio of 3.0% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and that are not experiencing or anticipating significant
growth, and a 4.0% to 5.0% core capital ratio requirement for all other
thrifts. See "Regulation and Supervision -- Federal Savings Institution
Regulations -- Capital Requirements." First Deposit will not be subject
to regulatory capital requirements.
(5) Assumes net proceeds are invested in assets that carry a risk-weighting
of 57.0%, the average risk-weighting of our assets as of December 31,
1998.
(6) Historical risk-based capital is comprised of tangible capital of $7.8
million plus our general valuation allowance of $709,000 at December
31, 1998.
(7) The difference between capital under generally accepted accounting
principles and risk-based capital is attributable to our investment in
Pinehurst Properties, LLC. See "Business of Douglas Federal --
Subsidiary."
33
PRO FORMA DATA
We cannot determine the actual net proceeds from the sale of the common
stock until the conversion is completed. However, we currently estimate
investable net proceeds to be between $8,770,000 and $13,918,000 at the minimum
and maximum, as adjusted, of the estimated valuation range. Our estimate of the
investible net proceeds assume that:
. First Deposit will sell 100% of the shares of common stock in the
subscription and community offerings;
. First Deposit will sell 8.0% of the shares to the employee stock
ownership plan and 380,000 shares will be sold to our directors
and officers, our associates and to our employees, for which
commissions will not be paid; and
. other conversion expenses, not including the fixed management fee
and sales commissions by Trident Securities, will be
approximately $427,500, regardless of the number of shares sold.
The following table sets forth our historical net earnings and
shareholders' equity before the conversion and our estimated consolidated net
income and shareholders' equity following the conversion. These estimates assume
that:
. the common stock to be issued in the conversion was sold at
January 1, 1998;
. the estimated net proceeds were invested at 4.6%, which was
approximately equal to the one-year U.S. Treasury bill rate at
December 31, 1998 (while Office of Thrift Supervision regulations
provide for the use of a yield representing the arithmetic
average of the average yield on our interest-earning assets and
the average cost of deposits, we believe that the use of the one-
year U.S. Treasury bill rate is more relevant in the current
interest-rate environment);
. First Deposit will be taxed at an effective state and federal
income tax rate of 34.0%; and
. a number of shares of common stock equal to 4.0% of the common
stock to be sold in the conversion will be purchased by the
restricted stock program in the open market following the
conversion.
Because we rely on the assumptions outlined above, shareholders'
equity and related data presented below do not represent the fair market value
of the common stock, the current value of assets or liabilities, or the amounts,
if any, that would be available for distribution to the shareholders in the
event of liquidation. In addition, the estimated income and related data are not
indicative of our actual results of operations for any current or future period.
The data presented below may be materially affected by a change in the number of
shares to be issued in the conversion and other factors. See "The Conversion --
Number of Shares to Be Issued."
34
At or for the Year Ended December 31, 1998
------------------------------------------------------
1,071,000 1,260,000 1,449,000 1,666,350
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In thousands, except share amounts)
Gross offering proceeds......................................... $10,710 $12,600 $14,490 $16,664
Less estimated offering expenses................................ (655) (684) (713) (746)
-------- -------- -------- -------
Estimated net offering proceeds............................. 10,055 11,916 13,777 15,918
Less: Common stock acquired by employee stock
ownership plan........................................... (857) (1,008) (1,159) (1,333)
Common stock to be acquired by restricted stock
program.................................................. (428) (504) (580) (667)
-------- -------- -------- -------
Estimated net proceeds as adjusted.......................... $8,770 $10,404 $12,038 $13,918
======== ======== ======== =======
Consolidated net income:
Historical.................................................. 780 780 780 780
Pro forma earnings on investable net proceeds............... 266 316 365 423
Less: Pro forma employee stock ownership plan
adjustment(1)......................................... (57) (67) (77) (88)
Pro forma restricted stock program adjustment(2)............ (56) (66) (76) (88)
-------- -------- -------- -------
Pro forma net earnings................................... $933 $963 $992 $ 1,027
======== ======== ======== =======
Net earnings per share:
Historical.................................................. 0.81 0.69 0.60 0.52
Pro forma earnings on investable net proceeds............... 0.28 0.28 0.28 0.29
Less: Pro forma employee stock ownership plan
adjustment(1)...................................... (0.06) (0.06) (0.06) (0.06)
Pro forma restricted stock program adjustment(2)............ (0.06) (0.06) (0.06) (0.06)
-------- -------- -------- -------
Pro forma net earnings per share......................... $0.97 $0.85 $0.76 $0.69
======== ======== ======== =======
Number of shares outstanding for earnings per share
calculations(1)............................................. 959,616 1,128,960 1,298,304 1,493,050
Shareholders' equity (book value (3)):
Historical.................................................. 9,662 9,662 9,662 9,662
Estimated net proceeds(2)(4)................................ 10,055 11,916 13,777 15,918
Less: Common stock acquired by employee stock
ownership plan(1)..................................... (857) (1,008) (1,159) (1,333)
Common stock acquired by restricted stock
program(2)............................................ (428) (504) (580) (667)
-------- -------- -------- -------
Pro forma shareholders' equity per share................. $18,431 $20,066 $21,701 $23,580
======== ======== ======== =======
Shareholders' equity per share (3):
Historical.................................................. 9.02 7.67 6.67 5.80
Estimated net proceeds(2)(4)................................ 9.39 9.46 9.51 9.55
Less: Common stock acquired by employee stock
ownership plan(1)..................................... (0.80) (0.80) (0.80) (0.80)
Common stock acquired by restricted stock
program(2)............................................ (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- -------
Pro forma shareholders' equity per share................. $17.21 $15.93 $14.98 $14.15
======== ======== ======== =======
Offering price as a percentage of pro forma
shareholders' equity per share.............................. 58.1% 62.8% 66.8% 70.7%
Ratio of offering price to pro forma net income per
share....................................................... 10.3 11.8 13.2 14.5
Number of shares outstanding for shareholders' equity
35
At or for the Year Ended December 31, 1998
------------------------------------------------------
1,071,000 1,260,000 1,449,000 1,666,350
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In thousands, except share amounts)
per share calculations....................................... 1,071,000 1,260,000 1,449,000 1,666,350
(1) The approximate amount the employee stock ownership plan expects to
borrow is not reflected as a liability but is reflected as a reduction
of capital. Although repayment of such debt will be secured solely by
the shares purchased by the employee stock ownership plan, we expect to
make discretionary contributions to the employee stock ownership plan
in an amount at least equal to the principal and interest payment on
the employee stock ownership plan debt. Pro forma net income has been
adjusted to give effect to such contributions, based upon a fully
amortizing debt with a ten-year term. Because First Deposit will be
providing the employee stock ownership plan loan, only principal
payments on the employee stock ownership plan loan are reflected as
employee compensation and benefits expense. The purchase price of
$10.00 was utilized to calculate the employee stock ownership plan
expense. The expense was 10% of the amount purchased, less income tax
benefits at 34.0%. The table assumes that 10.0% of the employee stock
ownership plan shares purchased in the conversion were committed to be
released at the beginning of the year and included in the outstanding
shares for earnings per share purposes. See "Management of Douglas
Federal -- Benefit Plans -- Employee Stock Ownership Plan."
(2) The dollar amount of the common stock to be purchased by the restricted
stock program is based upon the purchase price in the conversion and
represents unearned compensation and is reflected as a reduction of
capital. Such amount does not reflect possible increases or decreases
in the value of such stock relative to the purchase price of $10.00 in
the conversion. As we accrue compensation expense to reflect the
vesting of such shares under the restricted stock program, the charge
against capital will be reduced accordingly. Assumes the restricted
stock program expense was 20.0% of the amount purchased less the income
tax benefit at 34.0%. Implementation of the restricted stock program
within one year of the conversion would require shareholder approval at
a meeting of our shareholders. If the shares to be purchased by the
restricted stock program were newly issued shares purchased from First
Deposit by the restricted stock program at the purchase price rather
than shares purchased in the open market, at the minimum, midpoint,
maximum and 15.0% above the maximum of the estimated valuation range,
pro forma shareholders' equity per share would have been $16.93,
$15.70, $14.78 and $13.99, respectively, and pro forma net income per
share would have been $0.94, $0.83, $0.74 and $0.67, respectively. If
the restricted stock program acquires authorized but unissued shares
from First Deposit, your ownership interests in First Deposit will be
diluted by approximately 4.0%. See "Risk Factors -- Issuance of shares
for stock benefit plans may dilute your ownership interest."
(3) Consolidated shareholders' equity represents the excess of the carrying
value of our assets over our liabilities. The amounts shown do not
reflect the federal income tax consequences of the potential
restoration to income of the bad debt reserves for income tax purposes,
which would be required in the event of liquidation or in certain other
remote circumstances. The amounts shown also do not reflect the amounts
we are required to distribute in the event of liquidation to eligible
depositors from the liquidation account which we will establish upon
the consummation of the conversion. Pro forma shareholders' equity
information is not intended to represent the fair market value of the
common stock, the current value of our assets or liabilities or the
amounts, if any, that would be available for distribution to
shareholders in the event of liquidation. Such pro forma data may be
materially affected by a change in the number of shares to be sold in
the conversion and by other factors. The historical and pro forma per
share amounts have been calculated by dividing historical and pro forma
amounts by the indicated number of shares.
(4) No effect has been given to shares that may be issued upon the exercise
of options that may be granted under a stock option plan. Assuming that
all option shares were exercised at $10.00 per share at the beginning
of the period, at the minimum, midpoint, maximum and 15.0% above the
maximum of the estimated valuation range, pro forma shareholders'
equity per share would have been $16.55, $15.39, $14.52 and $13.77,
respectively, and pro forma net income per share would have been $0.91,
$0.80, $0.72 and $0.65, respectively.
36
THE CONVERSION
Our Board of Directors and the Office of Thrift Supervision have
approved the plan of conversion. Our members who are entitled to vote on the
conversion must also approve the plan of conversion. Approval by the Office of
Thrift Supervision does not constitute its recommendation or endorsement of the
plan of conversion.
General
On February 9, 1999, our Board of Directors adopted the plan of
conversion. The plan of conversion was subsequently amended and restated on
March 31, 1999 and April 26, 1999. The plan of conversion provides that we will
be converted from a federally-chartered mutual savings bank to a
federally-chartered capital stock savings bank. First Deposit, which has been
incorporated under Georgia law, will hold all of our outstanding capital stock.
The Office of Thrift Supervision has approved the plan, subject to, among other
things, the approval of the plan by our members. We have called a special
meeting of our members for this purpose to be held on June 25, 1999.
The plan of conversion also provides that First Deposit will offer
shares of common stock for sale in the subscription offering to our eligible
account holders, the employee stock ownership plan, supplemental eligible
account holders and other members. Concurrently, and subject to the prior rights
of holders of subscription rights, First Deposit may offer shares not subscribed
for in the subscription offering in a community offering with preference given
to natural persons residing in Douglas County, Georgia. We have the right to
accept or reject, in whole or in part, any orders to purchase shares of the
common stock received in the community offering. See "--Community Offering."
First Deposit has applied for and expects to receive approval from the
Office of Thrift Supervision to become a thrift holding company and to acquire
all of our common stock to be issued in the conversion. First Deposit plans to
purchase our issued and outstanding capital stock in exchange for 50.0% of the
net proceeds of the subscription and community offerings. First Deposit will
retain the remaining net proceeds of such offerings. The conversion will occur
only if at least 1,071,000 shares of common stock of First Deposit are sold.
The aggregate price of the shares of common stock to be sold in
connection with the conversion is estimated to be between $10,710,000 and
$14,490,000. This range was determined based upon an independent appraisal
prepared by Ferguson & Company, a consulting firm experienced in the valuation
and appraisal of savings institutions, of the estimated value of Douglas Federal
and First Deposit. All shares of common stock to be sold in connection with the
conversion will be sold at the same price. Ferguson & Company will affirm, or,
if necessary, update the independent appraisal at the completion of the
subscription and community offerings. See "Stock Pricing" for additional
information as to the determination of the estimated market value of First
Deposit's common stock.
The following is a brief summary of the material aspects of the
conversion. You should review the entire plan of conversion before purchasing
shares of common stock. A copy of the plan of conversion is available for you to
review at all of our offices. A copy of the plan of conversion is also available
at the Southeast Regional office in Atlanta, Georgia and the Washington, D.C.
office of the Office of Thrift Supervision.
37
Purposes of the Conversion
As a federally-chartered mutual savings bank, we do not have
shareholders and have no authority to issue capital stock. By converting to the
capital stock form of organization, we will be structured in the form used by
commercial banks, other business entities and a growing number of savings
institutions. The conversion will enhance our ability to access capital markets,
expand our current operations, acquire other financial institutions or branch
offices, provide affordable home financing opportunities to the communities we
serve or diversify into other financial services to the extent allowable by
applicable laws and regulations.
The holding company form of organization will provide additional
flexibility to diversify our business activities through existing or newly
formed subsidiaries, or through acquisitions of or mergers with both mutual and
stock institutions, as well as other companies. Although there are no current
arrangements, understandings or agreements regarding any such opportunities,
First Deposit will be in a position after the conversion, subject to regulatory
limitations and First Deposit's financial position, to take advantage of any
such opportunities that may arise.
The potential impact of the conversion upon our capital base is
significant. The conversion will increase our capital position to a level at
which we will be better positioned to take advantage of business opportunities.
At December 31, 1998, we had total equity, determined in accordance
with generally accepted accounting principles, of $9.6 million, or 9.6% of total
assets. Our regulatory tangible capital at that date was approximately 7.88% of
assets. An institution with a ratio of tangible capital to total assets of
greater than or equal to 5.0% is considered to be "well-capitalized" under
Office of Thrift Supervision regulations. Assuming that First Deposit uses 50.0%
of the net proceeds from the sale of 1,260,000 shares of its common stock to
purchase our stock, our capital will increase to $14.1 million or a ratio of
capital to adjusted assets, on a pro forma basis, of 13.39% after the
conversion. We expect that the investment of the net proceeds from the sale of
the common stock will provide us with additional income to increase our capital
position further.
After completion of the conversion, the unissued common and preferred
stock authorized by First Deposit's Articles of Incorporation will permit First
Deposit to raise additional equity capital through further sales of securities
and to issue securities in connection with possible acquisitions. At the present
time, First Deposit has no plans with respect to possible acquisitions or for
additional offerings of securities, other than the possible issuance of
additional shares upon exercise of stock options under its stock option plan or
the possible issuance of authorized but unissued shares to its restricted stock
program for stock awards. Following the conversion, First Deposit plans to use
stock-related incentive plans to attract and retain executive and other
personnel for Douglas Federal and First Deposit. See "Management of Douglas
Federal -- Benefit Plans."
Effects of Conversion
General. Each depositor in a mutual savings institution has both a
deposit account in the institution and a pro rata ownership interest in the net
worth of the institution based upon the balance in his or her account. A
depositor may only receive this ownership interest in the event of a liquidation
of the institution or in the event the institution declares a capital
distribution to depositors. However, this ownership interest is tied to the
depositor's account and has no tangible market value separate from such deposit
account. Any depositor who opens a deposit account obtains a pro rata ownership
interest in the
38
net worth of the institution without any additional payment beyond the amount of
the deposit. A depositor who reduces or closes his or her account receives a
portion or all of the balance in the account but nothing for his or her
ownership interest in the net worth of the institution, which is lost to the
extent that the balance in the account is reduced.
Consequently, mutual savings institution depositors normally have no
way to realize the value of their ownership interest, which has realizable value
only in the unlikely event that the mutual savings institution is liquidated or
in the event the institution declares a capital distribution to depositors. In
such event, the depositors of record at that time, as owners, would share pro
rata in any residual surplus and reserves after other claims, including claims
of depositors to the amounts of their deposits, are paid.
When a mutual savings institution converts to stock form, permanent
nonwithdrawable capital stock is created to represent the ownership of the
institution's net worth. The common stock is separate and apart from deposit
accounts and cannot be and is not insured by the Federal Deposit Insurance
Corporation or any other governmental agency. Certificates are issued to
evidence ownership of the capital stock. The stock certificates are transferable
and, therefore, the stock may be sold or traded if a purchaser is available with
no effect on any account the seller may hold in the institution.
Continuity. While the conversion is being accomplished, our normal
business of accepting deposits and making loans will continue without
interruption. We will continue to be regulated by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation. After the conversion,
our present management and staff will continue to provide services for
depositors and borrowers under current policies. The directors serving us at the
time of conversion will serve as our directors after the conversion. The
directors of First Deposit will consist initially of individuals currently
serving on our Board of Directors. All of our officers at the time of conversion
will retain their positions immediately after conversion.
Effect on Deposit Accounts. Under the plan of conversion, each of our
depositors at the time of conversion will automatically continue as a depositor
after the conversion, and each such deposit account will remain the same with
respect to deposit balance, interest rate and other terms. The Federal Deposit
Insurance Corporation will insure each such account to the same extent as before
the conversion. Depositors will continue to hold their existing certificates,
passbooks and other evidences of their accounts.
Effect on Loans. The conversion will not affect our outstanding loans,
and the amount, interest rate, maturity and security for each loan will remain
as they were contractually fixed before the conversion.
Effect on Voting Rights of Members. At present, all of our depositors
and certain borrowers are members of, and have voting rights in, us as to all
matters requiring membership action. Upon conversion, depositors and borrowers
will cease to be our members and will no longer be entitled to vote at our
meetings. Upon conversion, all of our voting rights will be vested in First
Deposit as our sole shareholder. Exclusive voting rights with respect to First
Deposit will be vested in the holders of First Deposit's common stock. Our
depositors and borrowers will not have voting rights after the conversion except
to the extent that they become shareholders of First Deposit through the
purchase of First Deposit's common stock.
39
Tax Effects. We have received an opinion from Womble Carlyle Sandridge
& Rice, PLLC with regard to federal income taxation and an opinion from Mauldin
& Jenkins, LLC with regard to Georgia income taxation to the effect that the
conversion will not be a taxable transaction to Douglas Federal, our eligible
account holders, our supplemental eligible account holders or First Deposit,
except as discussed below. See "-- Tax Aspects."
Effect on Liquidation Rights. If a mutual savings institution were to
liquidate, all claims of creditors, including those of depositors, to the extent
of deposit balances, would be paid first. Thereafter, if there were any assets
remaining, depositors would be entitled to such remaining assets on a pro rata
basis, based upon the deposit balances in their deposit accounts immediately
before liquidation. In the unlikely event that we were to liquidate after
conversion, we would also pay all claims of creditors, including those of
depositors, to the extent of their deposit balances, first, followed by
distribution of the "liquidation account" to certain depositors, with any assets
remaining thereafter distributed to First Deposit as the holder of our capital
stock. Under the rules and regulations of the Office of Thrift Supervision, a
post-conversion merger, consolidation, sale of bulk assets or similar
combination or transaction with another insured savings institution would not be
considered a liquidation and, in such a transaction, the liquidation account
would be assumed by the surviving institution.
Number of Shares to be Issued
Depending upon market or financial conditions following the
commencement of the subscription offering, the total number of shares to be
issued in the conversion may be increased or decreased without a resolicitation
of subscribers, provided that the product of the total number of shares times
the price per share is not below the minimum of the estimated price range or
more than 15.0% above the maximum of the estimated price range. Based on a fixed
purchase price of $10.00 per share and Ferguson & Company's estimate of the pro
forma market value of First Deposit and Douglas Federal ranging from a minimum
of $10,710,000 to a maximum, as increased by 15.0%, of $16,663,500, the number
of shares of common stock expected to be sold in the conversion is between a
minimum of 1,071,000 shares and a maximum, as adjusted by 15.0%, of 1,666,350
shares. The actual number of shares sold between this range will depend on a
number of factors and will be determined by First Deposit, subject to Office of
Thrift Supervision approval, if necessary.
In the event market or financial conditions change and cause the
aggregate purchase price of the shares to be below the minimum of the estimated
price range or more than 15.0% above the maximum of the estimated price range,
and if we do not terminate the plan of conversion after consultation with the
Office of Thrift Supervision, we will resolicit subscribers. We will permit
subscribers to continue their orders, in which case they must affirmatively
reconfirm their subscriptions before the expiration of the resolicitation
offering or we will promptly refund their subscription funds. The Office of
Thrift Supervision must approve any change in the estimated price range. A
resolicitation, if any, following the conclusion of the subscription offering
would not exceed 45 days unless further extended by the Office of Thrift
Supervision for periods up to 90 days not to extend beyond June 25, 2001. If
such resolicitation is not effected, we will return all funds promptly with
interest at our regular passbook rate of interest on payments made by check or
money order.
If First Deposit increases the number of shares issued due to an
increase of up to 15.0% in the estimated price range to reflect changes in
market or financial condition, those subscribing for the maximum number of
shares will not be given the opportunity to subscribe for an adjusted maximum
number of shares, except for the employee stock ownership plan, which may
subscribe for such adjusted amount. See "-- Limitations on Stock Purchases."
40
An increase in the number of shares First Deposit issued as a result of
an increase in the estimated market value of Douglas Federal and First Deposit
would decrease both a subscriber's ownership interest and First Deposit's pro
forma net earnings and shareholders' equity on a per share basis while
increasing pro forma net earnings and shareholders' equity on an aggregate
basis. A decrease in the number of shares to be issued in the conversion would
increase both a subscriber's ownership interest and First Deposit's pro forma
net earnings and shareholders' equity on a per share basis while decreasing pro
forma net earnings and shareholder's equity on an aggregate basis. For a
presentation of the effects of such changes, see "Pro Forma Data."
Subscription Rights and Subscription Offering
Subscription Rights. In accordance with the plan of conversion, rights
to subscribe for the purchase of common stock have been granted under the plan
of conversion to the following persons in the following order of descending
priority:
. eligible account holders, who are holders of deposit accounts with
a balance of $50 or more on December 31, 1997;
. the employee stock ownership plan;
. supplemental eligible account holders, who are holders of deposit
accounts with a balance of $50 or more on March 31, 1999; and
. our members, consisting of our depositors on May 1, 1999, the
voting record date for the special members meeting, and
borrowers with loans outstanding on January 1, 1990, which
continue to be outstanding on May 1, 1999, other than eligible
account holders and supplemental eligible account holders.
All subscriptions received will be subject to the availability of common stock
after satisfaction of subscriptions of all persons having prior rights in the
subscription offering and to the maximum and minimum purchase limitations
contained in the plan of conversion and as described below under "-- Limitations
on Stock Purchases."
Deposit accounts which will provide subscription rights to holders
thereof consist of any "qualifying deposit," as defined by the plan of
conversion. Under the plan, the aggregate balance as of the applicable date for
determining subscription rights of all deposit accounts with us shall be deemed
a qualifying deposit, provided such aggregate balance is at least $50.
Priority 1: Eligible Account Holders. Each eligible account holder
will receive, without payment, nontransferable subscription rights to subscribe
for common stock up to the greater of:
. the maximum amount permitted to be purchased in the community
offering, which is presently $350,000 for any individual or
individuals through a single account, and $700,000 when combined
with associates of, and persons acting in concert with, such
individual; or
. one-tenth of one percent (.10%) of the total offering of shares of
common stock, in each case subject to the overall purchase
limitation described above; or
41
. fifteen times the product, rounded down to the next whole number,
obtained by multiplying the total number of shares of common stock
to be issued by a fraction of which the numerator is the amount of
the eligible account holder's qualifying deposit and the
denominator is the total amount of qualifying deposits of all
eligible account holders, in each case on December 31, 1997. These
rights may not exceed the overall purchase limitation of $700,000
and does not include an increase in the shares issued due to an
increase in the estimated price range of up to 15.0%.
See "-- Limitations on Stock Purchases."
If eligible account holders exercise subscription rights for a number
of shares of common stock in excess of the total number of such shares eligible
for subscription, the shares of common stock will be allocated among the
subscribing eligible account holders so as to permit each subscribing eligible
account holder, to the extent possible, to purchase a number of shares
sufficient to make his or her total allocation of common stock equal to the
lesser of 100 shares or the number of shares subscribed for by the eligible
account holder. Any shares remaining after such allocation will be allocated
among the subscribing eligible account holders whose subscriptions remain
unsatisfied in the proportion that the amount of the qualifying deposit of each
eligible account holder whose subscription remains unsatisfied bears to the
total amount of the qualifying deposits of all eligible account holders whose
subscriptions remain unsatisfied. If the amount so allocated exceeds the amount
subscribed for by any one or more eligible account holders, the excess shall be
reallocated, one or more times as necessary, among those eligible account
holders whose subscriptions are still not fully satisfied on the same principle
until all available shares have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each eligible account holder must
list on his or her subscription order form all accounts in which he or she has
an ownership interest. Failure to list an account could result in less shares
being allocated than if all accounts had been disclosed. The subscription rights
of eligible account holders who are also our directors or officers or their
associates will be subordinated to the subscription rights of other eligible
account holders to the extent attributable to increased deposits in the twelve
months preceding December 31, 1997.
Priority 2: Employee Stock Ownership Plan. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by eligible
account holders, the employee stock ownership plan will receive, without payment
therefor, nontransferable subscription rights to purchase, in the aggregate, up
to 10.0% of the common stock issued, including any increase in the number of
shares of common stock issued as a result of an increase of up to 15.0% in the
maximum of the estimated price range. The employee stock ownership plan intends
to purchase 8.0% of the shares to be issued in the offering, or 85,680 shares
and 115,920 shares, based on the minimum and maximum of the estimated price
range, respectively. Subscriptions by the employee stock ownership plan will not
be aggregated with shares of common stock purchased directly by or which are
otherwise attributable to any other participants in the subscription offering,
including subscriptions of any of our directors, officers, employees or their
associates. See "Management of Douglas Federal -- Benefit Plans -- Employee
Stock Benefit Plan."
Priority 3: Supplemental Eligible Account Holders. To the extent that
there are sufficient shares remaining after satisfaction of subscriptions by the
eligible account holders and the employee stock ownership plan, each
supplemental eligible account holder will receive, without payment,
nontransferable subscription rights to subscribe for in the subscription
offering an amount equal to the
42
greater of the maximum amount permitted to be purchased in the community
offering, which is presently the greater of:
. $350,000 for any individual or individuals through a single account
and $700,000 when combined with associates of and persons acting in
concert with such individual;
. one-tenth of one percent (.10%) of the total offering of common
stock; or
. 15 times the product, rounded down to the next whole number,
obtained by multiplying the total number of shares of common stock
to be issued by a fraction of which the numerator is the amount of
the supplemental eligible account holder's qualifying deposit and
the denominator is the total amount of qualifying deposits of all
supplemental eligible account holders, in each case on March 31,
1999, subject to the overall purchase limitation of $700,000 and
not including an increase in the shares issued due to an increase
in the estimated price range of up to 15.0%.
See "-- Limitations on Stock Purchases."
In the event that supplemental eligible account holders exercise
subscription rights for a number of shares of common stock in excess of the
total number of such shares eligible for subscription, the remaining shares of
common stock shall be allocated among the subscribing supplemental eligible
account holders so as to permit each subscribing supplemental eligible account
holder, to the extent possible, to purchase a number of shares sufficient to
make his or her total allocation of common stock equal to the lesser of 100
shares or the number of shares subscribed for by the supplemental eligible
account holder. Any shares remaining after such allocation will be allocated
among the subscribing supplemental eligible account holders whose subscriptions
remain unsatisfied in the proportion that the amount of the qualifying deposit
of each supplemental eligible account holder whose subscription remains
unsatisfied bears to the total amount of the qualifying deposits of all
supplemental eligible account holders whose subscriptions remain unsatisfied. If
the amount so allocated exceeds the amount subscribed for by any one or more
remaining supplemental eligible account holders, the excess shall be
reallocated, one or more times as necessary, among those supplemental eligible
account holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
To ensure proper allocation of stock, each supplemental eligible
account holder must list on his or her subscription order form all accounts in
which he or she has an ownership interest. Failure to list an account could
result in less shares being allocated than if all accounts had been disclosed.
The subscription rights received by eligible account holders will be applied in
partial satisfaction to the subscription rights to be received as a supplemental
eligible account holder.
Priority 4: Other Members. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by the eligible account
holders, the employee stock ownership plan and the supplemental eligible account
holders, each of our other members not considered an eligible account holder or
a supplemental eligible account holder will receive, without payment therefor,
nontransferable subscription rights to subscribe for common stock in the
subscription offering up to the greater of:
. the maximum amount permitted to be purchased in the community
offering, which is presently $350,000 for any individual through a
single account and $700,000 when combined with associates of, and
persons acting in concert with, such individual; or
43
. one-tenth of one percent (.10%) of the total offering of common
stock, in each case subject to the overall purchase limitation
described above and not including an increase in shares issued due
to an increase in the estimated price range of up to 15.0%.
In the event that other members subscribe for a number of shares of
common stock which is in excess of the total number of shares of common stock
eligible for subscription, the remaining shares of common stock will be
allocated among the subscribing other members so as to permit each subscribing
other member, to the extent possible, to purchase a number of shares sufficient
to make his or her total allocation of common stock equal to the lesser of 100
shares or the number of shares subscribed for by the other member. Any shares
remaining after such allocation will be allocated among the subscribing other
members whose subscriptions remain unsatisfied pro rata in the same proportion
that the number of votes a subscribing other member is entitled to on May 1,
1999 bears to the total votes on such date of all subscribing other members
whose subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more remaining other members, the excess
shall be reallocated, one or more times as necessary, among those remaining
other members whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
Expiration Date for the Subscription Offering. The subscription
offering will expire at 12:00 noon, June 22, 1999, unless we extend it for up to
45 days or such additional periods with the approval of the Office of Thrift
Supervision. Subscription rights which have not been exercised before the
expiration date will become void.
We may not execute orders until all shares of common stock have been
subscribed for or otherwise sold. If all shares have not been subscribed for or
sold within 45 days after the expiration date, unless such period is extended
with the consent of the Office of Thrift Supervision, we will return to you
promptly, with interest, all funds we receive from you in the subscription
offering and we will cancel all withdrawal authorizations. If an extension
beyond the 45 day period following the expiration date is granted, we will
notify you of the extension of time and of your right to modify or rescind your
subscriptions and have your funds returned promptly with interest, and of the
time period within which you must affirmatively notify us of your intention to
confirm, modify or rescind your subscription. If we do not receive an
affirmative response to any resolicitation from you, we will rescind such order
and will return your subscription funds with interest at our regular passbook
rate. Such extensions may not go beyond June 25, 2001.
Community Offering
We may offer shares to certain members of the general public in a
community offering, which may begin at any time during or after the subscription
offering. A preference will be given in the community offering to natural
persons residing in Douglas and Paulding Counties, Georgia. First Deposit may
accept or reject any such orders, in whole or in part, in its sole discretion.
Individuals subscribing for common stock in the community offering may subscribe
for up to $350,000 worth of common stock, or up to $700,000 worth of common
stock when combined with associates of, and persons acting in concert with, such
individual, subject to the maximum purchase limitation and exclusive of shares
issued due to an increase in the estimated price range by up to 15.0%. See "--
Limitations on Stock Purchases." The opportunity to subscribe for shares of
common stock in the community offering is subject to our right to accept or
reject any such orders in whole or in part either at the time of receipt of an
order or as soon as practicable following the expiration date.
44
Subject to the foregoing, if the amount of common stock remaining is
insufficient to fill the orders of subscribers after completion of the
subscription offering, the remaining shares will be allocated among such
subscribers in a manner which permits each such person, to the extent possible,
to purchase the number of shares necessary to make his or her total allocation
of common stock equal to the lesser of 100 shares or the number of shares
subscribed for by such person, with preference being given to natural persons
residing in Douglas and Paulding Counties, Georgia. Thereafter, unallocated
shares will be allocated among such Douglas County and Paulding County residents
whose subscriptions remain unsatisfied on a 100 shares per order basis until all
such orders have been filled or the remaining shares have been allocated.
To the extent there are any shares remaining after all subscriptions by
Douglas County and Paulding County residents have been filled, any remaining
shares will be allocated among members of the general public using the foregoing
allocation method. The Boards of Directors of Douglas Federal and First Deposit
will establish all other terms and conditions of the offering.
Persons in Nonqualified States or Foreign Countries
We will make reasonable efforts to comply with the securities laws of
all states in the United States in which persons entitled to subscribe for stock
pursuant to the plan of conversion reside. However, the plan of conversion
provides that we are not required to offer subscription rights to any person who
resides in a foreign country or who resides in a state of the United States with
respect to which all of the following apply:
. a small number of persons otherwise eligible to subscribe for shares
of common stock reside in such state;
. we determine that compliance with the securities laws of such state
would be impracticable or unduly burdensome for reasons of cost or
otherwise; and
. the granting of subscription rights or the offer or sale of shares of
common stock to such persons would require Douglas Federal or First
Deposit or our respective officers, directors or trustees to register
as a broker, dealer, salesman or selling agent under the securities
laws of such state, or to otherwise qualify the common stock for sale
in such state.
Where the number of persons eligible to subscribe for common stock in one
state is small, we will base our decision as to whether or not to offer the
common stock in such state on a number of factors, including the size of
accounts held by account holders in the state, the cost of registering or
qualifying the common stock or the need to register First Deposit, its officers,
directors or employees as brokers, dealers or salesmen.
Marketing Arrangements
We have engaged Trident Securities as a consultant and financial
advisor in connection with the offering of the common stock and Trident
Securities has agreed to use its best efforts to solicit subscriptions and
purchase orders for shares of common stock in the offering. Based upon our
negotiations concerning the fee structure, Trident Securities will receive a
management fee of $40,000, and a commission equal to 1.65% of the aggregate
dollar amount of common stock sold in the subscription and community offerings,
exclusive of any shares of common stock sold to our directors and officers and
to the employee stock ownership plan. We will also reimburse Trident Securities
for its
45
reasonable out-of-pocket expenses incurred in its capacity as consultant and
financial advisor, excluding legal fees, in an amount not to exceed $10,000. In
the event the offering is consummated or Trident Securities ceases, under
certain circumstances after the subscription solicitation activities are
commenced, to provide assistance to First Deposit, we will reimburse Trident
Securities for its reasonable out-of-pocket expenses as described above. We have
agreed to indemnify Trident Securities for its reasonable costs and expenses in
connection with certain claims or liabilities, including certain liabilities
under the Securities Act of 1933. Trident Securities has received advances
towards its fees totaling $10,000.
Our directors and executive officers may participate in the solicitation of
offers to purchase common stock. We will direct prospective purchasers'
questions to executive officers or registered representatives. Our employees may
also participate in the offering in ministerial capacities or provide clerical
work in effecting a sales transaction. We have instructed employees who are not
executive officers not to solicit offers to purchase common stock or provide
advice regarding the purchase of common stock. We will rely on Rule 3a4-1 under
the Securities Exchange Act of 1934 and sales of common stock will be conducted
within the requirements of Rule 3a4-1, so as to permit officers, directors and
employees to participate in the sale of common stock. We will not compensate our
officers, directors or employees in connection with their participation by the
payment of commissions or other remuneration based either directly or indirectly
on the transactions in the common stock.
Restrictions on Transfer of Subscription Rights and Shares
Before the completion of the conversion, applicable regulations prohibit
any person with subscription rights, including the eligible account holders, the
employee stock ownership plan, the supplemental eligible account holders and
other members, from transferring or entering into any agreement or understanding
to transfer the legal or beneficial ownership of the subscription rights issued
under the plan of conversion or the shares of common stock to be issued upon
their exercise. Only the person to whom they are granted may exercise such
rights and may do so only for his or her account. Each person exercising such
subscription rights will be required to certify that he or she is purchasing
shares solely for his or her own account and that he or she has no agreement or
understanding regarding the sale or transfer of such shares. The regulations
also prohibit any person from offering or making an announcement of an offer or
intent to make an offer to purchase such subscription rights or shares of common
stock before the completion of the conversion.
We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders we
know to involve the transfer of subscription rights.
Limitations on Stock Purchases
The plan of conversion includes the following limitations on the number of
shares of common stock which may be purchased during the conversion:
. The minimum number of shares of common stock that any person may
purchase is 25.
. The maximum purchase in the subscription offering by any person
through a single deposit account is $350,000 of common stock, which
equals 35,000 shares. The maximum purchase by any person in the
community offering is $350,000 of common stock, which equals 35,000
shares.
46
. The maximum purchase in the subscription offering and community
offering combined by any person, related persons or persons acting
together is $700,000 of common stock, which equals 70,000 shares.
. Those limitations applicable to eligible account holders, supplemental
eligible account holders and other members contained in "--
Subscription Rights and Subscription Offering."
. The employee stock ownership plan is permitted to purchase in the
aggregate up to 10.0% of the shares of common stock issued, including
shares issued in the event of an increase in the estimated price range
of 15.0%, and intends to purchase 8.0% of the shares of common stock
issued.
. We will fill orders of persons purchasing shares of common stock in
the community offering up to a maximum of 2.0% of the total number of
shares of common stock offered. Thereafter, we will allocate the
remaining shares on an equal number of shares basis until all orders
have been filled.
. Our directors and officers and their associates may purchase, in all
categories of the conversion, an aggregate of no more than 34.0% of
the common stock offered. Any shares the employee stock ownership plan
purchases will not be included in calculating the number of shares
which such persons may purchase.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of our members, we
may increase both the individual amount permitted to be subscribed for and the
overall maximum purchase limitation in our sole discretion. If such amount is
increased after commencement of the subscription offering, subscribers will be
given the opportunity to increase their subscriptions up to the then applicable
limit, subject to the rights and preferences of any person who has priority
subscription rights.
Our Board of Directors may decrease the overall maximum purchase
limitation, in their sole discretion, without the further approval of our
members or resolicitation of subscribers. In the event that we decrease either
the individual purchase limitation or the number of shares of common stock to be
offered, we will decrease the orders of any person who subscribed for the
maximum number of shares of common stock by the minimum amount necessary so that
such person shall be in compliance with the then maximum number of shares for
which such person is permitted to subscribe.
The term "associate" of a person is defined to mean:
. any corporation or organization, other than us or Pinehurst
Properties, LLC, of which such person is a director, officer, partner
or 10.0% shareholder, either directly or indirectly;
. any trust or other estate in which such person has a substantial
beneficial interest or serves as a trustee or in a similar fiduciary
capacity; provided, however, such term shall not include the employee
stock ownership plan in which such person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity; or
47
. any relative or spouse of such person, or any relative of such spouse,
who either has the same home as such person or who is one of our
directors or officers.
Our directors and those of First Deposit are not treated as associates of each
other solely because of their Board membership.
Liquidation Rights
In the unlikely event of our complete liquidation in our present mutual
form, each depositor would receive his or her pro rata share of any of our
assets remaining after we pay the claims of all creditors, including the claims
of all depositors to the withdrawal value of their accounts. Each depositor's
pro rata share of such remaining assets would be in the same proportion as the
value of his deposit account was to the total value of all of our deposit
accounts at the time of liquidation. After the conversion, each depositor, in
the event of a complete liquidation, would have a claim as a creditor of the
same general priority as the claims of all of our other general creditors.
However, except as described below, his or her claim would be solely in the
amount of the balance in his or her deposit account plus accrued interest. He or
she would not have an interest in the value of our assets above that amount.
The plan of conversion provides for the establishment, upon the
completion of the conversion, of a special "liquidation account" for the benefit
of eligible account holders and supplemental eligible account holders in an
amount equal to our net worth as shown on our latest statement of financial
condition contained in this prospectus. Each eligible account holder and
supplemental eligible account holder, if he or she were to continue to maintain
his or her deposit account with us, would be entitled, upon our complete
liquidation after the conversion, to a liquidation distribution before our
payment of any liquidation distribution to our shareholders. Each eligible
account holder and supplemental eligible account holder would have an initial
interest in such liquidation account for each deposit account, including regular
accounts, transaction accounts such as NOW accounts, money market deposit
accounts, and certificates of deposit, with a balance of $50 or more held with
us on the eligibility record date and the supplemental eligibility record date,
respectively. Each eligible account holder and supplemental eligible account
holder will, with respect to each deposit account held, have a related inchoate
interest in a portion of the liquidation account balance, which interest we will
refer to as the subaccount balance. We will determine the initial subaccount
balance for each eligible account holder or supplemental eligible account holder
by multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of the qualifying deposit in the deposit
account on December 31, 1997 or March 31, 1999, as applicable, and the
denominator is the total amount of all qualifying deposits held by eligible
account holders or supplemental eligible account holders on such dates. Such
initial subaccount balance will not increase, but may decrease as provided
below. For deposit accounts in existence at both dates separate subaccounts
shall be determined on the basis of the qualifying deposits in such deposit
accounts on such respective record dates.
The operation and maintenance of the liquidation account will not operate
to restrict the use or application of any of our net worth accounts. However, we
will not voluntarily reduce our net worth accounts below the required dollar
amount of the liquidation account.
If, however, on any annual closing date after the eligibility record date
or supplemental eligibility record date, the qualifying deposit balance of an
eligible account holder or supplemental eligible account holder is less than the
lesser of:
48
. the deposit balance in such deposit account at the close of business
on any other annual closing date after the eligibility record date or
supplemental eligibility record date, or
. the amount of the qualifying deposit in such deposit account on
the dates referenced above;
we will reduce the subaccount balance in an amount proportionate to the
reduction in such deposit account. In the event that such a downward adjustment
is followed by an increase in the related qualifying deposit, the subaccount
balance will nevertheless not increase. Any assets remaining after the above
liquidation rights of eligible account holders and supplemental eligible account
holders are satisfied would be distributed to First Deposit as our sole
shareholder.
Tax Aspects
We will not seek a private ruling from the Internal Revenue Service with
respect to the proposed conversion. Instead, we have received an opinion of our
special counsel, Womble Carlyle Sandridge & Rice, PLLC, to the effect that for
federal income tax purposes, among other matters:
. our change in form from mutual to stock ownership will constitute
a reorganization under section 368(a)(1)(F) of the Internal
Revenue Code and neither Douglas Federal nor First Deposit will
recognize any taxable gain or loss as a result of the conversion;
. neither Douglas Federal nor First Deposit will recognize gain or
loss upon First Deposit's purchase of our capital stock or to
First Deposit upon the purchase of its common stock in the
conversion;
. the tax basis of the depositors' accounts with us immediately after
the conversion will be the same as the basis of their deposit accounts
immediately before the conversion;
. the tax basis of each eligible account holder's and supplemental
eligible account holder's interest in the liquidation account will
be zero;
. neither eligible account holders nor supplemental eligible account
holders will recognize taxable gain or loss upon acquiring
nontransferable subscription rights to purchase shares of the
common stock, provided that the amount to be paid for the common
stock is equal to the fair market value of such stock; and
. the tax basis to the shareholders of the common stock of First
Deposit purchased in the subscription offering or community
offering will be the amount paid for the common stock and the
holding period for the shares of common stock purchased by such
persons will begin on the date on which their subscription rights
are exercised.
Mauld in & Jenkins, LLC has opined that the conversion will not be a
taxable transaction to Douglas Federal, First Deposit, eligible account holders
or supplemental eligible account holders for Georgia income tax purposes.
Portions of both the federal and the state income tax opinions are based
49
upon the assumption that the subscription rights issued in connection with the
conversion will have no value.
Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant is not binding on the Internal Revenue Service and the
Internal Revenue Service could disagree with conclusions reached in the
opinions. In the event of a disagreement, the Internal Revenue Service may
prevail in a judicial or administrative proceeding.
Ferguson & Company has opined that the subscription rights do not have any
value, based on the fact that such rights are acquired by the recipients without
cost, are nontransferable and of short duration, and afford the recipients the
right only to purchase the common stock at a price equal to its estimated fair
market value, which will be the same price as the purchase price for the shares
of common stock sold in the community offering. Such valuation is not binding on
the Internal Revenue Service. If the subscription rights granted to eligible
account holders or supplemental eligible account holders are deemed to have an
ascertainable value, receipt of such rights could be taxable to those eligible
account holders or supplemental eligible account holders who receive and/or
exercise the subscription rights in an amount equal to such value and we could
recognize gain on such distribution. Eligible account holders and supplemental
eligible account holders are encouraged to consult with their own tax advisor as
to the tax consequences in the event that such subscription rights are deemed to
have an ascertainable value.
Interpretation and Amendment of the Plan of Conversion
To the extent permitted by law, all interpretations of the plan of
conversion by our Board of Directors will be final. The plan of conversion
provides that our Board of Directors shall have the discretion to interpret and
apply the provisions of the plan of conversion to particular circumstances and
that such interpretation or application shall be final. This includes any and
all interpretations, applications and determinations made by the Boards of
Directors on the basis of such information and assistance as was then reasonably
available for such purpose.
The plan of conversion provides that, if necessary or desirable, two-thirds
of our Board of Directors may substantively amend the plan of conversion at any
time before solicitation of proxies from our members to vote on the plan of
conversion. After submission of the proxy materials to our members, two-thirds
of our Board of Directors may amend the plan of conversion with the concurrence
of the Office of Thrift Supervision or resubmission to our members. Our Board of
Directors may amend the plan of conversion at any time after the approval of
members upon the order of or with the approval of the Office of Thrift
Supervision and no resolicitation of proxies and no further approval of the
members will be necessary unless the Office of Thrift Supervision requires
otherwise. By adopting the plan of conversion, members will be deemed to have
authorized amendment of the plan of conversion under the circumstances described
above.
Restrictions on Purchase or Transfer of Shares After Conversion
All shares of common stock purchased in connection with the conversion by
our directors or officers or their associates will be restricted. Such shares
may not be disposed of for a period of one year following the conversion, except
in the event of the death of the original purchaser or in the event of an
exchange of securities in a merger or acquisition approved by the applicable
regulatory authorities. Transfers that could result in a change of control of
Douglas Federal or First Deposit or result in the ownership by any person of
more than 10.0% of any class of First Deposit's securities may be subject to the
prior approval of the Office of Thrift Supervision.
50
Each certificate for restricted shares will bear a legend giving notice of
this restriction on transfer, and we will issue instructions to our transfer
agent to the effect that any transfer within such time period of any certificate
or record ownership of such shares other than as provided above is a violation
of the restriction. Any shares of common stock issued at a later date as a stock
dividend, stock split, or otherwise, with respect to such restricted stock will
be subject to the same restrictions. The insider trading rules promulgated under
to the Securities Exchange Act of 1934 apply to our officers and directors.
Purchases of outstanding shares of common stock of First Deposit by
directors, officers and their associates during the three-year period following
conversion may be made only through a broker or dealer registered with the
Securities and Exchange Commission, except with the prior written approval of
the Office of Thrift Supervision. This restriction does not apply, however, to
negotiated transactions involving more than 1.0% of First Deposit's outstanding
common stock or to the purchase of stock pursuant to any stock option plan to be
established after the conversion.
Unless approved by the Office of Thrift Supervision, First Deposit will be
prohibited from repurchasing any shares of the common stock for three years
after the conversion except:
. for an offer to all of First Deposit's shareholders on a pro rata
basis; or
. for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing, beginning one year following completion of the
conversion, First Deposit may repurchase its common stock so long as:
. the repurchases within the following two years are part of an open-
market program not involving greater than 5.0% of First Deposit's
outstanding capital stock during a twelve-month period;
. the repurchases do not cause First Deposit to become undercapitalized;
and
. First Deposit provides to the Regional Director of the Office of
Thrift Supervision no later than 10 days before the commencement of a
repurchase program written notice containing a full description of the
program to be undertaken and such program is not disapproved by the
Regional Director.
In addition, under current Office of Thrift Supervision policies, repurchases
may be allowed in the first year following conversion and in amounts greater
than 5.0% in the second and third years following conversion, provided there are
valid and compelling business reasons for such repurchases and the Office of
Thrift Supervision approves such repurchases.
51
FIRST DEPOSIT
First Deposit is a Georgia corporation recently organized at the direction
of our Board of Directors for the purpose of acquiring all of our capital stock
to be issued in the conversion. First Deposit expects to receive approval from
the Office of Thrift Supervision to become a savings and loan holding company.
Upon completion of the conversion, First Deposit will be regulated by the Office
of Thrift Supervision. See "The Conversion" and "Regulation and Supervision --
Holding Company Regulation." After the conversion, First Deposit will have no
significant assets other than all of the shares of our capital stock acquired in
the conversion and an amount equal to 50.0% of the net proceeds of the
conversion, including the loan to the employee stock ownership plan. First
Deposit will have no significant liabilities. First Deposit intends to use a
portion of the net proceeds it retains to loan to the employee stock ownership
plan funds to enable the employee stock ownership plan to purchase 8.0% of the
stock issued in connection with the conversion.
First Deposit's management is described under "Management of First
Deposit." Initially, First Deposit will neither own nor lease any property, but
will instead use our premises, equipment and furniture. At the present time,
First Deposit does not intend to employ any persons other than certain officers
who are currently our officers, but will utilize our support staff from time to
time. First Deposit will hire additional employees as appropriate to the extent
it expands its business in the future.
Management believes that the holding company structure will provide
additional flexibility to diversify our business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with other
financial institutions and financial services related companies. Although there
are no current arrangements, understandings or agreements regarding any such
opportunities, we will be in a position after the conversion, subject to
regulatory limitations and our financial position, to take advantage of any such
acquisition and expansion opportunities that may arise. First Deposit
anticipates that it will fund its initial activities with the proceeds it
retains, income from the investment of such proceeds, and dividends from Douglas
Federal.
52
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Our results of operations are dependent primarily on net interest income,
which is the difference between the income earned on our loan and investment
portfolios and our cost of funds, consisting of the interest paid on deposits
and borrowings. Results of operations are also affected by our provision for
loan losses and fees and other service charges. Our noninterest expense
principally consists of compensation and employee benefits, occupancy and
equipment expense, federal deposit insurance premiums, data processing,
advertising and business promotion and other expenses. Results of operations are
also significantly affected by general economic and competitive conditions,
particularly changes in interest rates, government policies and actions of
regulatory authorities. Future changes in applicable law, regulations or
government policies may materially impact us. See "Business of Douglas Federal."
Traditionally, our primary goal has been to control growth and improve our
profitability, market share, asset quality and our capital position by investing
in:
. primarily one- to four-family loans secured by properties located in
our primary market area;
. commercial real estate and construction and development loans secured
by properties located in our primary market area, to the extent that
such loans meet our general underwriting criteria;
. consumer loans; and
. funds not utilized for loan investments in short-term U.S. Treasury
and agency obligations, including mortgage-backed and mortgage-related
securities; and building capital while controlling operating expenses.
Forward-Looking Statements
This prospectus contains certain forward-looking statements which are
based on certain assumptions and describe future plans, strategies and our
expectations. These forward-looking statements are generally identified by use
of the words "believe," "expect," "intend," "anticipate," "estimate," "project,"
or similar expressions. Our ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a
material adverse effect on our operations include, but are not limited to,
changes in interest rates, general economic conditions, legislation and
regulation, monetary and fiscal policies of the U.S. Government, including
policies of the U.S. Treasury and the Federal Reserve Board, the quality or
composition of our loan or investment portfolios, demand for loan products,
deposit flows, competition, demand for financial services in our market area and
accounting principles and guidelines. You should consider these risks and
uncertainties in evaluating forward-looking statements and should not place
undue reliance on such statements. We will not publicly release the result of
any revisions which may be made to any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
53
Management Strategy
In the future, we intend to seek growth opportunities and means of
lessening our exposure to interest rate risk while avoiding investments we
believe bear risks inconsistent with our investment policies. We intend to grow
by expanding the products and services we offer, as necessary, in order to
improve our market share in our primary market area as well as seeking
opportunities to expand our market share and product line through acquisitions,
although we have no specific acquisition plans. We will seek to expand consumer
loans, including home equity loan originations. Finally, depending upon market
conditions, management may implement leverage strategies to enhance income. Such
strategies would be to increase borrowings and invest the borrowed funds in
secured investments to enhance income from the spread between the cost of the
borrowed funds and the investment yield. However, we intend to continue to offer
the products and services and continue to invest in those investments in which
we have historically invested.
Management of Interest Rate Risk and Market Risk Analysis
Qualitative Analysis
The principal objective of our interest rate risk management function is to
evaluate the interest rate risk included in certain balance sheet accounts,
determine the appropriate level of risk given our business strategy, operating
environment, capital and liquidity requirements and performance objectives and
manage the risk consistent with our Board of Directors' approved guidelines.
Through such management, we seek to reduce the vulnerability of our operations
to changes in interest rates, while not subjecting us to undue credit or
investment risk. We monitor our interest rate risk as such risk relates to our
operating strategies. Our Board of Directors has established an investment
committee, responsible for reviewing our asset/liability policies and interest
rate risk position, which meets on a regular basis, and reports trends and
interest rate risk position to our Board of Directors on a quarterly basis. The
extent of the movement of interest rates is an uncertainty that could have a
negative impact on our earnings. See "Risk Factors-Our high levels of fixed rate
loans may lead to decreased profitability if interest rates rise."
In recent years, we have become subject to the increasing risk that
interest rates may rise due to the substantial levels of fixed-rate loans we
have been originating to satisfy the high customer demand for such products in
our primary market area. To mitigate such risks, we intend to:
. invest in short-term U.S. Treasury and agency obligations;
. seek opportunities to increase our investment in adjustable rate
mortgage-backed securities; and
. sell a significant portion of our fixed-rate loans in the secondary
market.
Depending upon the magnitude of any change in interest rates, we may not be
able to react quickly enough to reinvest such funds. We therefore may experience
a decrease in earnings following a significant increase in interest rates. We
may also increase non-deposit borrowings which would further enable us to invest
in higher yielding instruments in an increasing interest rate environment.
Quantitative Analysis
54
Net Portfolio Value. As part of our interest rate risk analysis, we use
an interest rate sensitivity model which generates estimates of the change in
our net portfolio value or NPV over a range of interest rate scenarios and which
is prepared by our regulators on a quarterly basis. NPV is the present value of
expected cash flows from assets, liabilities, and off-balance sheet contracts.
The NPV ratio, under any interest rate scenario, is defined as the NPV in that
scenario divided by the market value of assets in the same scenario. Our
regulators produce this analysis using their own model, based upon data
submitted on our quarterly regulatory reports, including estimated loan
prepayment rates, reinvestment rates and deposit decay rates. See "Regulation
and Supervision - Federal Savings Institution Regulation." The following table
sets forth our NPV as of December 31, 1998 as calculated by our regulators.
NPV as % of
Net Portfolio Value Portfolio Value of Assets
------------------------------------------- -----------------------------
Change in Interest Rates in
Basis Points (Rate Shock) Amount $ Change % Change NPV Ratio Change (1)
------------------------- ---------- ------------ ------------ ------------- -------------
(Dollars in thousands)
+400 $ 4,674 $(7,513) (62)% 4.92% (683)
+300 6,660 (5,527) (45) 6.85 (491)
+200 8,693 (3,495) (29) 8.73 (302)
+100 10,634 (1,553) (13) 10.45 (131)
Static 12,187 - - 11.76 -
-100 13,087 899 7 12.48 72
-200 13,774 1,587 13 13.01 125
-300 14,657 2,469 20 13.68 192
-400 15,459 3,272 27 14.28 252
_________________
(1) Expressed in basis points.
Shortcomings are inherent in the methodology used in the above interest
rate risk measurements. Modeling changes in NPV require making certain
assumptions which may or may not reflect the manner in which the actual yields
and costs respond to changes in market interest rates. In this regard, the NPV
model presented assumes that the composition of our interest sensitive assets
and liabilities existing at the beginning of a period remains constant over the
period being measured and also assumes that a particular change in interest
rates is reflected uniformly across the yield curve regardless of the duration
to maturity or repricing of specific assets and liabilities. Accordingly, the
NPV measurements and net interest income models provide only an indication of
our interest rate risk exposure at a particular point in time. These
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on our net interest income and will
differ from actual results.
Based on our NPV ratio provided by our regulators and recent industry
statistics, an increase in interest rates would expose us to above average
interest rate risk. See "Regulation and Supervision."
Analysis of Net Interest Income
55
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
Average Balance Sheets. The following tables set forth certain
information relating to us at December 31, 1998, and for the years ended
December 31, 1998 and 1997. The average yields and costs are derived by dividing
income or expense by the average balance of interest-earning assets or
interest-bearing liabilities, respectively, for the periods shown except where
noted otherwise and reflect annualized yields and costs. Average balances are
derived from month-end balances for 1997 and derived from average daily balances
for 1998. Management does not believe that the use of average monthly balances
instead of average daily balances has caused any material differences in the
information presented. The yields and costs include fees which are considered
adjustments to yields. Loan interest and yield data does not include any accrued
interest from non-accruing loans.
For the Years Ended December 31,
----------------------------------------------------------
1998 1997
--------------------------- -----------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------- --------- -------- -------- --------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Mortgage loans, net........................ $ 79,751 $6,473 8.12% $ 73,765 $ 6,084 8.25%
Consumer loans............................. 1,098 97 8.83 1,113 97 8.72
Overnight and short-term deposits.......... 4,724 230 4.87 4,239 160 3.77
Investment securities(1)................... 5,837 362 6.20 6,104 346 5.67
-------- ------ -------- -------
Total interest-earning assets........ 91,410 7,162 7.84 85,221 6,687 7.85
Non-interest earning assets..................... 4,225 1,733
-------- --------
Total assets................... $ 95,635 $ 86,954
======== ========
Liabilities and Equity:
Interest-bearing liabilities:
Transaction accounts........................ $ 11,204 $ 388 3.46% $ 10,220 $ 271 2.65%
Savings accounts............................ 16,177 696 4.30 13,928 576 4.14
Certificates of deposit..................... 49,078 2,837 5.78 47,060 2,698 5.73
-------- ------ -------- -------
Total deposits................. 76,459 3,921 5.13 71,208 3,545 4.98
FHLB advances............................... 5,307 305 5.75 4,583 238 5.19
-------- ------ -------- -------
Total interest-bearing
liabilities................... 81,766 4,226 5.17 75,791 3,783 4.99
------ -------
Other liabilities............................... 4,633 2,543
Total liabilities.............. 86,399 78,334
Equity capital.................................. 9,236 8,620
-------- --------
Total liabilities and
retained earnings............. $ 95,635 $ 86,954
======== ========
Net interest income/Net interest rate
spread (2)...................................... $2,936 2.67% $ 2,904 2.86%
====== ==== ======= ====
Net earnings assets/Net interest margin(3)...... $ 9,644 3.21% $ 9,430 3.41%
======== ==== ======== ====
Ratio of interest-earning assets to
interest-bearing liabilities.................... 111.79% 112.44%
======== ========
________________
(1) Includes investment securities available-for-sale, investment securities
held-to-maturity, stock in Freddie Mac, Fannie Mae, and Federal Home Loan
Bank Atlanta.
56
(2) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
The following table sets forth the weighted average rates for all
interest-earning assets and interest-bearing liabilities as of December 31,
1998.
As of
December 31, 1998
-----------------
Loans............................................................... 7.87
Investment Securities............................................... 5.21
Overnight and Short-term Deposits................................... 4.81
------
Total interest-bearing assets.................................. 7.51
======
Interest-bearing demand and savings................................. 3.96
Certificate of Deposit.............................................. 5.60
FHLB advances....................................................... 5.60
------
Total interest-bearing liabilities............................. 5.01
======
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected our interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to:
. changes attributable to changes in volume multiplied by prior
rate;
. changes attributable to changes in rate multiplied by prior
volume; and
. the net change.
The changes attributable to the combined impact of volume and rate have been
allocated on a proportional basis between changes in rate and volume.
Year Ended
December 31, 1998
Compared to
Year Ended
December 31,
1997
-----------------------------------------
Increase (Decrease) Due to
-----------------------------------------
Volume Rate Net
-------------- -------- ---------------
(In thousands)
Interest-earning assets:
Mortgage loans, net............................... $ 486 $ (97) $ 389
Consumer loans.................................... - - -
Overnight and short term deposits................. 19 51 70
Investment securities............................. (15) 31 16
----- ------ -----
Total interest-earning assets............ $ 490 $ (15) $ 475
----- ------ -----
57
Year Ended
December 31, 1998
Compared to
Year Ended
December 31,
1997
-----------------------------------------
Increase (Decrease) Due to
-----------------------------------------
Volume Rate Net
-------------- -------- ---------------
(In thousands)
Interest-bearing liabilities:
Transaction accounts............................. $ 28 $ 89 $ 117
Savings accounts................................. 97 23 120
Certificates of deposit.......................... 115 24 139
------ ----- ------
Total interest-bearing deposits......... 240 136 376
FHLB advances.................................... 40 27 67
------ ----- ------
Total interest-bearing liabilities...... $ 280 $ 163 $ 443
------- ------ -------
Net change in net interest income............ $ 210 $ (178) $ 32
======= ====== =======
Comparison of Financial Condition at December 31, 1998 and December 31, 1997
Assets totaled $100.9 million at December 31, 1998, an increase of $9.3
million, or 10.15%, from $91.6 million at December 31, 1997. Most of this
increase was concentrated in the loan portfolio, which increased $9.1 million
for the year ending December 31, 1998 to $84.6 million, which increase was
partially offset by a reduction in securities of $2.3 million. Cash and due from
banks and federal funds sold increased during the same period by $2.5 million.
Total deposits increased by $9.8 million, from $75.9 million at December 31,
1997 to $85.7 million at December 31, 1998. Federal Home Loan Bank advances
decreased $1.0 million from $6.0 million at December 31, 1997 to $5.0 million at
December 31, 1998.
Loans. The increase in total loans was primarily due to increases in
residential real estate loans. Total residential real estate mortgage loans
increased $9.8 million, or 15.5%, and total real estate mortgage loans as a
percentage of total loans increased slightly from 83.82% at December 31, 1997 to
86.44% at December 31, 1998. Real estate construction loans increased from $5.3
million, or 7.00% of the portfolio, at December 31, 1997 to $6.8 million, or
8.0% of the portfolio, at December 31, 1998. The increase in real estate
mortgage and construction loans resulted from increased growth in the housing
demand in our market area.
Allowance for Loan Losses. The allowance for loan losses increased by
$134,000 to $1.0 million at December 31, 1998 from $866,000 at December 31,
1997. This increase is primarily related to the net increase in total loans of
$9.1 million. In addition, in the past two years, the volume of commercial and
consumer loans have gradually increased by $517,000 and $3,500,000 for the years
ended December 31, 1998 and 1997, respectively, consistent with management's
marketing plans. Beginning in 1997, management began growing the consumer and
commercial loan portfolio as a means of increasing loan activity. Traditionally,
commercial and consumer loans have a greater loss experience factor than
traditional one- to four family mortgage loans.
The adequacy of the allowance for loan losses is evaluated quarterly by
management based upon a review of significant loans, with particular emphasis on
nonperforming and delinquent loans that management believes warrant special
attention. Management's determination of the adequacy of the allowance is also
based on an evaluation of the entire portfolio and involves applying a loss
factor to each
58
major type of classified and non-classified loan. A loss factor, which is based
on peer group information, is applied to each major category of non-classified
loans. These categories consist of permanent one-to-four family loans, permanent
non-residential loans, one-to-four family construction loans, land loans,
commercial loans and consumer loans. These loss factors, which are
representative of the net charge-off ratio over the past five years, do not take
into account current trends, current economic conditions or specifically
identified classified loans. Specifically identified classified loans are
evaluated individually and specific reserves are based on the expected loss. The
general portion of reserves is based on management's evaluation of the other
factors inherent in the loan portfolio, such as current economic conditions, the
increase in total loans during the period, the volume of loans by category,
past-due loans and nonaccrual loans. Based on the above evaluation, combined
with the significant overall increase as well as increases in commercial,
consumer and construction loans, management provided an additional $48,000 in
provision for the year ended December 31, 1998. As of December 31, 1998, the
allowance consisted of $294,000 of total specific reserves based on loss
factors, $181,000 of special reserves for identified loans and $525,000 of total
general reserves.
At December 31, 1998, the allowance for loan losses provided coverage
of 101.73% of total non-performing loans, up from 80.04% at December 31, 1997.
The allowance for loan losses as a percentage of total loans at December 31,
1998 increased only 0.03%, to 1.18% compared to 1.15% at December 31, 1997. As
of December 31, 1998 and 1997, management believes that the allowance for loan
losses is adequate to absorb losses in the loan portfolio.
Investment Securities. The balances of securities held-to-maturity
decreased from $4.4 million at December 31, 1997 to $1.0 million at December 31,
1998. The balances of securities available-for-sale increased during the same
period from $2.7 million to $3.7 million. This net decrease was the result of
sales of equity securities and principal payments of these securities, totaling
approximately $5.2 million during the year ended December 31, 1998. The
repayments were offset by purchases of securities totaling $2.7 million. The net
decrease in securities of $2.2 million was primarily the result of the maturity
of securities. These proceeds were used to fund loan growth, provide liquidity
and reduce Federal Home Loan Bank advances.
Deposits. Total deposits increased $9.8 million, or 12.93% from $75.9
million at December 31, 1997 to $85.7 million at December 31, 1998. Of this
total increase, certificates of deposit increased $1.9 million, or 3.85%,
noninterest-bearing accounts increased $1.5 million, or 67.66%, and
interest-bearing demand and savings increased $6.4 million, or 25.61%.
Interest-bearing demand accounts include interest-bearing transaction accounts.
The significant increase in savings accounts is attributable to programs
specifically implemented to attract these particular types of accounts. The new
program implemented in 1997 offered special rates on savings accounts. The
increase in the average balance of these savings accounts for 1998 was $2.5
million, which yielded 4.86%. Federal Home Loan Bank advances decreased from
$6.0 million at December 31, 1997 to $5.0 million at December 31, 1998, which
decrease was compensated for through net cash provided by operations.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
General. Net income for the year ended December 31, 1998 increased by
$130,000, or 20.04% to $780,000 compared to $650,000 for the year ended December
31, 1997. Net interest income for both years ended December 31, 1998 and 1997
was $2.9 million. The constant level of net interest income for the year ended
December 31, 1998 represents an increase of $475,000 in interest income coupled
with an increase in interest expense of $443,000. Noninterest income increased
by $352,000 in 1998. Noninterest expense increased by $187,000 to $2.4 million
for the year ended December 31, 1998 compared to $2.2
59
million for the prior year. The return on average assets increased from 0.75%
for the year ended December 31, 1997 to 0.81% for the year ended December 31,
1998. The return on average equity also increased from 7.54% for the year ended
December 31, 1997 to 8.43% for the year ended December 31, 1998.
Interest Income. Interest income for the year ended December 31, 1998
was $7.2 million, an increase of $475,000 or 7.10% from $6.7 million for the
year ended December 31, 1997. The largest component of interest income is
interest on mortgage loans. Interest on mortgage loans increased from $6.1
million for the year ended December 31, 1997 to $6.5 million for the year ended
December 31, 1998. This increase of $389,000 or 6.39% is primarily the result of
loan volume increases. The average balance of mortgage loans increased $6.0
million to $79.8 million, while the yield on mortgage loans decreased 13 basis
points from 8.25% to 8.12%, partially offsetting the increase due to volume. The
increase in interest on loans was complemented by an increase in interest on
investment securities and short-term deposits. Interest income on securities
increased $16,000 and interest income on short-term deposits increased by
$69,000. The increase in interest income on securities is attributable to higher
yields. The average balance of securities decreased from $6.1 million for the
year ended December 31, 1997 to $5.8 million for the year ended December 31,
1998. The increase in interest income on short-term deposits is attributable to
a combination of increased volume and yields. The average balance increased by
$485,000 with an increase in yield of 110 basis points. Average interest-earning
assets were $91.4 million for the year ended December 31, 1998, an increase of
$6.2 million, or 7.28%, from $85.2 million for the year ended December 31, 1997.
The average yield on interest earning assets decreased one basis point to 7.84%
for the year ended December 31, 1998, from 7.85% for the year ended December 31,
1997.
Interest Expense. Interest expense increased during the year ended
December 31, 1998 to $4.2 million, from $3.8 million for the year ended December
31, 1997. Substantially all, or 93.0%, of the interest expense is attributable
to interest-bearing deposits. The largest category of interest-bearing deposits
is certificates of deposit. Interest on certificates of deposit for the year
ended December 31, 1998 was $2.8 million, up $139,000 from $2.7 million in 1997,
which was primarily the result of an increase in the average balance on
certificates of deposit, from $47.0 million in 1997 to $49.0 million in 1998,
combined with an increase of five basis points in the rates paid on these
deposits from 5.73% in 1997 to 5.78% in 1998. Interest expense on savings
accounts increased $120,000, from $576,000 for the year ended December 31, 1997
to $696,000 for the year ended December 31, 1998. Interest expense on
transaction accounts increased $117,000, from $271,000 for the year ended
December 31, 1997 to $388,000 for the year ended December 31, 1998. This
increase is attributable to an increase in the average balance of transaction
accounts, which increased $984,000 during 1998, combined with an increase of 81
basis points in the rates paid on these accounts, from 2.65% to 3.46%. Interest
expense on Federal Home Loan Bank advances increased $67,000 from $238,000 for
the year ended December 31, 1997 to $305,000 for the year ended December 31,
1998. This increase is primarily attributable to the increase in average
advances outstanding from $4.6 million for the year ended December 31, 1997 to
$5.3 million for the year ended December 31, 1998. The factors contributing to
an increase in interest expense was representative of an 18 basis point increase
in the cost of interest-bearing liabilities.
Net Interest Income. Net interest income for the year ended December
31, 1998 was $2.9 million, compared to $2.9 million for the year ended December
31, 1997. The yield on average interest-earning assets increased from 7.85% to
7.84%, while the average yield on interest-bearing liabilities increased from
4.99% for the year ended December 31, 1997 to 5.17% for the year ended December
31, 1998. As a result, the interest rate spread decreased from 2.86% to 2.67%
while the net interest margin decreased from 3.41% to 3.21%.
60
Provision for Loan Losses. The provision for loan losses increased from
$60,000 for the year ended December 31, 1997 to $108,000 for the year ended
December 31, 1998. This increase is primarily the result of the 12.0% increase
in total loans in 1998. As discussed earlier, the increase is also due to
increases in commercial, consumer and construction loans, all of which carry a
greater loss factor. See "Business of Douglas Federal - Delinquent Loans,
Classified Assets and Real Estate Owned - Allowance for Loan Losses."
Noninterest Income. Total noninterest income increased $352,000, or
85.38% to $764,000 for the year ended December 31, 1998, compared to $412,000
for the same period in 1997. Noninterest income primarily consists of servicing
fees and deposit account service charges and gains on sale of securities. The
single most significant change in noninterest income was an increase of $274,000
in gains on the sale of Freddie Mac and Fannie Mae stock.
Noninterest Expense. Total noninterest expense increased $187,000 to
$2.4 million for the year ended December 31, 1998, up from $2.2 million for the
prior year. The decrease in salaries and employee benefits of $41,000 was more
than offset by the increases in equipment and occupancy expenses of $33,000 and
other expenses of $194,000. Included in the increase in other expenses were
increases in data processing of $29,000, bank service charges of $43,000, and
other losses of $123,000, $14,000 of which was recovered after December 31,
1998. The increases in noninterest expense represent normal increases and
increases in expense related to the volume of loans and deposit accounts for the
year ended December 31, 1998. Other losses of $90,000 were recognized as a
result of our conversion to a new computer system.
The decrease in compensation expense of $41,000 for the year ended
December 31, 1998 is directly related to our efforts to increase efficiencies in
operations.
Income Taxes. Income tax expense increased from $386,000 for the year
ended December 31, 1997 to $405,000 for the year ended December 31, 1998. The
increase is primarily the result of an increase in income from operations of
$149,000 for the year ended December 31, 1998 and net of an increase in deferred
taxes of $48,000, which is primarily due to loan loss reserves. The effective
tax rate for the years ended December 31, 1998 and 1997 was 34.0% and 37.0%,
respectively.
Liquidity and Capital Resources
Our primary sources of funds are deposits, principal and interest
payments on loans, mortgage- backed and investment securities and Federal Home
Loan Bank advances. While maturities and scheduled amortization of loans are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. We
have continued to maintain the required levels of liquid assets as defined by
Office of Thrift Supervision regulations. These requirements, which may be
varied at the direction of the Office of Thrift Supervision depending upon
economic conditions and deposit flows, are based upon a percentage of deposits
and short-term borrowings. Our current required liquidity ratio is 4.00%. At
December 31, 1998 and December 31, 1997, our liquidity ratio was 12.03% and
10.04%, respectively. The liquidity ratio upon receipt of our portion of the
proceeds at the minimum and maximum of the estimated valuation range will be
well in excess of the regulatory minimum requirement. The pro forma liquidity
ratio at the minimum and maximum of the estimated valuation range is 14.00% and
14.73%, respectively. This assumes that 50.0% of the proceeds we receive will be
invested in securities, with the other 50.0% of the proceeds used to fund loans.
61
Management's current strategy is to maintain liquidity as close as
possible to the minimum regulatory requirement and to invest any excess
liquidity in higher yielding interest-earning assets. We manage our liquidity
position and demands for funding primarily by investing excess funds in
short-term investments and utilizing Federal Home Loan Bank advances in periods
when our demands for liquidity exceed funding from deposit inflows.
Our most liquid assets are cash, cash equivalents and securities
available-for-sale. The levels of these assets are dependent on our operating,
financing, lending and investing activities during any given period. At December
31, 1998, cash and cash equivalents and securities available-for-sale totaled
$12.0 million, or 11.87% of total assets.
We have other sources of liquidity if a need for additional funds
arises. At December 31, 1998, we had $5 million in advances outstanding from the
Federal Home Loan Bank and, at December 31, 1998, had an additional overall
borrowing capacity from the Federal Home Loan Bank of $8.5 million. Depending on
market conditions, the pricing of deposit products and Federal Home Loan Bank
advances, we may continue to rely on Federal Home Loan Bank borrowings to fund
asset growth.
At December 31, 1998, we had commitments to fund loans and unused
outstanding lines of credit, unused standby letters of credit and undisbursed
proceeds of construction mortgages totaling $7.0 million. We anticipate that we
will have sufficient funds available to meet our current loan origination
commitments. Certificate accounts, including Individual Retirement Accounts and
Keogh accounts which are scheduled to mature in less than one year from December
31, 1998 totaled $39.0 million. Based upon experience, management believes the
majority of maturing certificates of deposit will remain with us. In addition,
our management believes that we can adjust the rates offered on certificates of
deposit to retain deposits in changing interest rate environments. In the event
that we do not retain a significant portion of these deposits, we would be able
to utilize Federal Home Loan Bank advances to fund deposit withdrawals, which
would result in an increase in interest expense to the extent that the average
rate paid on such advances exceeds the average rate paid on deposits of similar
duration.
At December 31, 1998, we exceeded all minimum regulatory capital
requirements with a tangible capital level of $7.8 million, or 7.88% of total
adjusted assets, which exceeds the required level of $1.5 million, or 1.50%;
core capital of $7.8 million, or 7.88% of total adjusted assets, which exceeds
the required level of $3.0 million, or 3.00%; and risk-based capital of $8.5
million, or 15.08% of risk-weighted assets, which exceeds the required level of
$4.5 million, or 8.00%. See "Regulatory Capital Compliance."
Our primary investing activities are the origination of residential
one- to four-family loans, non-residential real estate loans, real estate
construction and development loans, and the purchase of United States Treasury
and agency securities, mortgage-backed securities and other investment
securities. During the years ended December 31, 1998 and 1997, our loan
originations totaled $60.3 million and $46.4 million, respectively. Purchases of
U.S. Treasury and agency securities, mortgage-backed securities and other
investment securities totaled $2.7 million and $2.6 million for the years ended
December 31, 1998 and 1997, respectively. These activities were funded primarily
by principal repayments on loans, investment securities, and deposit growth.
We experienced a net increase in total deposits from the prior year of
$9.8 million and $6.4 million for the years ended December 31, 1998 and 1997,
respectively. Deposit flows are affected by the level of interest rates, the
interest rates and products offered by local competitors, interest rates offered
by us and other factors.
62
Impact of Inflation and Changing Prices
The financial statements and notes presented in this prospectus have
been prepared in accordance with generally accepted accounting principals which
provide for the measurement of financial position and operating results
generally in terms of historical dollar amounts without considering the changes
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increased cost of our operations. Unlike
industrial companies, nearly all of our assets and liabilities are monetary in
nature. As a result, interest rates have a greater impact on our performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
our goods and services.
Accounting Matters
For a discussion of Statement of Financial Standards No. 130,
"Reporting Comprehensive Income and Statement of Financial Standards," and
Statement of Financial Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", see pages F-12 and F-13 of our financial statements.
Statement of Financial Standards No. 134 "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," and No. 135 "Recission of FASB Statement No. 75"
are not applicable to us.
Year 2000 Issues
Introduction. Similar to other financial institutions, our operations
are particularly sensitive to potential problems arising from the inability of
many existing computer hardware and software systems and association
applications to process accurately information relating to any two-digit "date
field" entries referring to the year 2000 and beyond. Many existing systems are
constructed to read such entries as referring to dates beginning with "19,"
rather than "20." This set of issues is generally referred to as the "Year 2000"
problem. The Federal Financial Institutions Examination Council, through the
bank regulatory agencies, has issued compliance guidelines requiring financial
institutions to develop and implement plans for addressing Year 2000 issues
relevant to their operations.
State of Readiness. We have implemented a detailed Year 2000 plan, as
required by our regulators, to evaluate Year 2000 compliance of our computer
systems and the equipment which supports our operations. Also included in this
Year 2000 plan is a detailed review of the readiness of our service providers,
vendors, major fund providers, major borrowers, and companies with which we have
material investments. These reviews and updates have revealed that these
entities have developed their own Year 2000 compliance plans and are meeting the
deadlines established by their plans. We have received assurances from these
entities that the Year 2000 issue will not have a material adverse impact on
their relationship with us. While these assurances do not rise to the level of a
certification or warranty, management is comfortable with the assurances it has
received. As of December 31, 1998, we had met all current target objectives of
the Year 2000 plan, and management believes that we will continue to meet all
future target objectives in accordance with the terms of the plan.
Like many financial institutions, we rely upon computers for the daily
conduct of our business and for data processing generally. As part of our
regular upgrading of computer systems, we purchased and installed new computers,
servers, and software. We also upgraded all of our ATMs. The vendor of
63
our core account processing system is executing its Year 2000 readiness plan in
cooperation with us and has certified that the system is Year 2000 compliant.
In addition to our core account processing system, we rely on financial
accounting and mortgage loan origination systems that are computer-based, and
thus vulnerable to the Year 2000 issues. We have also installed new financial
accounting, mortgage loan origination, and mortgage loan servicing systems which
are Year 2000 compliant as part of our computer upgrade.
As a result of our core account processing system and the new financial
accounting, mortgage loan origination, and mortgage loan servicing systems,
management believes that we have resolved the Year 2000 issues with respect to
the most critical computer systems and applications. Management has completed
the testing phase with respect to our computer systems and other equipment that
is Year 2000 sensitive, which includes equipment containing embedded
microprocessors or other technology related to the recognition of dates. The
results of testing performed through March 31, 1999 have not identified any
non-compliance systems or equipment.
Because of our substantial progress made towards our Year 2000
conversion, we do not anticipate that any additional significant changes will be
required or that the Year 2000 issue will pose significant operational problems
for us. However, if the necessary changes are not made or completed in a timely
fashion or unanticipated problems arise, the Year 2000 issue may take longer for
us to address and may have a material impact on our financial condition and
results of operations.
We receive periodic updates from our third party service providers on
the status of their progress in remediation and testing. These providers are
also subject to Year 2000 compliance examinations by the federal bank regulatory
agencies. While these updates do not rise to the level of certification or
warranties, they do indicate what management believes to be satisfactory
progress toward a timely resolution of the Year 2000 issue by these providers.
In addition to our interaction with major service providers, we have
contacted in writing every vendor, major fund providers, major borrowers, and
companies with which we have material investments, to evaluate their Year 2000
compliance plans and state of readiness and to determine the extent to which our
systems may be affected by the failure of others to remediate their own Year
2000 issues. To date, we have received written responses from surveys
distributed from over 50% of such parties. While these written responses do not
rise to the level of a certification or warranty, they generally indicate that
these parties have developed adequate plans to address the Year 2000 issue or
that their failure to resolve Year 2000 issues will have a minimal impact on our
systems or operations. We intend to re-contact those parties from whom we have
not received a response, either in writing or through personal contact with our
management. We have not independently confirmed any information received from
other parties with respect to Year 2000 issues. These other parties may not
complete their Year 2000 conversion in a timely fashion or they may suffer a
Year 2000 business disruption that may adversely affect our financial condition
and results of operations.
We do not generally utilize Year 2000 compliance as a criteria in the
loan underwriting process. This is primarily the result of approximately 96% of
our loan portfolio being composed of either one- to four-family residential
mortgage loans, construction and development loans or consumer loans. Generally,
borrowers of such loans do not present as significant a risk to repayment as a
result of Year 2000 issues. Commercial real estate loans represent only 3.7% of
total loans and all are secured by real estate. In addition, no commercial real
estate borrower was identified as mission critical during the Year 2000
assessment process.
64
Costs to Address the Year 2000 Issue. The new computer systems were
installed as a result of management's desire to keep us competitive by ensuring
that our systems take advantage of recent advances in technology. Our costs to
achieve Year 2000 compliance are currently budgeted to be $50,000, and these
costs are not expected to have a material financial impact on us. At December
31, 1998, we expensed $23,336 to Year 2000 compliance costs. We have and intend
to continue to fund such costs from our operations. However, as we progress with
our Year 2000 conversion and implement the necessary changes to our systems,
certain additional costs may be identified. Additional costs could have a
material adverse effect on our financial condition and results of operations.
Risks of Year 2000 Issues. To date, we have not identified any system
which presents a material risk of not being Year 2000 compliant in a timely
fashion or for which a suitable alternative cannot be implemented. However, as
we progress with our Year 2000 conversion, we may identify systems which do
present a material risk of Year 2000 disruption. Such disruption may include,
among other things, the inability to process and underwrite loan applications,
to credit deposits and withdrawals from customer accounts, to credit loan
payments or track delinquencies, to reconcile and record daily activity properly
or to engage in similar normal banking activities. Additionally, if our
commercial customers are not Year 2000 compliant and suffer adverse effects on
their operations, their ability to meet their obligations to us could be
adversely affected. Our failure to identify systems which require Year 2000
conversion that are critical to our operations or our failure or that of others
with which we do business to become Year 2000 compliant in a timely manner could
have a material adverse impact on our financial condition and results of
operations. Moreover, to the extent that the risks posed by the Year 2000
problem are pervasive in data processing and transmission and communications
services worldwide, we cannot predict with any certainty that our operations
will remain materially unaffected after January 1, 2000 or on dates preceding
this date at which time post-January 1, 2000 dates become significant within our
systems.
We have identified seven mission-critical vendors, of which six are
Year 2000 compliant. The remaining vendor is in the process of testing for Year
2000 compliance.
Contingency Plans. We have two types of contingency plans: Remediation
and Business Interruption. Remediation Plans are designed to mitigate the risks
associated with the failure to complete renovation, validation, and
implementation of mission-critical systems successfully. Business Interruption
Plans are plans of action to ensure our ability to continue functioning as a
business entity in the event of unanticipated systems failures at critical dates
before, on, or after the Year 2000.
Remediation Plans: Our Year 2000 conversion is expected to be completed
before any potential disruption to our business. Moreover, we have developed
Year 2000 remediation contingency plans for mission-critical systems. These
plans would be invoked in the event of anticipated failures of particular Year
2000 projects or sub-projects. Such plans involve the designation of alternate
vendors to back up systems and would essentially constitute replacement of the
current Year 2000 remediation path with an alternate one. Remediation plans will
be built in succeeding stages of detail and this process may, if management
deems appropriate, be halted at any point where the success of the base project
is clearly predictable. We completed testing of our systems in 1998.
Business Interruption Plans: Those plans would be invoked if
unanticipated Year 2000 problems occur in production, similar to scenarios in
disaster recovery plans. We have targeted the essential functions that may be
adversely affected, and have developed specific responses, ranging from the
printing out of records from the core banking system before January 1, 2000, to
ensure that a hard copy of the data is available in the event of a failure, to
preparations for failures of voice and data communications through the use of
manual posting and courier services, as well as ensuring that branches can
process
65
off-line for a period of time. Teams will be established for mobilization in
case of emergencies that threaten our viability, and require that certain
resources be available immediately for utilization. We will continue to fine-
tune these plans, train staff to carry them out, and test them. Staff will be
trained to follow the plans, in conjunction with our Year 2000 team, as they are
trained to follow disaster recovery plans in the event of a disaster.
We believe the failure to resolve Year 2000 issues adequately presents
the following risks, which we believe reflect the most likely worst case
scenario:
. the possibility of the lack of power or communication services
for periods in excess of one day;
. loss of customers to other financial institutions if our service
provider is unable to process consumer transactions, resulting
in a loss of revenue;
. concern on the part of depositors that Year 2000 issues could
impair access to their deposit account balances, resulting in
significant outflow of deposits on or before December 31, 1999;
and
. governmental agencies, such as the Federal Home Loan Bank, and
correspondent banks could fail to provide us with funds, which
could materially impair our liquidity and affect our ability to
fund loans and deposit withdrawals.
The discussion above contains certain forward-looking statements. The
costs of the Year 2000 conversion, the date which we have set to complete such
conversion, and the possible risks associated with the Year 2000 issue are based
on our current estimates and are subject to various uncertainties that could
cause the actual results to differ materially from our expectations. Such
uncertainties include, among others, our success in identifying systems that are
not Year 2000 compliant, the nature and amount of programming required to
upgrade or replace each of the affected systems, the availability of qualified
personnel, consultants and other resources, and the success of the Year 2000
conversion efforts of others.
66
BUSINESS OF DOUGLAS FEDERAL
General
We were originally organized in 1960 as a federally-chartered savings
bank. Our deposit accounts are insured to the maximum allowable amount by the
Savings Association Insurance Fund as administered by the Federal Deposit
Insurance Corporation. In addition to our principal office, which is located in
Douglasville, Georgia, we serve our customers from a full-service banking
facility located in Lithia Springs, Douglas County, Georgia.
We are a community-oriented savings institution whose principal
business consists of accepting retail deposits from the general public in our
primary market area. Our primary market area for lending consists of Douglas and
Paulding Counties, Georgia. We invest those deposits, together with funds
generated from operations and borrowings, primarily in one- to four-family
residential mortgage loans, construction loans, commercial real estate loans,
automobile loans and, to a much lesser extent, commercial loans and passbook
savings loans. We also invest in government issued and sponsored mortgage-backed
securities, securities issued by the U.S. Government and agencies thereof, and
other investments permitted by applicable laws and regulations.
We have a wholly-owned service subsidiary, Pinehurst Properties, LLC,
that holds our real estate owned and owns real property for residential
development purposes. At December 31, 1998, Pinehurst Corporation, the
predecessor of Pinehurst Properties, LLC had total assets of $1.9 million which
consist of subdivided residential real property located in Douglas County,
Georgia. See "-- Subsidiary."
At December 31, 1998, we had total assets of approximately $100.9
million, total deposits of approximately $85.7 million, retained earnings of
approximately $9.7 million and had a tangible capital ratio of 7.88%, a core
capital ratio of 7.88% and a total risk-based capital ratio of 15.08%. See
"Regulation and Supervision -- Federal Savings Institution Regulation -- Capital
Requirements."
At December 31, 1998, our gross loan portfolio totaled $84.6 million,
or 83.8% of the total assets, of which $73.1 million were one- to four-family
residential mortgage loans, $3.1 million were commercial real estate loans,
$416,000 were land and land development loans, $6.0 million were construction
and development loans, and $1.9 million were consumer loans, consisting
primarily of automobile loans. We originate one- to four-family mortgage loans
generally secured by properties located in our primary market area.
Our investment activities primarily consist of investments in
mortgage-backed securities and U.S. Government obligations. At December 31,
1998, our securities portfolio totaled $4.7 million, or 4.7% of total assets, of
which $3.7 million was categorized as available-for-sale. At December 31, 1998,
our mortgage-backed securities portfolio totaled $1.0 million, or 1.0% of total
assets, of which all were classified as held-to-maturity and consisted entirely
of mortgage-backed securities, guaranteed or issued by governmental-sponsored
and federal agencies such as the Fannie Mae, Freddie Mac and Ginnie Mae. Our
investment securities generally consist of U.S. Government or federal agency
obligations. See "Investment Activities."
At December 31, 1998, our deposit accounts totaled $85.7 million or
93.9% of total liabilities, of which $35.2 million, or 41.1% were comprised of
passbook savings accounts, retail checking/NOW accounts, money market accounts
and commercial checking accounts. In additional to core deposits, we
67
had $50.5 million of certificate accounts, or 58.9% of total deposits, of which
$12.8 million were certificates of deposit with balances of $100,000 or more.
Market Area and Competition
We are headquartered in Douglasville, Georgia and have been, and intend
to continue to be, a community-oriented financial institution. Our primary
market area is comprised of the Counties of Douglas and Paulding, Georgia, which
are serviced through our main office and our other full service banking office.
Our main office is located in downtown Douglasville, and our branch office is
located approximately 10 miles from our main office. Based on the most recent
information available, we had approximately 13.41% of the total bank and thrift
deposits in Douglas County.
Our primary market area consists principally of suburban and rural
communities with service, wholesale/retail trade, government and manufacturing
serving as the basis of the local economy. Service jobs represent the largest
type of employment in our primary market area, with jobs in wholesale/retail
trade accounting for the second largest employment sector. Douglasville is
located approximately 25 miles from Atlanta, Georgia and is accessible from
Interstate 20, a major Interstate running east to west through Georgia. The easy
accessibility to Douglas County and its close proximity to Atlanta, Georgia has
resulted in Douglas County being among one of the fastest growing areas in the
country in recent years. Management believes that our market area continues to
show economic growth with stable to moderately increasing real estate values.
Management hopes to capitalize on this high growth to expand our market share.
We face significant competition both in generating loans and in
attracting deposits. Our primary market area is highly competitive and we face
direct competition from a significant number of financial institutions, many
with a statewide or regional presence and, in some cases, a national presence.
Many of these financial institutions are significantly larger and have greater
financial resources than we have. Our competition for loans comes principally
from commercial banks, savings banks, credit unions, mortgage brokers, mortgage
banking companies, and insurance companies. In addition, we have recently faced
significant competition for first mortgage loans on new home construction from
builders who have been offering financing for purchasers of new homes in the
builders' development projects. Our most direct competition for deposits has
historically come from savings, commercial banks, and credit unions. In
addition, we face significant competition for deposits from non-bank
institutions such as brokerage firms and insurance companies in such instruments
as short-term money market funds, corporate and government securities funds,
mutual funds, and annuities. Competition may also increase as a result of the
lifting of restrictions on the interstate operations of financial institutions.
We have also experienced significant competition from credit unions, which have
a competitive advantage because they do not pay state or federal income taxes.
Such competitive advantage has placed increased pressure on us with respect to
our loan and deposit pricing.
Lending Activities
Loan Portfolio Composition. Our loan portfolio consists primarily of
first mortgage loans secured by one- to four-family residences.
The types of loans that we may originate are subject to federal laws
and regulations. Interest rates we charge on loans are affected by the demand
for such loans, the supply of money available for lending purposes and the rates
offered by competitors. These factors are, in turn, affected by, among other
things,
68
economic conditions, monetary policies of the federal government, including the
Federal Reserve Board and legislative tax policies.
The following table sets forth the composition of our loan portfolio in
dollar amounts and as a percentage of the portfolio at the dates indicated.
At December 31,
-------------------------------------------------------
1998 1997
-------------------------- -------------------------
Percent Percent
Amount of Total Amount of Total
------------ ---------- ------------ ----------
Real estate mortgage loans: (Dollars in thousands)
One-to four-family................................. $ 73,115 86.44% $ 63,304 83.82%
Commercial real estate............................. 3,109 3.68 2,501 3.31
Land and land development.......................... 416 0.49 2,369 3.14
Construction and development....................... 6,014 7.11 5,323 7.05
----------- ------ ----------- ------
Total real estate mortgage loans.................. 82,654 97.72 73,497 97.32
1,932 2.28 2,023 2.68
----------- ------ ----------- ------
Consumer Total loans................................... $ 84,586 100.00% $ 75,520 100.00%
=========== ====== =========== ======
Less:
Unearned discounts and deferred loan fees..... 209 224
Allowance for loan losses..................... 1,000 866
----------- -----------
Loan receivable, net.......................... $ 83,377 $ 74,430
=========== ===========
Loan Maturity. The following table shows the remaining contractual
maturity of our loans at December 31, 1998. The table does not include the
effect of future principal prepayments.
December 31, 1998
-----------------------------------------------------------------------------
One- to Construction Land and
Four- Commercial and Land Total
Family Real Estate Development Development Consumer Loans
------ ----------- ------------ ----------- -------- -----
(In thousands)
Amounts due:
One year or less........... $ 13,333 $ 1,744 $ 5,986 $ 284 $ 475 $ 21,822
After one year:
More than one year to
two years................. 1,095 544 8 - 189 1,836
More than two years to
five years................ 2,692 449 20 132 1,233 4,526
More than five years....... 55,995 372 - - 35 56,402
-------- ----------- ----------- ----------- -------- --------
Total amount due........ $ 73,115 $ 3,109 $ 6,014 $ 416 $ 1,932 84,586
======== =========== =========== =========== ======== ========
Less:
Unearned discounts
and deferred loan fees.... 209
Allowance for loan losses.. 1,000
--------
Loans, net..................... $ 83,377
========
69
The following tables set forth at December 31, 1998, the dollar amount
of loans contractually due after December 31, 1999 and whether such loans have
fixed interest rates or adjustable interest rates.
Due after December 31, 1999
---------------------------------------------------------
Fixed Adjustable Total
------------------ ---------------- -----------------
(In thousands)
Real estate loans:
One- to four-family $ 48,942 $ 10,840 $ 59,782
Commercial 1,365 - 1,365
Construction and development 28 - 28
Land and land development 132 - 132
--------------- -------------- ---------------
Total real estate loans 50,467 10,840 61,307
Consumer loans 1,457 - 1,457
--------------- -------------- ---------------
Total Loans $ 51,924 $ 10,840 $ 62,764
=============== ============== ===============
Origination, Sale and Servicing of Loans. Our mortgage lending
activities are conducted primarily by our loan personnel operating at our two
offices. In-market loan originations are generated by our marketing efforts,
which include print, radio and television advertising, lobby displays and direct
contact with local civic organizations, as well as by our present customers,
walk-in customers and referrals from real estate agents, brokers and builders.
We underwrite loans we originate pursuant to our policies and procedures and
generally underwrite in accordance with Fannie Mae, Freddie Mac, Federal Housing
Administration, and Department of Veterans Affairs underwriting standards. We
originate both adjustable-rate and fixed-rate loans. Our ability to originate
fixed- or adjustable-rate loans is dependent upon the relative customer demand
for such loans, which is affected by the current and expected future level of
interest rates. In recent years, we have originated primarily fixed-rate loans
as a result of low customer demand for adjustable-rate loans given the
prevailing low interest rate environment.
Generally, we hold loans we originate for investment, although we
frequently sell fixed-rate loans we originate through the secondary market.
During the years ended December 31, 1998 and December 31, 1997, we
originated $37.5 million and $24.8 million of one- to four-family mortgage
loans, respectively. On January 1, 1996, we implemented SFAS No. 122 pursuant to
which we may recognize the value of servicing rights as an asset. In the year
ended December 31, 1998, the fair value of servicing rights under SFAS No. 122
and SFAS No. 125 were not material and were not recognized in the financial
statements for those periods.
70
The following table sets forth loan originations, purchases, sales, and
principal repayments for the periods indicated:
For the Year Ended at
--------------------------------
December 31,
--------------------------------
1998 1997
------------- -----------
(In thousands)
Mortgage loans (gross):
Beginning balance................................................................. $ 73,497 $ 74,297
------------- -----------
Mortgage loans originated:
One- to four-family........................................................... 37,512 24,806
Commercial real estate........................................................ 1,837 3,886
Construction and development.................................................. 20,115 17,178
------------- -----------
Total mortgage loans originated........................................... 59,464 45,870
Loan Purchases.................................................................. - -
Transfer of mortgage loans to foreclosed real estate.......................... (188) (311)
Sales......................................................................... (11,887) (12,295)
Principal repayments.......................................................... (38,232) (34,064)
------------- -----------
Ending Balance................................................................ $ 82,654 $ 73,497
============= ===========
Consumer loans (gross):
Beginning balance.............................................................. $ 2,023 $ 2,262
Consumer loans originated..................................................... 793 514
Principal repayments.......................................................... (884) (753)
------------- -----------
Ending balance................................................................ $ 1,932 $ 2,023
============= ===========
One- to Four-Family Lending. We currently offer both fixed-rate and
adjustable-rate mortgage ("ARM") loans with maturities of up to 30 years secured
by one- to four-family residences. Substantially all of the residences securing
these loans are located in our primary market area. One- to four-family mortgage
loan originations are generally obtained from our in-house loan representatives,
from existing or past customers, and through referrals from members of our local
communities. At December 31, 1998, our one- to four-family mortgage loans
totaled $73.1 million, or 86.44% of total loans. Of the one- to four-family
mortgage loans outstanding at that date, 79.73% were fixed-rate mortgage loans
and 20.27% were ARM loans.
We currently offer fixed-rate mortgage loans with terms from ten to
generally 30 years. We generally sell approximately our fixed-rate loans with
maturities in excess of 15 years. We do not purchase one- to four-family
mortgage loans.
We currently offer one-year residential ARM loans with an interest rate
that adjusts annually based on the change in the relevant United States Treasury
index and ARM loans with an interest rate that adjusts every six months based on
the 11th District cost of funds. We also offer loans that bear fixed rates of
interest for specified periods of time and, thereafter, adjust on an annual
basis. These loans provide for up to a 2.0% periodic cap and a lifetime cap of
6.0% over the initial rate. As a consequence of using caps, the interest rates
on these loans may not be as rate sensitive as our cost of funds. Borrowers of
one-year residential ARM loans are generally qualified at a rate of 2.0% above
the initial interest rate. We also offer ARM loans that are convertible into
fixed-rate loans with interest rates based upon the then current market rates.
ARM loans generally pose greater credit risks than fixed-rate loans, primarily
because as interest rates rise, the required periodic payment by the borrower
rises, increasing the potential for default. However, as of December 31, 1998,
we had not experienced higher default rates on these loans relative to our other
loans.
71
Generally, one- to four-family mortgage loans are underwritten
according to secondary market policies and guidelines. Generally, we originate
one- to four-family residential mortgage loans in amounts up to 80.0% of the
lower of the appraised value or the selling price of the property securing the
loan and up to 97.0% of the appraised value or selling price if private mortgage
insurance is obtained. Mortgage loans we originate generally include due-on-sale
clauses which provide us with the contractual right to deem the loan immediately
due and payable in the event the borrower transfers ownership of the property
without our consent. We require fire, casualty, title and, in certain cases,
flood insurance on all properties securing our real estate loans.
Included in our one- to four-family loan portfolio are home equity
loans. We originate home equity loans that are secured by a lien on the
borrower's residence and generally do not exceed $250,000. We use the same
underwriting standards for home equity loans as we use for one- to four-family
residential mortgage loans. Home equity loans are generally originated in
amounts which, together with all prior liens on such residence, do not exceed
90.0% of the appraised value of the property securing the loan. The interest
rates for home equity loans either float at a stated margin over the prime rate
or have fixed interest rates. As of December 31, 1998, we had $3.5 million, or
4.19% of our total loan portfolio outstanding, in home equity loans.
Commercial Real Estate Lending. We originate commercial real estate
loans that are generally secured by properties used for business purposes such
as office buildings, schools, nursing homes, retail stores and churches located
in our primary market area. We lend to local churches to fund construction of or
renovations to church facilities. Such loans are adjustable rate mortgages and
fixed-rate loans with a maximum loan to value ratio of 80.0%. We currently have
five church loans totaling $1.6 million in the aggregate. All such loans are
performing in accordance with their terms. Our commercial real estate
underwriting policies provide that commercial real estate loans may be made in
amounts up to 80.0% of the appraised value of the property, subject to our
current internal loan-to-one-borrower limit, which at December 31, 1998 was $1.5
million.
Commercial real estate loans generally have adjustable rates and terms
to maturity that do not exceed 15 years. Our current lending guidelines
generally require that the loan to value ratio on property securing commercial
real estate loans and multi-family loans not exceed 80.0%. Adjustable-rate
commercial real estate loans provide for interest at a margin over a designated
index, often a designated prime rate, with periodic adjustments, generally at
frequencies of up to five years. In underwriting commercial real estate loans,
we analyze the financial condition of the borrower, the borrower's credit
history, the reliability and predictability of the net income generated by the
property securing the loan and the value of the property itself. We generally
require personal guarantees of the borrowers in addition to the security
property as collateral for such loans. Appraisals on properties securing
commercial loans we originate are performed by independent appraisers approved
by our Board of Directors. At December 31, 1998, our largest commercial real
estate loan was a $728,000 loan secured by a local church and was performing in
accordance with its terms. There were no multi-family loans outstanding at
December 31, 1998.
Commercial real estate loans generally present a higher level of credit
risk than loans secured by one- to four-family residences. This greater credit
risk is due to several factors, including the concentration of principal in a
limited number of loans and borrowers, the effect of general economic conditions
on income-producing properties and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
commercial real estate and multi-family properties is typically dependent upon
the successful operation of the related real estate project. If the cash flow
from the project is reduced, the borrower's ability to repay the loan may be
impaired and the
72
value of the property may be reduced. We seek to minimize these risks through
our underwriting standards.
Construction and Development and Land and Land Development Lending. We
originate construction loans for the development of residential and commercial
property, including speculative loans. Construction loans are offered primarily
to experienced local developers and builders operating in our market area. The
majority of our construction loans are originated to finance the construction by
developers and builders of one- to four-family residential real estate and, to a
lesser extent, multi-family and commercial real estate properties located in our
primary market area. Construction loans are generally offered with terms of up
to 12 months and may be made in amounts of up to 75.0% of the appraised value of
the property on multi-family and commercial real estate construction and 80.0%
on one- to four-family residential construction. Land loans are made in amounts
up to 60.0% of the appraised value of the land securing the loan.
Construction loan proceeds are disbursed periodically in increments as
construction progresses and as inspections by our inspecting officers warrant.
At December 31, 1998, our largest loan balance with a single construction and
development loan borrower was $1.3 million. At December 31, 1998, we had loans
of $953,672 to builders in connection with the real estate development
activities of our subsidiary, Pinehurst Properties, LLC.
Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with us or another lender for the finished home. The home
buyer may be identified either during or after the construction period, with the
risk that the builder will have to debt service the speculative construction
loan and finance real estate taxes and other carrying costs of the completed
home for a significant time after the completion of construction until the home
buyer is identified. We lend to approximately 20 local builders, many of whom
may have only two speculative loans outstanding from us. We consider
approximately 10 builders as core borrowers with several speculative loans
outstanding at any one time. Rather than originating lines of credit to home
builders to construct several homes at once, we originate and underwrite a
separate loan for each home. Speculative construction loans are originated for a
term of 12 months, with interest rates ranging from 9.0% to 10.5% above the
prime lending rate, and with a loan-to-value ratio of no more than 80.0% of the
appraised estimated value of the completed property. At December 31, 1998, we
had 18 borrowers with aggregate outstanding speculative loan balances of $2.7
million, all of which were performing according to their respective terms and
the largest of which amounted to $400,000.
Construction financing is generally considered to involve a higher
degree of credit risk than long-term financing or improved, owner-occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development compared to the estimated cost of construction and
other assumptions, including the estimated time to sell residential properties.
If the estimated value proves to be inaccurate, we may be confronted with a
property, when completed, having a value which is insufficient to assure full
repayment. We seek to minimize this risk through our underwriting standards.
Consumer Lending. Consumer loans at December 31, 1998 amounted to $1.9
million, or 2.28% of our total loans and consisted primarily of new and used
automobile loans and loans secured by savings accounts. Such loans are generally
originated in our primary market area and generally are secured by deposit
accounts, personal property and automobiles. These loans are typically shorter
term and generally
73
have higher interest rates than one- to four-family mortgage loans.
Historically, we have not advertised our consumer loans and have made these
loans only to existing customers.
Loans secured by rapidly depreciable assets such as automobiles or that
are unsecured entail greater credit risks than one- to four-family residential
mortgage loans. In such cases, repossessed collateral for a defaulted loan may
not provide an adequate source of repayment of the outstanding loan balance,
since there is a greater likelihood of damage, loss or depreciation of the
underlying collateral. Further, consumer loan collections on these loans are
dependent on the borrower's continuing financial stability and, therefore, are
more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Finally, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans in the event of a default. At December 31,
1998, we did not have any loans 90 days or more delinquent.
Loan Approval Procedures and Authority. Our Board of Directors
establishes our lending policies. Such policies provide that our President,
Senior Vice President and other Vice Presidents may approve installment loans up
to $25,000 and personal loans up to $5,000. Our Executive Committee may approve
loans in excess of these limits. Our Executive Committee approves all new loans
over $300,000 and all maturing loans with aggregate balances over $500,000. We
have loan review personnel who submit a written report to the Executive
Committee and the full Board of Directors each quarter, evaluating the quality
and trend of the loan portfolio. Our loan review personnel are independent of
loan officers and lending responsibilities.
Delinquent Loans, Classified Assets and Real Estate Owned
Delinquencies and Classified Assets. Reports listing all delinquent
accounts are generated and reviewed by management on a monthly basis and the
Board of Directors performs a monthly review of all loans or lending
relationships delinquent 60 days or more and all REO. The procedures we take
with respect to delinquencies vary depending on the nature of the loan and cause
of delinquency and whether the borrower is habitually delinquent. When a
borrower fails to make a required payment on a loan, we take a number of steps
to have the borrower cure the delinquency and restore the loan to current
status. We generally send the borrower a written notice of non-payment after the
loan is first past due. Our guidelines provide that telephone, written
correspondence and/or face-to-face contact will be attempted to ascertain the
reasons for delinquency and the prospects of repayment. When contact is made
with the borrower at any time before foreclosure, we usually attempt to obtain
full payment, work out a repayment schedule with the borrower to avoid
foreclosure or, in some instances, accept a deed in lieu of foreclosure. In the
event payment is not then received or the loan not otherwise satisfied,
additional letters and telephone calls generally are made. If the loan is still
not brought current or satisfied and it becomes necessary for us to take legal
action, which typically occurs after a loan is 60 days or more delinquent, we
will commence foreclosure proceedings against any real property that secures the
loan. If a foreclosure action is instituted and the loan is not brought current,
paid in full, or refinanced before the foreclosure sale, the property securing
the loan generally is sold at foreclosure and, if purchased by us, becomes real
estate owned and is sold by us as soon as possible.
Federal regulations and our Asset Classification Policy require that we
utilize an internal asset classification system as a means of reporting problem
and potential problem assets. We have incorporated the Office of Thrift
Supervision internal asset classifications as a part of our credit monitoring
system. We currently classify problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard"
74
assets include those characterized by the "distinct possibility" that the
insured institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "Doubtful" have all of the weaknesses inherent
in those classified "Substandard" with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
Office of Thrift Supervision which can order the establishment of additional
general or specific loss allowances. The Office of Thrift Supervision, in
conjunction with the other federal banking agencies, has adopted an interagency
policy statement on the allowance for loan and lease losses. The policy
statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation guidelines. Generally, the policy statement
recommends that institutions have effective systems and controls to identify,
monitor and address asset quality problems; that management has analyzed all
significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary.
Our Investment Committee reviews and classifies our assets on a regular
basis and the Board of Directors reviews the results of the reports on a
quarterly basis. We classify assets in accordance with the management guidelines
described above. At December 31, 1998, we had $1.2 million, or 1.19% of total
assets, designated as Substandard. At such date, no assets were classified as
Doubtful or Loss in accordance with Office of Thrift Supervision regulations. As
of December 31, 1998, we did not have any classified loans designated as Special
Mention.
Non-Performing Assets and Impaired Loans. The following table sets
forth information regarding non-accrual loans and real estate owned. At December
31, 1998, we had $228,000 of real estate owned. It is our policy to cease
accruing interest on loans 90 days or more past due and to charge-off all
accrued interest. We do, however, continue accruing interest on loans 90 days or
more past due that are in the process of being renewed or extended. We believe
that all loans on nonaccrual status are well secured and have provided, when
necessary, for allocated reserves to bring specific loans to their net
realizable value. Each nonaccruing loan at December 31, 1998 is in process of
collection. For the years ended December 31, 1998 and 1997, no interest income
was recorded on nonaccrual loans. For the years ended December 31, 1998 and
1997, the amount of additional interest income that would have been recognized
on
75
nonaccrual loans if such loans had continued to perform in accordance with their
contractual terms was $63,000 and $87,000, respectively. In 1993, we adopted
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No.
114"), as amended by SFAS No. 118. There were loans totaling $983,000 that met
the definition of impaired loans, per SFAS 114 at December 31, 1998. This
compares to $1.1 million for December 31, 1997.
-----------------------------------------------------------------------------
At December 31,
-------------------------------------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------------------------------------
(Dollars in thousands)
-------------------------------------------------------------------------------------------------------
Non-accrual loans(1):
-------------------------------------------------------------------------------------------------------
Mortgage loans:
-------------------------------------------------------------------------------------------------------
One- to four-family........................................ $ 532 $ 612
-------------------------------------------------------------------------------------------------------
Commercial real estate..................................... 444 470
-------------------------------------------------------------------------------------------------------
Construction and development............................... - -
-------------------------------------------------------------------------------------------------------
Land and development....................................... 7 -
-------------------------------------------------------------------------------------------------------
Consumer and other loans............................................ - -
------ ------
-------------------------------------------------------------------------------------------------------
Total non-accrual loans.................................... 983 1,082
-------------------------------------------------------------------------------------------------------
Loans 90 days or more past due and accruing:
-------------------------------------------------------------------------------------------------------
Construction and development........................................ - -
-------------------------------------------------------------------------------------------------------
Land and land development........................................... - -
------ ------
-------------------------------------------------------------------------------------------------------
Total accruing loans 90 days or more past due.............. - -
-------------------------------------------------------------------------------------------------------
Total non-performing loans................................................... 983 1,082
-------------------------------------------------------------------------------------------------------
Total foreclosed real estate................................................. 228 353
------ ------
-------------------------------------------------------------------------------------------------------
Total non-performing assets.................................................. $1,211 $1,435
====== ======
-------------------------------------------------------------------------------------------------------
Restructured loans........................................................... - -
-------------------------------------------------------------------------------------------------------
Non-performing loans to total loans.......................................... 1.16% 1.44%
====== ======
-------------------------------------------------------------------------------------------------------
Non-performing assets to total assets........................................ 1.20% 1.57%
====== ======
-------------------------------------------------------------------------------------------------------
---------
(1) Loans are presented before allowance for loan losses.
There were no restructured loans at December 31, 1998. Restructured
loans would include loans that were modified while delinquent. Although the
amount due under these loans would normally not be modified from the terms of
the loans when originated, certain adjustments may be made to these loans to
help the borrower make payments while the loans are delinquent and to enable us
to avoid foreclosure proceedings.
Allowance for Loan Losses. The allowance for loan losses is
established through a provision for loan losses based on management's evaluation
of the risks inherent in our loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover estimated losses on loans which are deemed probable and
estimable based on information currently known to management. The allowance is
based upon a number of factors, including economic conditions, actual loss
experience and industry trends. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review our allowance
for loan losses. Such agencies may require us to make additional provisions for
estimated loan losses based upon judgments different from those of management.
As of December 31, 1998, our allowance for loan losses was 1.18% of total loans
as compared to 1.15% as of December 31, 1997. We had non-performing loans of
$983,000 at December 31, 1998. We will continue to monitor and modify our
allowances for loan losses as conditions dictate. While management believes our
allowance for loan losses is sufficient to cover losses inherent in our loan
portfolio at this time, no assurances can be given that our level of allowance
for loan losses will be sufficient to cover loan losses incurred by us or that
future adjustments to the allowance for loan losses
76
At or For the Year Ended December 31,
1998 1997
---- ----
(Dollars in thousands)
Balance at beginning of period.............................. $ 866 $ 784
Provision for loan losses................................... 108 60
Charge-offs:
Mortgage loans:
One- to four-family....................................... - -
Commercial real estate.................................... - -
Construction and development.............................. - -
Consumer loans............................................ (1) -
------- ------
Total charge-offs..................................... (1) -
Recoveries(1)............................................... 27 22
------- ------
Balance at end of period.................................... $ 1,000 $ 866
======= ======
Ratio of net recoveries during the period to average
net loans outstanding during the period................... .03% .03%
======= ======
Ratio of allowance for loan losses to total loans
receivable at the end of the period....................... 1.18% 1.15%
======= ======
Ratio of allowance for loan losses to non-performing
loans at the end of the period............................ 101.73% 80.00%
======= ======
____________
(1) Consists of lease recoveries in a bankruptcy.
The following table sets forth our percent of allowance for loan losses to
total allowance for loan losses and the percent of loans to total loans in each
of the categories listed at the dates indicated.
December 31,
---------------------------------------------------------------------
1998 1997
---------------------------------- --------------------------------
Percent Percent
of Loans of Loans
Percent of in Each Percent of in Each
Allowance Category Allowance Category
to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans
------ ---------- -------- ------ ---------- --------
(Dollars in thousands)
One- to four-family(1).......... $ 593 59.30% 86.44% $496 57.27% 83.82%
Commercial real estate.......... 193 19.30 3.68 163 18.82 3.31
Construction and development.... 130 13.00 7.11 116 13.40 7.05
Land and land development....... 14 1.40 .49 48 5.54 3.14
Consumer loans.................. 70 7.00 2.28 43 4.97 2.68
------ ------ ------ ---- ------ ------
Total allowance................. $1,000 100.00% 100.00% $866 100.00% 100.00%
====== ====== ====== ==== ====== ======
________________
(1) Includes home equity lines of credit.
Real Estate Owned. At December 31, 1998, we had $228,000 of real estate
owned. At December 31, 1998, real estate owned consisted of two one- to four-
family properties. When we acquire property
77
through foreclosure or by deed in lieu of foreclosure, it is initially recorded
at the lower of the recorded investment in the corresponding loan or the fair
value of the related assets at the date of foreclosure, less costs to sell.
Thereafter, if there is a further deterioration in value, we provide for a
specific valuation allowance and charge operations for the diminution in value.
It is our policy to have obtained an appraisal on all real estate subject to
foreclosure proceedings before the time of foreclosure. It is our policy to
require appraisals on foreclosed properties and conduct inspections on
foreclosed properties.
Investment Activities
We are authorized to invest in various types of liquid assets, including
U.S. Treasury obligations with terms of five years or less, U.S. Agency
obligations, including mortgage-backed securities with terms of five years or
less rated by a highly regarded rating service, such as Standard & Poors, as AA
or better with certain certificates of deposit of insured banks and savings
institutions, corporate obligations up to a maximum of 1.0% of our total assets
that have terms of five years or less and are rated by a highly regarded rating
service, such as Standard & Poors, as AA or better. We are also authorized to
invest in mutual funds whose assets conform to the investments that we are
otherwise authorized to make directly. In addition, at December 31, 1998, we
owned approximately $1.2 million of equity securities. At December 31, 1998,
the equity securities consisted of Freddie Mac and Fannie Mae stock.
Generally, our investment policy is to invest funds among various
categories of investments and maturities based upon our need for liquidity, to
achieve the proper balance between our desire to minimize risk and maximize
yield, and, to a much lesser extent, to provide collateral for borrowings and to
fulfill our asset/liability management policies. To date, our investment
strategy has been directed toward high- quality assets with short and
intermediate terms to maturity. These high-quality assets consist primarily of
U.S. Treasury obligations, Federal agency obligations and high-grade corporate
debt securities. At December 31, 1998, the weighted average term to maturity
for investment securities available-for-sale and mortgage-backed and related
securities held-to-maturity was 4.2 years and 21.0 years, respectively. See
"Notes to Financial Statements" for information regarding the maturities of our
securities.
Management determines the appropriate classification of securities at the
time of purchase. If management has the intent and ability to hold debt
securities to maturity, they are stated at amortized cost. If securities are
purchased for the purpose of selling them in the near term, they are classified
as trading securities and are reported at fair value with unrealized holding
gains and losses reflected in current earnings. All other debt and equity
securities are classified as securities available for sale and are reported at
fair value, with net unrealized gains or losses reported, net of income taxes,
as a separate component of equity. As a member of the Federal Home Loan Bank of
Atlanta, we are required to hold Federal Home Loan Bank of Atlanta stock which
is carried at cost since there is no readily available market value.
Historically, we have not held any securities considered to be trading
securities.
78
The following table sets forth certain information regarding the amortized
cost and fair value of our securities at the dates indicated.
At December 31,
-------------------------------------
1998 1997
------------------ -----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------ --------- -----
(In thousands)
Investment securities, available-for-sale:(1)
U.S. Treasury and agency obligations............ $2,492 $2,504 $1,487 $1,500
Equity Securities............................... 1,167 1,203 1,093 1,166
------ ------ ------ ------
Total investment securities....................... $3,659 $3,707 $2,580 $2,666
====== ====== ====== ======
The following table sets forth certain information regarding the amortized
cost and fair values of our mortgage-backed and mortgage-related securities, all
of which were classified as held-to-maturity at the dates indicated.
At December 31,
---------------------------------------------
1998 1997
--------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- -------- --------- -------
(In thousands)
Investment securities, available-for-sale:(1)
U.S. Treasury and agency obligations.................... $ - $ - $3,000 $2,987
Mortgage-backed securities held-to-maturity:
Fixed rate:
FHLMC pass-through securities......................... 1,042 1,071 1,374 1,418
------ ------ ------ ------
Total mortgage-backed securities.......................... $1,042 $1,071 $4,374 $4,405
====== ====== ====== ======
The following table sets forth our mortgage-backed securities activities
for the periods indicated.
For the Year Ended
December 31,
------------------
1998 1997
------ ------
(In thousands)
Mortgage-backed securities:
At beginning of period.................................... $1,374 $1,497
Mortgage-back securities purchased...................... - -
Mortgage-backed securities sold......................... - -
Amortization and repayments............................. (332) (123)
------ ------
Balance of mortgage-backed securities at end of period...... $1,042 $1,374
====== ======
The table below sets forth certain information regarding the carrying
amount, weighted average yields and contractual maturities of our investment
securities, and mortgage-related securities as of December 31, 1998.
79
December 31, 1998
-----------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years
-------------------- ------------------- ------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Amount Yield Amount Yield Amount Yield
-------- -------- -------- -------- -------- -------
(Dollars in thousands)
Investment securities,
available-for-sale:
U.S. Treasury and agency
obligations
$ - -% $2005 6.25% $499 6.08%
Equity securities...................................... 1203 0.78 - - - -
----- ----- ----- ------ ---- -----
Total investment securities........................ $1203 0.78% $2005 6.25% $499 6.08%
===== ===== ===== ====== ==== =====
Mortgage-backed securities held-
to-maturity:
FHLMC pass through securities.......................... $ - -% $ 26 10.50% $175 8.00%
===== ===== ===== ====== ==== =====
December 31, 1998
-------------------------------------------------------------------------
More than Ten Years Total
------------------------- Average ----------------------------
Weighted Remaining Weighted
Carrying Average Years to Carrying Market Average
Amount Yield Maturity Amount Value Yield
-------- -------- -------- -------- ------ -------
(Dollars in thousands)
Investment securities,
available-for-sale:
U.S. Treasury and agency
obligations............................................ $ - - % 4.2 $2,504 $2,504 6.22%
Equity securities........................................ - - - 1,203 1,203 0.78
------- ------- ------- ------ ------ -----
Total investment securities.......................... $ - - % 4.2 $3,707 $3,707 4.45
======= ======= ======= ====== ====== =====
Mortgage-backed securities held-
to-maturity:
FHLMC pass through securities.......................... $ 841 7.83% 21.0 $1,042 $1,071 7.93%
======= ======= ======= ====== ====== =====
Sources of Funds
General. Deposits, loan repayments and prepayments, maturities of
securities and cash flows generated from operations are the primary sources of
our funds for use in lending, investing and for other general purposes.
Deposits. We offer a variety of deposit accounts with a range of interest
rates and terms. Our deposits consist of passbook and statement savings
accounts, money market accounts, transaction accounts and time deposits
currently ranging in terms from one to five years. At December 31, 1998, the
balance of savings and money market accounts represented 41.1% of total
deposits. The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. Our deposits are obtained predominantly from the areas surrounding
our offices. We have historically relied primarily on providing a higher level
of customer service and long-standing relationships with customers to attract
and retain these deposits and also rely on competitive pricing policies and
advertising; however, market interest rates and rates offered by competing
financial institutions significantly affect our ability to attract and retain
deposits. We have become more susceptible to short-term fluctuations in deposit
flows, as customers have become more interest rate conscious. We manage the
pricing of our deposits in keeping with our asset/liability management,
liquidity and
80
profitability objectives. Based on our experience, we believe that our passbook
and statement savings, money market accounts and transaction accounts are
relatively stable sources of deposits. Our time deposits have been a relatively
stable source of funds as well, including the $39.0 million of certificates of
deposit maturing in one year or less; however, our ability to attract and
maintain time deposits and the rates paid on these deposits has been and will
continue to be significantly affected by market conditions. We are seeking
opportunities to increase transaction deposit accounts through aggressive
advertising, offering ATM services, and offering interest on such accounts. We
also intend to expand our deposit products to attract new customers, including
local businesses.
The following table presents our deposit activity for the periods
indicated:
For the Year Ended
December 31,
------------------
1998 1997
-------- --------
(In thousands)
Net increase before interest credited..... $6,761 $3,593
Interest credited......................... 3,048 2,830
------ ------
Net increase in deposits.......... $9,809 $6,423
====== ======
At December 31, 1998, we had $12.8 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
Amount
-------------
(In thousands)
3 months or less $ 3,596
Over 3 through 6 months 1,818
Over 6 through 12 months 5,568
Over 12 months 1,774
-------
Total $12,756
=======
The following table sets forth the distribution of our deposit accounts as
of the dates indicated and the weighted average interest rates on each category
of deposits presented.
At December 31,
----------------------------------------------------------------------------
1998 1997
---------------------------------- --------------------------------
Percent Weighted Percent Weighted
of Total Average of Total Average
Balance Deposits Rate Balance Deposits Rate
-------- -------- -------- ------- -------- --------
(Dollars in thousands)
Noninterest bearing demand............. $ 3,826 4.46% - % $ 2,281 3.01% -%
Interest bearing demand and savings.... 31,350 36.59 3.96 24,959 32.89 3.51
------- ------ ---- ------- ------- ----
Total................................ 35,176 41.05 3.53 27,240 35.90 3.22
------- ------ ---- ------- ------- ----
Certificate accounts (1)(2):
Within 12 months..................... 39,032 45.56 5.52 37,611 49.57 5.76
Over 12 months through 36
months............................... 8,355 9.75 5.83 7,982 10.52 5.90
Over 36 months....................... 3,123 3.64 6.04 3,044 4.01 6.06
------- ------ ---- ------- ------- ----
Total certificate accounts........... 50,510 58.95 5.60 48,637 64.10 5.80
------- ------ ---- ------- ------- ----
Total deposits....................... $85,686 100.00% 4.75% $75,877 100.00% 4.87%
======= ====== ==== ======= ======= ====
________________
(1) Based on remaining maturity of certificates.
(2) Includes retirement accounts such as IRA and Keogh accounts.
81
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1998.
Period to Maturity from
December 31, 1998
---------------------------
Less than One to Over At December 31,
One Three Three -----------------
Year Years Years 1998 1997
--------- ------ ----- ------- -------
(Dollars in thousands)
Certificate Accounts:
0 to 4.00%..................... $ 30 $ 22 $ $ 52 $ 36
4.01% to 5.00%................. 3,732 229 31 3,992 949
5.01% to 6.00%................. 33,696 7,476 811 41,983 40,755
6.01% to 7.00%................. 1,332 2,580 108 4,020 6,161
7.01% to 8.00%................. 241 180 42 463 732
8.01% to 9.00%................. - - 4 - -
Total..................... $39,031 $10,487 $992 $50,510 $48,637
======= ======= ==== ======= =======
Borrowings. As part of our operating strategy, we have utilized advances
from the Federal Home Loan Bank as an alternative to retail deposits to fund our
operations when borrowings are less costly and can be invested at a positive
interest rate spread or when we need additional funds to satisfy loan demand.
By utilizing Federal Home Loan Bank advances, which possess varying stated
maturities, we can meet our liquidity needs without otherwise being dependent
upon retail deposits and revising our deposit rates to attract retail deposits,
which have no stated maturities, except for certificates of deposit, which are
interest rate sensitive and which are subject to withdrawal from us at any time.
These Federal Home Loan Bank advances are collateralized primarily by certain of
our mortgage loans and secondarily by our investment in capital stock of the
Federal Home Loan Bank. Federal Home Loan Bank advances are made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities. The maximum amount that the Federal Home Loan Bank will
advance to member institutions, including us, fluctuates from time to time in
accordance with the policies of the Federal Home Loan Bank. See "Regulation and
Supervision - Federal Home Loan Bank System." At December 31, 1998, we had $5.0
million in outstanding advances from the Federal Home Loan Bank. We have
borrowing capacity at December 31, 1998 of $8.5 million.
The following table sets forth certain information regarding our borrowed
funds at or for the periods ended on the dates indicated:
At or For the Year Ended
December 31,
------------------------
1998 1997
----------- ----------
(Dollars In thousands)
FHLB advances:
Average balance outstanding (monthly) $5,307 $4,583
Maximum amount outstanding at any month-end during the period 6,000 6,000
Balance outstanding at end of period 5,000 6,000
Weighted average interest rate during period 5.75% 5.19%
Weighted average interest rate at end of period 5.60% 6.49%
82
Subsidiary
Our service corporation subsidiary, Pinehurst Properties, LLC, successor by
merger on April 20, 1999 to Pinehurst Corporation, is involved in the
development of residential real estate. Pinehurst Properties is involved in two
developments. One is a gated residential community consisting of 33 lots, of
which 16 had been sold as of December 31, 1998. The second development is a
more traditional subdivision project that has been divided into two phases;
Phase I consists of 61 lots and Phase II consists of 81 lots. As of December
31, 1998, none of the lots in this development had been sold. Douglas Federal
had made loans totaling approximately $1.9 million in the aggregate as of
December 31, 1998, to builders to finance the construction of single-family
homes on lots sold by Pinehurst Corporation, the predecessor of Pinehurst
Properties, LLC.
Properties
We conduct our business through an executive and one other full service
branch office. We own both offices. The following table sets forth information
regarding our properties.
Original Year Net Book Value of Property
Location Acquired at December 31, 1998
-------- ------------- --------------------------
Executive/Main Branch Office:
8458 Campbellton Street
Douglasville, Georgia 30134-1803 September 1969 $150,000
Branch Office:
1855 Thornton Road
Lithia Springs, Georgia 30122-2619 June 1973 $158,000
We also own property for possible branch expansion or a new main office
located at Chapel Hill Road and Interstate 20, Douglasville, Georgia. The net
book value of this property as of December 31, 1998 was $246,000. Our
subsidiary, Pinehurst Properties, LLC, owns approximately 80 acres of real
property located in Douglasville, Georgia, that has been subdivided and is being
currently developed and sold as residential lots. We also own property for
possible branch expansion located at Douglas Boulevard and Brightstar Road in
Douglasville. The net book value of this property as of December 31, 1998, was
$401,000.
Legal Proceedings
We are not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Such routine
legal proceedings, in the aggregate, are believed by management to be immaterial
to our financial condition or results of operations.
Personnel
As of March 1, 1999, we had 35 full-time employees and 4 part-time
employees. The employees are not represented by a collective bargaining unit
and we consider our relationship with our employees to be good. See "Management
of Douglas Federal -- Benefits Plans" for a description of certain compensation
and benefit programs offered to our employees.
83
MANAGEMENT OF FIRST DEPOSIT
Directors of First Deposit
The directors of First Deposit are also our directors. The Board of
Directors of First Deposit is divided into three classes, two of which contains
three persons and one of which contains two persons. The directors will be
elected by First Deposit's shareholders for staggered three year terms, or until
their successors are elected and qualified. One class of directors, consisting
of Messrs. Boyd and J. Fowler, has a term of office expiring at the first annual
meeting of shareholders, a second class, consisting of Messrs. King, Zellars and
A. Fowler, has a term expiring at the second annual meeting of shareholders and
a third class, consisting of Messrs. Abercrombie, Higgins and Belyeu, has a
term of office expiring at the third annual meeting of shareholders. The
biographical information of each director is contained in "Management of
Douglas Federal -- Biographical Information." It is currently intended that
directors of First Deposit will receive no additional fees for their services as
directors of First Deposit.
Executive Officers of First Deposit
The following individuals are executive officers of First Deposit and hold
the offices indicated opposite their names. The biographical information for
each executive officer is contained in "Management of Douglas Federal --
Biographical Information."
Name Position(s) Held With First Deposit
- ---- -----------------------------------
Danny A. Belyeu Chairman of the Board of Directors
Alpha A. Fowler, Jr. Vice Chairman of the Board of Directors
J. David Higgins President, Chief Executive Officer and Treasurer
John L. King Senior Vice President and Chief Financial Officer
Patricia Owen Secretary
The executive officers of First Deposit are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation, retirement or removal by the Board of Directors.
Since the formation of First Deposit, none of the executive officers,
directors or other personnel has received remuneration from First Deposit.
Information concerning the principal occupations, employment and other
information concerning the directors and officers of First Deposit during the
past five years is described in "Management of Douglas Federal -- Biographical
Information."
84
MANAGEMENT OF DOUGLAS FEDERAL
Directors
The directors of First Deposit are also our directors. Our current
directors will remain directors of Douglas Federal after the conversion. The
following table sets forth certain information regarding our Board of Directors.
Director Term
Name Age (1) Position(s) Held With Us Since Expires
Expires
Alpha A. Fowler, Jr. 78 Chairman and Chief Executive Officer, 1960 2000
President, Treasurer and Director
J. David Higgins 61 Senior Vice President, Controller and Director 1990 2001
John L. King 46 Director 1993 2000
Mac C. Abercrombie, Jr. 69 Director 1993 2001
Danny A. Belyeu 54 Director 1979 2001
Carlton H. Boyd 67 Director 1984 2002
Joseph H. Fowler 47 Director 1984 2002
John B. Zellars 75 Director 1990 2000
________________
(1) As of February 10, 1999.
Executive Officers Who Are Not Directors
The following table sets forth certain information regarding our executive
officers who are not also directors.
Name Age (1) Position(s) Held With Us
- ---- ------- ------------------------
Patricia Owen 54 Vice President and Secretary
Michael Coggin 54 Vice President
_______________
(1) As of February 10, 1999.
Our executive officers are elected annually and will hold office until the
annual meeting of the Board of Directors held immediately after the first annual
meeting of our shareholders after the conversion, and until their successors are
elected and qualified or until death, resignation, retirement or removal by the
Board of Directors. Officers are re-elected by the Board of Directors annually.
Biographical Information
Alpha A. Fowler, Jr. has served as our Chairman of the Board of Directors
and Chief Executive Officer since 1994. Mr. Fowler co-founded us in 1960 and
has been a director and officer since then. Mr. Fowler also served on the
Georgia Public Service Commission from 1965 to 1970 and represented Douglas
County in the Georgia House of Representatives from 1946 to 1960.
Mac C. Abercrombie, Jr. has served on our Board since 1993. Mr.
Abercrombie currently serves as Vice Chairman of the Board of Commissioners of
Douglas County, on which he has served since 1992. Mr. Abercrombie also served
as Sheriff of Douglas County from 1965 to 1973.
85
Carlton H. Boyd has served on our Board since 1984. Mr. Boyd was the Vice
President and General Manager of a local automobile dealership for over 45 years
and is now semi-retired.
Danny A. Belyeu has served on our Board since 1979. Mr. Belyeu has owned
and operated an automobile dealership since 1980.
Joseph H. Fowler has served on our Board since 1984. Mr. Fowler has
practiced law with the law firm of Hartley, Rowe & Fowler, P.C. of Douglasville,
Georgia since 1978.
John B. Zellars has served on our Board since 1990. Mr. Zellars also has
served as Vice Chairman of the Federal Home Loan Bank. Mr. Zellars has served
previously as the Chairman and Chief Executive Officer of Georgia Federal
Savings Bank and as the Chairman of the United States League of Savings
Institutions.
J. David Higgins has served on our Board since 1990. He has served as our
President and Treasurer since 1994. Before joining us, Mr. Higgins served for
four years as a Regional Branch Manager for California Federal Savings & Loan.
John L. King has served as our Senior Vice President since 1994, as our
Controller since 1985, and has served on our Board since 1993. Before joining
us, Mr. King worked for Georgia Federal Bank as the financial reporting and tax
manager, First Atlanta Corporation as an accounting officer and for the Internal
Revenue Service as an agent.
Patricia Owen has served us in various capacities since 1973, and presently
serves as our Vice President and as Secretary of us and our Service Corporation.
Michael Coggin has served as our Vice President and Vice President of Real
Estate Development for our Service Corporation since 1999. Before joining us,
Mr. Coggin had served as Vice President of Marketing Services for Russell
Corporation since 1994.
Meetings and Committees of the Boards of Directors of Douglas Federal and First
Deposit
Our Board of Directors meets monthly and may have additional special
meetings as may be called in the manner specified in the Bylaws. During the
year ended December 31, 1998, the Board held 12 meetings. For the year ended
December 31, 1998, no Director attended fewer than 75% in the aggregate of the
total number of meetings of the Board or Committees on which such Director
served.
Our Board of Directors has established the following committees:
The Executive Committee consists of Messrs. A. Fowler, Belyeu, and
Abercrombie. This committee also acts as our loan committee and acts for the
Board on matters not requiring action by the full Board between regular meetings
of the Board. The committee meets on an as-needed basis and met 51 times in
fiscal year 1998.
The Audit Committee consists of Messrs. J. Fowler and Zellars. The
committee meets annually or as necessary with our private auditors to review the
annual audit report and any other matters of concern. The Audit Committee will
make a report at least annually to the Board of Directors on the findings of the
annual audit report.
86
Additionally, the Board has established the following committees composed
of directors and/or management: the Investment Committee, the Appraisal
Committee, the Construction Loan Inspection Committee, the Compliance Committee
and the Compensation Committee.
Compensation of Directors
All of our outside Directors receive an annual retainer of $3,000 to be
paid quarterly. In addition, each Director receives a fee of $500 for each
regular meeting which they attend and members of committees receive a fee of
$400 for each committee meeting attended.
Executive Compensation
The following table sets forth the cash compensation we paid for services
rendered in all capacities during the fiscal year ended December 31, 1998, to
our Chairman and Chief Executive Officer and to our President. None of our
other executive officers received salary and bonus in excess of $100,000 in
1998.
Annual Compensation All Other Compensation
---------------------------- ----------------------
Name and Principal Position Year Salary Bonus
- --------------------------- ---- ------ -----
Alpha A. Fowler, Jr.
Chairman and Chief Executive Officer 1998 $53,000 $ 5,000 $ 8,745(1)
J. David Higgins 1998 $79,000 $ 25,000 $13,035(1)
President and Treasurer
_______________
(1) Consists of contributions to our profit sharing plan.
Employment Agreements
Upon the conversion, First Deposit and Douglas Federal intend to enter into
employment agreements with Messrs. A. Fowler, Higgins, Coggin and King and Ms.
Owen. The employment agreements are subject to the review and approval of the
Office of Thrift Supervision and may be amended as a result of such Office of
Thrift Supervision review. Review of compensation arrangements by the Office of
Thrift Supervision does not indicate, and should not be construed to indicate,
that the Office of Thrift Supervision has passed on the merits of such
arrangements. The employment agreements are intended to ensure that we will be
able to maintain a stable and competent management base after the conversion.
Our continued success depends to a significant degree on the skills and
competence of Messrs. A. Fowler, Higgins, Coggin and King and Ms. Owen. We do
not currently hold "key man" life insurance on any executive officer.
The employment agreement with Alpha A. Fowler, Jr. provides that he shall
continue to serve as Chairman and Chief Executive Officer of Douglas Federal and
shall serve as Vice Chairman of First Deposit. During the term of this
Agreement, Mr. Fowler will receive:
. an annual salary of $58,300, which is subject to discretionary annual
increases by our Board of Directors;
. benefits under other programs that are maintained for employees of
Douglas Federal or First Deposit generally;
87
. reimbursements for reasonable business expenses; and
. the medical, dental and other healthcare benefits as are extended to
other management personnel.
The agreement has an initial term of three years and a maximum term of four
years measured from the date of the agreement. The agreement is automatically
renewed on a daily basis so that, subject to the four-year maximum term, the
term is always three years. If we decide to end the automatic renewals, the
term will become fixed as the shorter of the four-year maximum term or three
years measured from 30 days after the date we give notice that we are ending the
automatic renewals. If the agreement is terminated by us for cause, as defined
in the agreement, or by Mr. Fowler without good reason, as defined in the
agreement, Mr. Fowler will receive only such salary amounts as are due and owed
to him through the effective date of the termination. If he is terminated
without cause or upon permanent disability, or if he terminates his employment
with good reason, 60 days' prior written notice of intent to terminate is
required and Mr. Fowler will receive a termination payment equal to his average
monthly compensation for the remaining term of the agreement. Average monthly
compensation means the quotient determined by dividing (a) the greater of (1)
Mr. Fowler's then current base salary, or (2) the highest average of his base
salary for the most recent three consecutive 12-month periods during which he
was employed by us immediately before the effective date of the termination by
(b) twelve (12). In addition, Mr. Fowler has agreed not to engage in the
community banking business or become involved in a bank holding company within a
20-mile radius of any of our existing offices or facilities for a period equal
to the greater of 12 months or the remainder of the term of the Agreement
following his termination for any reason, and not to solicit our customers or
employees within the same geographic area for the same period of time.
We also intend to enter into employment agreements with Messrs. Higgins,
Coggin and King and Ms. Owen that contain essentially identical terms and
conditions, except that the base salaries set forth in such agreements are
$86,900 for Mr. Higgins, $50,000 for Mr. Coggin, $75,000 for Mr. King and
$46,900 for Ms. Owen. In addition, the agreements for Mr. Coggin, Mr. King and
Ms. Owen do not have a provision for a four-year maximum term. All employment
agreements will become effective as of June 25, 1999.
Insurance Plans
All of our full-time employees, upon completion of the applicable
introductory period, are covered as a group for comprehensive hospitalization,
including major medial and long-term disability insurance. Life insurance is
also provided to employees and directors.
Benefit Plans
Profit Sharing Plan. We sponsor the Douglas Federal Bank Employees' Saving
& Profit Sharing Plan, a tax-qualified defined contribution plan, for our
eligible employees. The profit sharing plan includes both a profit sharing plan
component and 401(k) savings plan component. All eligible employees are
eligible to participate in the profit sharing plan after completing one year of
service with us.
Each participant in the profit sharing plan may elect to have his monthly
compensation reduced on a pre-tax basis by a whole percentage not less than 1%
nor more than 15%. We contribute the salary reduction amounts at least monthly
to the profit sharing plan on behalf of the participant, which contributions are
allocated to his salary reduction contribution account. No employer matching
contributions are made to the profit sharing plan. A participant is always
fully vested in the amount in his salary reduction contribution account.
88
We, in our sole and absolute discretion, may make an annual profit-sharing
contribution to the profit-sharing plan. We will allocate any profit-sharing
contribution we make to each participant eligible to share in the contribution
in the ratio that the participant's compensation for that year bears to the
total compensation of all participants entitled to share in the contribution for
that year. We will credit the amount allocated to each participant to his
profit-sharing account. The amount in the participant's profit-sharing account
will be fully vested if he is employed by us at his normal retirement age (i.e.,
age 65), if he terminates employment on account of disability, if we terminate
the profit-sharing plan, if he dies while employed or if he completes at least
six years of service with us.
Distributions are made from the profit-sharing plan to a participant when
he retires, dies or otherwise leaves his job with us. A participant may
withdraw all or a portion of the amount in his salary reduction contribution
account under certain limited circumstances while actively employed.
Each participant may direct the trustee under the profit-sharing plan as to
the investment and reinvestment of the amounts in both his salary reduction
contribution account and profit sharing account among the investment funds
selected from time to time by the profit-sharing plan's administrative
committee. One of the investment funds is an "employer stock fund" through
which the participant may invest in shares of stock of the First Deposit.
Employee Stock Ownership Plan ("ESOP"). In connection with the conversion,
we also intend to implement an ESOP. An ESOP is a special type of tax-qualified
defined contribution retirement plan designed to invest primarily in prescribed
types of employer securities, including common stock. An ESOP is funded by
employer contributions, in the form of either cash or stock. The ESOP holds
funds in trust for the benefit of eligible employees and their beneficiaries,
and uses such funds to buy stock from existing shareholders or directly from the
employer. Beyond providing additional retirement benefits, an ESOP provides
eligible employees with an opportunity to become "owners" of the employer and to
participate in the potential appreciation in the value of the stock.
Each of our employees who has satisfied the ESOP eligibility requirements
may become a participant in our ESOP. The ESOP is intended primarily to provide
benefits when a participant retires on or after age 65. The ESOP also provides
benefits before age 65 if the participant becomes totally and permanently
disabled or if the participant dies with an amount to his or her credit under
the ESOP. A participant may also be entitled to a benefit under the ESOP if the
participant leaves us for reasons other than retirement, disability or death.
A participant will become vested in a percentage of his or her ESOP account
in accordance with the following schedule:
Years of Service Percentage
---------------- ----------
Fewer than 2 0%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
Regardless of the number of his or her years of service, a participant will
become fully vested in his or her ESOP account if he or she is employed by us at
age 65, if he or she becomes totally and permanently disabled while working for
us or if he or she dies while employed.
89
The amount of a participant's benefit under the ESOP depends on a number of
factors, including our contributions, the amount of the participant's
compensation, the amounts forfeited by participants who leave their jobs with us
before their benefits are vested and the value of the ESOP Stock. Thus, the
value of a participant's ultimate benefit under the ESOP cannot be predicted.
The ESOP intends to purchase 8.0% of the common stock issued in connection
with the conversion (the "ESOP Stock"). As part of the conversion and in order
to fund the ESOP's purchase of the ESOP Stock, the ESOP intends to borrow from
First Deposit an amount equal to 100% of the aggregate purchase price of the
ESOP Stock. The term of such loan will be 10 years. The interest rate on the
loan is expected to be at or near the prime rate, which is currently 7.75%. The
ESOP Stock purchased with the loan proceeds will serve as collateral for the
loan. Based on the sale of 1,071,000 shares or 1,449,000 shares at the minimum
and maximum of the estimated price range, the amount of the loan to the ESOP
would be $856,800 or $1,159,200, respectively, or $1,333,080 if the estimated
price range is increased by 15.0%. We will make annual contributions to the
ESOP to enable the ESOP's trustees to repay the loan. Additionally, any
dividends First Deposit may pay with respect to the ESOP Stock First Deposit may
also use to repay the loan.
The ESOP will hold the common stock purchased with the loan proceeds in a
suspense account, which stock will be released from the suspense account each
year in accordance with the method of release selected by the administrative
committee administering the ESOP. While held in the suspense account, the ESOP
Stock is pledged as collateral for the ESOP loan. The ESOP can provide no other
security. When released from the suspense account, the ESOP Stock will be
allocated to the accounts of the participants. Each participant's share of the
ESOP Stock released from the suspense account will be that number of shares of
ESOP Stock which his or her compensation for the plan year bears to the
compensation of all eligible employees entitled to share in our contribution for
the plan year.
We will appoint three individuals to serve as the ESOP's trustees. Subject
to their fiduciary duties, the trustees will vote the shares of the ESOP Stock
allocated to each participant's ESOP account in accordance with the
participant's instructions. The trustees will vote those shares of ESOP Stock
for which they do not receive timely instructions, or that have not been
allocated to the accounts of participants, as directed by the ESOP's
administrative committee.
Stock Option Plan. Following the conversion, the Board of Directors of
First Deposit intends to adopt a stock-based benefit plan which would provide
for the granting of options to purchase common stock to certain individuals.
Currently, First Deposit anticipates granting stock options under a single stock
option plan covering full-time employees and outside directors of First Deposit
and its affiliates. However, it is possible that First Deposit may establish a
separate option plan solely for outside directors. At a meeting of shareholders
of First Deposit following the conversion, which under applicable regulations
may not be held earlier than six months after the completion of the conversion,
the Board of Directors intends to present the stock option plan to shareholders
for approval. First Deposit anticipates reserving an amount equal to 10.0% of
the shares of common stock issued in the conversion, or 144,900 shares based
upon the issuance of 1,449,000 shares, for issuance under the stock option plan.
No specific award determinations have been made at this date.
First Deposit intends to design the stock option benefits provided under
the stock option plan to attract and retain qualified personnel in key
positions, provide officers and key employees with a proprietary interest in
First Deposit as an incentive to contribute to the success of First Deposit and
reward key employees for outstanding performance. First Deposit may condition
the granting or vesting of stock options on the achievement of individual or
company-wide performance goals, including the achievement by First Deposit or
Douglas Federal of specified levels of net income, asset growth, return on
equity or
90
other specific financial performance goals. First Deposit anticipates
that the stock option plan will provide for the grant of:
. options for employees to purchase First Deposit's common stock intended
to qualify as incentive stock options under Section 422 of the Internal
Revenue Code;
. options for all participants that do not qualify as incentive stock
options or "Non-Statutory Stock Options"; and
. limited rights which participants may exercise only upon a change in
control of First Deposit.
Unless sooner terminated, the stock option plan will be in effect for a period
of ten years from the earlier of adoption by the Board of Directors or approval
by First Deposit's shareholders. If such plan is adopted within one year after
conversion, Office of Thrift Supervision regulations provide that none of our
individual officers or employees may receive more than 25.0% of the stock
options available under the stock option plan and non-employee directors may not
receive more than 5.0% individually, or 30.0% in the aggregate, of the stock
options available under the stock option plan. First Deposit intends to grant
options with limited rights under the stock option plan at an exercise price
equal to the fair market value of the underlying common stock on the date of
grant. Subject to any applicable regulations, upon exercise of limited rights
in the event of a change in control, the employee will be entitled to receive a
lump sum cash payment equal to the difference between the exercise price of the
related option and the fair market value of the shares of common stock subject
to the option on the date of exercise of the right in lieu of purchasing the
stock underlying the option. First Deposit anticipates that all options granted
contemporaneously with shareholder approval of the stock option plan will
qualify as incentive stock options to the extent permitted under Section 422 of
the Internal Revenue Code.
A committee of the Board of Directors will administer the stock option plan
and will determine which officers and employees may receive options, whether
such options will qualify as incentive stock options, the number of shares
underlying each option, the exercise price of each option, the manner of
exercise of the options and the time when such options become exercisable.
If First Deposit adopts an option plan in the form described above, an
employee will not realize taxable income upon grant or exercise of any incentive
stock option, provided that the employee does not dispose of the shares received
through the exercise of such option for at least one year after the date the
employee receives the stock in connection with the option exercise and two years
after the date of grant of the option. Such a disposition would be considered a
disqualifying disposition. First Deposit may not take a compensation expense
deduction with respect to the grant or exercise of incentive stock options,
unless the employee disposes of the shares in a disqualifying disposition. In
the case of a non-statutory stock option and in the case of a disqualifying
disposition of an incentive stock option, an employee will be deemed to receive
ordinary income upon exercise of the stock option in an amount equal to the
amount by which the fair market value of the common stock on the date of
exercise exceeds the exercise price of the option. The amount of taxable income
realized by an optionee upon the exercise of a non-statutory stock option or due
to a disqualifying disposition of shares acquired through the exercise of an
incentive stock option are a deductible expense for tax purposes by First
Deposit.
Stock options under an option plan adopted by First Deposit would become
vested and exercisable in the manner specified by the committee responsible for
administering the plan, subject to applicable regulations. If the stock option
plan is adopted within one year after the conversion, awards would become vested
and exercisable subject to applicable Office of Thrift Supervision regulations,
which such
91
regulations require that any awards begin vesting not earlier than one year from
the date of shareholder approval of the plan and, thereafter, vest at a rate of
no more than 20.0% per year and may not be accelerated except in case of death
or disability. First Deposit anticipates options granted in connection with the
stock option plan will remain exercisable for at least three months following
the date on which the employee ceases to perform services for Douglas Federal or
First Deposit, except that in the event of death or disability, in which cases
options accelerate and become fully vested and remain exercisable for up to one
year thereafter, or such longer period as determined by First Deposit. However,
any incentive stock options exercised more than three months following the date
the employee ceases to perform services as an employee, other than termination
due to death or disability, would be treated for tax purposes as a non-statutory
stock option. First Deposit also anticipates that in the event of retirement, if
the optionee continues to perform services as a director or consultant on behalf
of Douglas Federal, First Deposit or an affiliate, unvested options would
continue to vest in accordance with their original vesting schedule until the
optionee ceases to serve as our director or consultant. If the stock option plan
is adopted in the form described above, First Deposit, if requested by the
optionee, could elect, in exchange for vested options, to pay the optionee, or
beneficiary in the event of death, the amount by which the fair market value of
the common stock exceeds the exercise price of the options on the date of the
employee's termination of employment.
All options granted to outside directors under an option plan must, by law,
be non-statutory stock options and would vest and become exercisable in a manner
specified by the committee, in compliance with applicable regulations, and would
expire upon the earlier of ten years following the date of grant or one year
following the date the optionee ceases to be a director or consultant. In the
event of the death or disability of a participant, all previously granted
options would immediately vest and become fully exercisable.
In compliance with any applicable regulations, the stock option plan
described above may be amended after the expiration of the one-year period to
provide for accelerated vesting of previously granted options in the event of a
change in control of First Deposit or Douglas Federal. A change in control
would be defined in the plan document and would generally occur when a person or
group of persons acting in concert acquires beneficial ownership of 20.0% or
more of any class of equity security of First Deposit or Douglas Federal or in
the event of a tender or exchange offer, merger or other form of business
combination, sale of all or substantially all of the assets of First Deposit or
Douglas Federal or contested election of directors which resulted in the
replacement of a majority of the Board of Directors by persons not nominated by
the directors in office before the contested election.
Restricted Stock Program. Following the conversion, First Deposit intends
to establish a restricted stock program which would provide for the grant of
stock awards to our officers, employees and non-employee directors as a method
of providing officers, employees and non-employee directors with a proprietary
interest in First Deposit in a manner designed to encourage such persons to
continue their employment with us. The benefits under the restricted stock
program may be provided for under either a separate plan for officers and
employees and a separate plan for outside directors or may be combined with the
stock option plan. First Deposit intends to present the restricted stock
program for shareholder approval at a meeting of shareholders, which First
Deposit may hold no earlier than six months after the completion of the
conversion.
First Deposit expects to contribute funds to the restricted stock program
to enable such plan to acquire, in the aggregate, an amount equal to 4.0% of the
shares of common stock issued in the conversion, or 57,960 shares based upon the
issuance of 1,449,000 shares. First Deposit will acquire these shares through
open market purchases, if permitted, or from authorized but unissued shares.
Although no specific award determinations have been made at this date, First
Deposit anticipates that it will provide
92
stock awards to our directors, officers and employees or their affiliates to the
extent permitted by applicable regulations. If such program is adopted within
one year after conversion, Office of Thrift Supervision regulations provide that
no individual officer or employee may receive more than 25.0% of the stock
awards available under the restricted stock program, and non-employee directors
may not receive more than 5.0% individually, or 30.0% in the aggregate, of the
stock awards available under the restricted stock program. Shares of common
stock granted under the restricted stock program will be awarded at no cost to
the recipients. Our officers, directors and employees will also be eligible
recipients under a stock option plan, if a stock option plan is adopted.
A committee of the Board of Directors will administer the restricted stock
program. Stock awards will not be transferable or assignable. First Deposit
may make allocations and grants to officers and employees under the restricted
stock program in the form of non performance-based grants and/or performance-
based grants. First Deposit may make the granting or vesting of stock awards
under the restricted stock program conditioned upon the achievement of
individual or company-wide performance goals, including First Deposit's or
Douglas Federal's achievement of specified levels of net income, return on
assets, return on equity or other specified financial performance goals and will
be in compliance with applicable regulations. If First Deposit adopts the
restricted stock program or any separate plans for employees and directors
within one year after the conversion, awards would become vested in compliance
with applicable Office of Thrift Supervision regulations, which such regulations
require that any awards begin vesting not earlier than one year from the date of
shareholder approval of the program and, thereafter, vest at a rate of no more
than 20.0% per year and may not be accelerated except in case or death or
disability.
In the event of death, stock awards will become 100% vested. In the event
of disability, stock awards would be 100% vested upon termination of employment
of an officer or employee, or upon termination of service as a director. In the
event of retirement, if the participant continues to perform services as a
director or consultant on behalf of us, First Deposit or an affiliate or, in the
case of a retiring director or as a consulting director, unvested stock awards
will continue to vest in accordance with their original vesting schedule until
the recipient ceases to perform such services at which time any unvested stock
awards would lapse.
The restricted stock program described above may be amended after the
expiration of the one-year period to provide for accelerated vesting of shares
granted under the restricted stock program in the event of a change in control
of Douglas Federal or First Deposit in accordance with applicable regulations.
A change in control, which will be defined in the plan document, generally
occurs when a person or group of persons acting in concert acquires beneficial
ownership of 20.0% or more of a class of equity securities of First Deposit or
Douglas Federal or in the event of a tender or exchange offer, merger or other
form of business combination, sale of all or substantially all of the assets of
First Deposit or Douglas Federal or contested election of directors which
results in the replacement of a majority of the Board of Directors by persons
not nominated by the directors in office before the contested election.
When shares become vested in accordance with the restricted stock program
described above, the participants will recognize taxable income equal to the
fair market value of the common stock at that time. First Deposit may take a
deduction equal to that amount for the year in which it becomes taxable to the
individual. When shares become vested and are actually distributed in
accordance with the restricted stock program, the participants also receive
amounts equal to any accrued dividends with respect thereto. Before vesting,
recipients of grants may direct the voting of the shares awarded to them.
Shares not subject to grants and shares allocated subject to the achievement of
performance goals will be voted by the trustee of the restricted stock program
in accordance to the directions provided by individuals with respect
93
to shares subject to grants. Vested shares will be distributed to recipients as
soon as practicable following the day on which they are vested.
In the event that the restricted stock program acquires additional
authorized but unissued shares after the conversion, the interests of existing
shareholders would be diluted. See "Pro Forma Data."
Certain Transactions
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. In
addition, loans made to a principal shareholder, director or executive officer
or their related interests in excess of the greater of $25,000 or 5.0% of our
capital and surplus must be approved in advance by a majority of the
disinterested members of the Board of Directors.
We may extend credit to an executive officer:
. in any reasonable and legally permissible amount to finance the
education of the executive officer's children;
. in any reasonable and legally permissible amount to finance the
purchase, construction, maintenance or improvement of the executive
officer's primary residence when secured by a first lien and no other
such loan is outstanding; or
. for any other purpose not specifically authorized, if the aggregate
amount of such loans to our executive officer at any one time does not
exceed the higher of $25,000 or 2.5% of our capital and unimpaired
surplus, but in no event shall such extensions of credit be more
$100,000.
At December 31, 1998, we had approximately $149,819 in loans to our
directors and executive officers. All loans to executive officers and directors
were performing in accordance with their original terms at December 31, 1998.
We do not extend credit to a director or any related interest of that
individual, in an amount that when aggregated, is more than our legal lending
limit. Loans to employees and nonexecutive officers do not need the prior
approval of our Board of Directors, though all such loans must be made
exclusively by one of our senior officers. All such loans shall also be subject
to the general restrictions outlined in the paragraph above and must be reported
to the Board of Directors when the aggregate amount of the extensions of credit
to any one employee or nonexecutive officer exceeds $500,000.
We do not extend credit or grant a line of credit to our directors,
executive officers, or to any related interest of those individuals, in an
amount that when aggregated with all other extensions of credit to these
individuals and their related interests, exceeds the regulatory percentage of
our total equity capital and reserves. We do not prohibit any extension of
credit made under to a benefit or compensation program that is widely available
to our employees and that does not give preference to any insider over our other
employees.
94
FEDERAL AND STATE TAXATION
Federal Taxation
General. We will report our income on a December 31 fiscal year basis
using the accrual method of accounting and will be taxed in the same manner as
other corporations with some exceptions, including particularly our reserve for
bad debts discussed below. The following discussion of tax matters is intended
only as a summary and does not purport to be a comprehensive description of the
tax rules applicable to us. Douglas Federal has never been audited by either the
Internal Revenue Service or the Georgia State Department of Revenue.
Bad Debt Reserve. Historically, savings institutions such as ours which
met certain definitional tests primarily related to their assets and the nature
of their business were permitted to establish a reserve for bad debts and to
make annual additions thereto, which are deducted in arriving at their taxable
income. Our deductions with respect to "qualifying real property loans," which
are generally loans secured by certain interest in real property, were computed
using an amount based on our actual loss experience, or a percentage equal to
8.0% of our taxable income, computed with certain modifications and reduced by
the amount of any permitted addition to the non-qualifying reserve. Due to our
loss experience, we generally recognized a bad debt deduction equal to 8.0% of
taxable income.
In August 1996, the provisions repealing the above thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8.0% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the last
taxable year beginning before January 1, 1988. We have previously recorded a
deferred tax liability equal to the bad debt recapture and as such, the new
rules will have no effect on net income or federal income tax expense. For
taxable years beginning after December 31, 1995, our bad debt deduction will be
equal to net charge-offs. The new rules allow an institution to suspend the bad
debt reserve recapture for the 1996 and 1997 tax years if the institution's
lending activity for those years is equal to or greater than the institution's
average mortgage lending activity for the six taxable years preceding 1996. For
this purpose, only home purchase and home improvement loans are included and the
institution can elect to have the tax years with the highest and lowest lending
activity removed from the average calculation. If an institution is permitted
to postpone the reserve recapture, it must begin our six year recapture no later
than the 1998 tax year. The unrecaptured base year reserves will not be subject
to recapture as long as the institution continues to carry on the business of
banking. In addition, the balance of the pre-1988 bad debt reserves continue to
be subject to a provision of present law referred to below that require
recapture in the case of certain excess distributions to shareholders.
Distributions. To the extent that we make "non-dividend distributions"
that are considered as made:
. from the reserve for losses on qualifying real property loans, to the
extent the reserve for such losses exceeds the amount that would have
been allowed under the experience method, or
. from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be
included in the our taxable income.
Non-dividend distributions include distributions in excess of our current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation. However,
95
dividends paid out of our current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not be considered to result in
a distribution from our bad debt reserve. Thus, any dividends that would reduce
amounts appropriated to our bad debt reserve and deducted for federal income tax
purposes would create a tax liability for us. The amount of additional taxable
income created from an Excess Distribution is an amount that, when reduced by
the tax attributable to the income, is equal to the amount of the distribution.
Thus, if, after the conversion, we make a "non-dividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 34.0% Federal corporate
income tax rate. See "Regulation and Supervision" and "Dividend Policy" for our
limits on the payment of dividends. We do not intend to pay dividends that would
result in a recapture of any portion of our bad debt reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code imposes a tax
on alternative minimum taxable income at a rate of 20.0%. The excess of the bad
debt reserve deduction claimed by us over the deductions that would have been
allowable under the experience method is treated as a preference item for
purposes of computing "alternative minimum taxable income." Only 90.0% of the
"alternative minimum taxable income" can be offset by net operating loss
carryovers of which we currently have none. "Alternative minimum taxable
income" is increased by an amount equal to 75.0% of the amount by which our
adjusted current earnings exceeds our "minimum taxable income."
Dividends Received Deduction and Other Matters. We may exclude from our
income 100% of dividends we receive as a member of the same affiliated group of
corporations. The corporate dividends received deduction is generally 70.0% in
the case of dividends received from unaffiliated corporations with which we will
not file a consolidated tax return, except that if we own more than 20.0% of the
stock of a corporation distributing a dividend then 80.0% of any dividends
received may be deducted.
Georgia Taxation
The State of Georgia imposes a tax at the rate of 6.0% on the "Georgia
taxable income" of Douglas Federal and First Deposit. Georgia taxable income is
equal is equal to federal taxable income with certain adjustments. Significant
modifications include the subtraction from federal taxable income of interest or
dividends on obligations or securities of the United States that are exempt from
state income taxes, and a recomputation of the bad debt reserve deduction on
reduced modified taxable income. Since Douglas Federal and First Deposit will
recognize no taxable gain for federal tax purposes as a result of the
conversion, Douglas Federal and First Deposit will recognize no Georgia taxable
income as a result of the conversion.
96
REGULATION AND SUPERVISION
General
As a federal savings association, we are subject to extensive regulation,
examination and supervision by the Office of Thrift Supervision, as our
chartering agency, and the Federal Deposit Insurance Corporation, as the insurer
of our deposits. We must file reports with the Office of Thrift Supervision and
the Federal Deposit Insurance Corporation concerning our activities and
financial condition in addition to obtaining regulatory approvals before
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. We are subject to periodic examinations by the
Office of Thrift Supervision and the Federal Deposit Insurance Corporation to
test our compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive system of oversight of our activities
and our financial condition, and is intended primarily for the protection of the
insurance fund and our depositors.
This system also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of our assets
and our establishment of adequate loan loss reserves. Any change in such
policies, whether by the Office of Thrift Supervision, the Federal Deposit
Insurance Corporation or Congress, could have a material adverse impact on our
operations. In addition, First Deposit, as a savings and loan holding company,
will be required to file certain reports with, and otherwise comply with the
rules and regulations, of the Office of Thrift Supervision and of the Securities
and Exchange Commission under the federal securities laws.
The following description of statutory provisions and regulations which
apply to savings associations and their holding companies are not complete
descriptions of such statutes and regulations. The purpose of the description
is to give you a general understanding of the application of such laws and
regulations to our activities and operations. For a more complete understanding
of these laws and regulations, you should review them in their entirety.
Federal Savings Institution Regulation
Business Activities. As a federal savings institution, our activities are
governed by the Home Owners' Loan Act, as amended and, in certain respects, the
Federal Deposit Insurance Act and the regulations issued by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation under these statutes.
These laws and regulations set forth the nature and extent of our permissible
activities. In particular, certain types of our lending activities, such as
commercial loans, non-residential real property loans and consumer loans, are
limited to a specified percentage of our capital or assets.
Loans-to-One Borrower. The Home Owners' Loan Act provides generally that,
as a federal savings association, we are subject to the same limits as a
national bank on loans to a single borrower. Generally, this limit is 15.0% of
our unimpaired capital and surplus and allowance for loan losses, plus an
additional 10.0% of unimpaired capital and surplus, if the loan is secured by
readily-marketable collateral, which includes certain types of financial
instruments and bullion. At December 31, 1998, our largest loan consisted of a
$728,000 commercial real estate loan to a local church. At December 31, 1998,
our largest relationship with a single borrower consisted of an aggregate of
$1.3 million in real estate loans.
Qualified Thrift Lender Test. The Home Owners' Loan Act also requires us
to meet what is called "a qualified thrift lender test." Under this test, we
are required to either qualify as a "domestic building
97
and loan association" as that term is defined in the Internal Revenue Code, or
maintain at least 65.0% of our "portfolio assets" in certain "qualified thrift
investments" in at least nine months out of each 12-month period. Generally
speaking, our "portfolio assets" are our total assets less certain liquid and
intangible assets and the property used in the conduct of our business.
"Qualified thrift investments" are primarily residential mortgages and related
investments. If we failed to meet this test, we would be required to either
convert to a bank charter or operate under certain restrictions. As of December
31, 1998, we met the "qualified thrift lender test." Recent legislation has
permitted education loans, credit card loans and small business loans to be
considered as "qualified thrift investments."
Limitation on Capital Distributions. The Office of Thrift Supervision
imposes limitations on all capital distributions by a savings institution, such
as cash dividends, payments to repurchase its shares, cash payments to
shareholders of another institution in a merger transaction and other
distributions charged against capital. These limitations establish three tiers
of institutions, which are based primarily on an institution's designated
capital level. As a result, if we were to meet or exceed all of our regulatory
capital requirements both before and after a proposed distribution and we have
not been advised by the Office of Thrift Supervision that we were in need of
more than normal supervision, we could, after prior notice to the Office of
Thrift Supervision, make capital distributions during a calendar year equal to
the greater of:
. 100% of our net earnings to date during the calendar year plus the amount
that would reduce our excess capital by 50.0% at the beginning of the
calendar year; or
. 75.0% of our net earnings during the previous four quarters.
Any additional capital distributions would require prior approval from the
Office of Thrift Supervision. In the event we do not meet our capital
requirements or the Office of Thrift Supervision notifies us that we are in need
of more than normal supervision, our ability to make capital distributions could
be restricted. In addition, the Office of Thrift Supervision could prohibit a
proposed capital distribution, which limitations would otherwise permit, if the
Office of Thrift Supervision determines that such distribution constituted an
unsafe or unsound practice.
The Office of Thrift Supervision has recently adopted amendments to its
capital distribution limitations which, if adopted, would simplify these
limitations and more closely resemble the limitations the other banking agencies
impose. These proposed rules would eliminate the prior notice requirement for
cash dividends within a certain amount paid by institutions which will remain
adequately capitalized following the distribution. However, capital
distributions over a certain amount will still require approval. In addition, a
savings association must provide notice to the Office of Thrift Supervision if a
capital distribution would reduce the amount of common or preferred stock, or
would retire debt instruments included in the capital. Also, savings
associations which are part of a holding company structure must provide notice
to the Office of Thrift Supervision with regard to any capital distributions.
Liquidity. We are required to maintain an average daily balance of
specified liquid assets which will result in a monthly average of not less than
a certain percentage of our net withdrawable deposit accounts plus short-term
borrowings. This percentage requirement is currently established at 4.0%. The
Office of Thrift Supervision may impose monetary penalties if we fail to satisfy
these liquidity requirements. Our average liquidity ratio for the month ended
December 31, 1998 was 12.03%, which exceeded the applicable requirements. We
have never been subject to monetary penalties for failure to
98
meet our liquidity requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
Assessments. As a federal savings association, we are required by
regulation to pay assessments to the Office of Thrift Supervision to fund the
agency's operations. The general assessment, paid on a semi-annual basis, is
based upon our total assets, including those of our consolidated subsidiaries,
as reported in our latest quarterly Thrift Financial Report. The assessments we
paid for the year ended December 31, 1998 totaled $26,554.
Branching. Office of Thrift Supervision regulations permit us to branch
throughout the country under certain conditions. We are generally permitted to
establish interstate networks and geographically diversify our loan portfolios
and lines of business. Federal regulatory authority preempts any state law
purporting to regulate branching by federal savings associations.
Transactions with Related Parties. The Federal Reserve Act limits our
authority to engage in transactions with related parties or "affiliates." The
Federal Reserve Act restricts the aggregate amount of covered transactions with
any individual affiliate to 10.0% of our capital and surplus and also limits the
aggregate amount of transactions with all affiliates to 20.0% of our capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in the Federal Reserve Act, and
the purchase of low-quality assets from affiliates is generally prohibited. The
Federal Reserve Act generally requires that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to us as those prevailing at the time for comparable
transactions with non-affiliates. We are also prohibited from extending credit
to any affiliate engaged in activities not permitted for a bank holding company
and from purchasing the securities of an affiliate, other than those of a
subsidiary.
Our authority to extend credit to executive officers, directors and 10.0%
or more shareholders, as well as entities such persons control, is governed by
the Federal Reserve Act and Regulation O issued under these provisions. Among
other things, such loans are required to be made on terms substantially the same
as those offered to non-affiliated individuals, and not to involve more than the
normal risk of repayment. Recent legislation created an exception for loans to
insiders made under a benefit or compensation program that is widely available
to all of our employees and which do not give a preference to the insiders over
other employees. Regulation O also places individual and aggregate limits on
the amounts of loans which we may make to insiders, based, in part, on our
capital position and requires that we follow certain board of directors approval
procedures.
Enforcement. Under the Federal Deposit Insurance Act, the Office of Thrift
Supervision has primary enforcement responsibility over savings institutions and
has the authority to bring action against all "institution-affiliated parties,"
including shareholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution. Formal enforcement action may range from the
issuance of a capital directive or cease and desist order to removal of officers
or directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $25,000 per
day, or $1 million per day in especially egregious cases. The Federal Deposit
Insurance Corporation has the authority to recommend to the Office of Thrift
Supervision that enforcement action be taken with respect to a particular
savings institution. If the Office of Thrift Supervision takes no action, the
Federal Deposit Insurance Corporation has authority to take such action under
certain circumstances. Federal and state law also establish criminal penalties
for certain violations.
99
Standards for Safety and Soundness. The Federal Deposit Insurance Act
requires each federal banking agency to establish standards for all insured
depository institutions relating to, among other things, internal controls,
information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, and compensation, fees and benefits
and such other operational and managerial standards as the agency deems
appropriate. The federal banking agencies have adopted final regulations and
Interagency Guidelines Establishing Standards for Safety and Soundness to
implement these safety and soundness standards. These guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by these guidelines, the
agency may require the institution to submit to the agency an acceptable plan to
achieve compliance. The final regulations establish deadlines for the submission
and review of such safety and soundness compliance plans.
Capital Requirements. The Office of Thrift Supervision capital regulations
require savings institutions to meet three capital standards: a 1.5% tangible
capital standard, a 3.0% leverage ratio and an 8.0% risk-based capital standard.
The Office of Thrift Supervision regulations require that, in meeting the
leverage ratio, tangible and risk-based capital standards institutions generally
must deduct investments in and loans to subsidiaries engaged in activities not
permissible for a national bank. In addition, the Office of Thrift Supervision
prompt corrective action regulation provides that a savings institution that has
a leverage capital ratio of less than 4.0% will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "-- Prompt
Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital, which is defined as core capital and supplementary
capital, to risk-weighted assets of 8.0%. In determining the amount of risk-
weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight of between 0% and 100%, as assigned by the Office of
Thrift Supervision capital regulation based on the risks Office of Thrift
Supervision believes are inherent in the type of asset. The components of core
capital are equivalent to those discussed earlier under the 3.0% leverage
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and, within
specified limits, the allowance for loan and lease losses. Overall, the amount
of supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The Office of Thrift Supervision has incorporated an interest rate risk
component into its regulatory capital rule. The final interest rate risk rule
also adjusts the risk-weighting for certain mortgage derivative securities.
Under the rule, savings associations with "above normal" interest rate risk
exposure would be subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. The net portfolio value is
the difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts. A savings association's interest
rate risk would be measured by the decline in the net portfolio value of its
assets that would result from a hypothetical 2.0% increase or decrease in market
interest rates divided by the estimated economic value of the association's
assets, as calculated in accordance with guidelines our regulators set forth. A
savings association whose measured interest rate risk exposure exceeds 2.0% must
deduct an interest rate component in calculating its total capital under the
risk-based capital rule. The interest rate risk component is an amount equal to
one-half of the difference between the institution's measured interest rate risk
and 2.0%, multiplied by the estimated economic value of the institution's
assets. That dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement. Under the rule,
there is a two quarter lag between the reporting date of an institution's
financial data and the effective date for the new capital requirement based on
that data. A savings
100
association with assets of less than $300 million and risk-based capital ratios
in excess of 12.0% is not subject to the interest rate risk component, unless
the Office of Thrift Supervision determines otherwise. The rule also provides
that the Office of Thrift Supervision may waive or defer an institution's
interest rate risk component on a case-by-case basis. The Office of Thrift
Supervision has postponed indefinitely the date that the component will first be
deducted from an institution's total capital.
At December 31, 1998, we met each of our capital requirements, in each case
on a fully phased-in basis. See "-- Regulatory Capital Compliance" for a table
which sets forth in terms of dollars and percentages tangible, leverage and
risk-based capital requirements, our historical amounts and percentages at
December 31, 1998, and estimated amounts and percentages based upon the issuance
of the shares within the estimated price range and assuming that First Deposit
retains a portion of the net proceeds.
Prompt Corrective Regulatory Action. Under the Office of Thrift
Supervision prompt corrective action regulations, our federal regulators are
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
capitalization. Generally, a savings institution that has a total risk-based
capital ratio of less than 8.0% or a leverage ratio or a Tier 1 capital ratio
that is less than 4.0% is considered to be undercapitalized. A savings
institution that has a total risk-based capital less than 6.0%, a Tier 1 risk-
based capital ratio of less than 3.0% or a leverage ratio that is less than 3.0%
is considered to be "significantly undercapitalized" and a savings institution
that has a tangible capital to assets ratio equal to or less than 2.0% is deemed
to be "critically undercapitalized." The Office of Thrift Supervision generally
is required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that an institution
must file a capital restoration plan with the Office of Thrift Supervision
within 45 days of the date an institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Any parent holding company must guarantee compliance with
the plan. In addition, numerous mandatory supervisory actions may become
immediately applicable to the institution depending upon its category,
including, but not limited to, increased monitoring by regulators, restrictions
on growth and capital distributions, and limitations on expansion. The Office
of Thrift Supervision could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. The Federal Deposit Insurance Corporation
has adopted a risk-based insurance assessment system. Institutions are assigned
to one of three capital categories based on their financial information, as of
the reporting period ending seven months before the assessment period. The
capital categories are:
. well-capitalized;
. adequately capitalized; or
. undercapitalized.
Institutions are also placed in one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the Federal Deposit Insurance
Corporation by the institution's primary federal regulator and information that
the Federal Deposit Insurance Corporation determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned with the most well capitalized,
healthy institutions receiving the lowest rates.
101
Our deposits are presently insured by the Savings Association Insurance
Fund. Both the Savings Association Insurance Fund and the Bank Insurance Fund
are statutorily required to be recapitalized to a 1.25% of insured reserve
deposits ratio. Until recently, members of the Savings Association Insurance
Fund and Bank Insurance Fund were paying average deposit insurance assessments
of between 24 and 25 basis points. The Bank Insurance Fund met the required
reserve in 1995, whereas the Savings Association Insurance Fund was not expected
to meet or exceed the required level until 2002 at the earliest. This situation
was primarily due to the statutory requirement that Savings Insurance
Association Fund members make payments on bonds issued in the late 1980s by the
Financing Corporation to recapitalize the predecessor to the Savings Association
Insurance Fund.
In view of the Bank Insurance Fund's achieving the 1.25% ratio, the Federal
Deposit Insurance Corporation ultimately adopted a new assessment rate schedule
of from 0 to 27 basis points under which 92% of Bank Insurance Fund members paid
an annual premium of only $2,000. With respect to Savings Association Insurance
Fund member institutions, the Federal Deposit Insurance Corporation adopted a
final rule retaining the previously existing assessment rate schedule applicable
to Savings Association Insurance Fund member institutions of 23 to 31 basis
points. As long as the premium differential continued, it may have had adverse
consequences for Savings Association Insurance Fund members, including reduced
earnings and an impaired ability to raise funds in the capital markets. In
addition, Savings Association Insurance Fund members could have been placed at a
substantial competitive disadvantage to Bank Insurance Fund members with respect
to pricing of loans and deposits and the ability to achieve lower operating
costs.
On September 30, 1996, the President of the United States signed into law
the Deposit Insurance Funds Act of 1996 which, among other things, imposed a
special one-time assessment on Savings Association Insurance Fund member
institutions to recapitalize the Savings Association Insurance Fund. As required
by this legislation, the Federal Deposit Insurance Corporation imposed a special
assessment of 65.7 basis points on Savings Association Insurance Fund assessable
deposits held as of March 31, 1995, payable November 27, 1996. We recognized
this special assessment as an expense in the quarter ended September 30, 1996
that was generally tax deductible. The special assessment we recorded amounted
to $396,910 on a pre-tax basis and $244,000 on an after-tax basis.
The Deposit Insurance Funds Act also spread the obligations for payment of
the Financing Corporation bonds across all Savings Association Insurance Fund
and Bank Insurance Fund members. Beginning on January 1, 1997, Bank Insurance
Fund deposits were assessed for a Financing Corporation bond payment of 1.30
basis points, while Savings Association Insurance Fund deposits pay 6.48 basis
points. Full pro rata sharing of the Financing Corporation bond payments between
Bank Insurance Fund and Savings Association Insurance Fund members will occur on
the earlier of January 1, 2000 or the date the Bank Insurance Fund and Savings
Association Insurance Fund are merged.
As a result of the Deposit Insurance Funds Act, the Federal Deposit
Insurance Corporation voted to effectively lower Savings Association Insurance
Fund assessments to 0 to 27 basis points as of January 1, 1997, a range
comparable to that of Bank Insurance Fund members. Most recently, the Federal
Deposit Insurance Corporation determined to continue the 0 to 27 basis point
range for the second half of 1998. Savings Association Insurance Fund members
will also continue to make the Financing Corporation bond payments described
above. We cannot predict the level of Federal Deposit Insurance Corporation
insurance assessments on an on-going basis, whether the federal thrift charter
will be eliminated or whether the Bank Insurance Fund and the Savings
Association Insurance Fund will eventually be merged.
102
Our assessment rate for 1998 ranged from 6.28 to 5.82 basis points and the
regular premium paid for this period was $46,725.
The Federal Deposit Insurance Corporation is authorized to raise the
assessment rates in certain circumstances. The Federal Deposit Insurance
Corporation has exercised this authority several times in the past and may raise
insurance premiums in the future. If the Federal Deposit Insurance Corporation
takes such action, it could have an adverse effect on our earnings.
Community Reinvestment Act. Under the Community Reinvestment Act, we have
a continuing and affirmative obligation consistent with our safe and sound
operation to help meet the credit needs of our entire community, including low-
and moderate-income neighborhoods. The Community Reinvestment Act does not
establish specific lending requirements or programs nor does it limit our
discretion to develop the types of products and services that we believe are
best suited to our community, consistent with the provisions of the statute. The
Community Reinvestment Act requires the Office of Thrift Supervision, in
connection with its examination of our operations, to assess our record of
meeting the credit needs of our community and to take such record into account
in its evaluation of certain applications which we may submit. Finally, the
Community Reinvestment Act requires the Office of Thrift Supervision to provide
a written evaluation of our Community Reinvestment Act performance through the
use of a four-tiered descriptive rating system, which replaced the five-tiered
numerical rating system. Our latest Community Reinvestment Act rating we
received was "Outstanding."
Federal Home Loan Bank System. We are a member of the Federal Home Loan
Bank System, which consists of 12 regional Federal Home Loan Banks. This system
provides a central credit facility primarily for member institutions. As a
member, we are required to acquire and hold shares of capital stock in the
Federal Home Loan Bank in an amount at least equal to 1.0% of the aggregate
principal amount of our unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20th of our borrowings from the
Federal Home Loan Bank, whichever is greater. We were in compliance with this
requirement with an investment in Federal Home Loan Bank stock at December 31,
1998 of $0.7 million. Advances from the Federal Home Loan Bank must be secured
by specified types of collateral and a member may only obtain long-term advances
for the purpose of providing funds for residential housing finance. At December
31, 1998, we had $5.0 million in Federal Home Loan Bank advances.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent savings institutions and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. For the years ended December 31, 1998, and 1997, our
dividends from the Federal Home Loan Bank amounted to approximately $53,065 and
$51,721. If dividends were reduced, the our net interest income would likely
also be reduced. Further, there can be no assurance that the impact of recent
or future legislation on the Federal Home Loan Banks will not also cause a
decrease in the value of the Federal Home Loan Bank stock we hold.
Federal Reserve System. The Federal Reserve Board regulations require
savings institutions to maintain non-interest-earning reserves against their
transaction accounts. The Federal Reserve Board regulations generally require
that reserves be maintained against transaction accounts as follows: for
accounts aggregating $47.8 million or less, the reserve requirement is 3.0%; and
for accounts greater than $47.8 million, the reserve requirement is $1.4 million
plus 10.0% against that portion of total transaction accounts in excess of $47.8
million. The Federal Reserve Board may change these reserve requirements.
103
The first $4.7 million of otherwise reservable balances are exempted from
the reserve requirements. We are currently in compliance with these
requirements. Because we must maintain required reserves in the form of either
vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-
through account, as defined by the Federal Reserve Board, the effect of this
reserve requirement is to reduce the amount of our interest-earning assets.
Federal Home Loan Bank System members are also authorized to borrow from the
Federal Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all Federal Home Loan Bank sources before borrowing from
a Federal Reserve Bank.
Holding Company Regulation
First Deposit will be a non-diversified unitary savings and loan holding
company within the meaning of the Home Owners' Loan Act. As such, First Deposit
will be required to register with the Office of Thrift Supervision and will be
subject to Office of Thrift Supervision regulations, examinations, supervision
and reporting requirements. In addition, the Office of Thrift Supervision has
enforcement authority over First Deposit and Pinehurst Properties, LLC. Among
other things, this authority permits the Office of Thrift Supervision to
restrict or prohibit activities that it determines to be a serious risk to
Douglas Federal, as the subsidiary savings institution of First Deposit. We
must notify the Office of Thrift Supervision 30 days before declaring any
dividend to First Deposit.
As a unitary savings and loan holding company, First Deposit generally will
not be restricted under existing laws as to the types of business activities in
which it may engage, provided that we continue to be a qualified thrift lender,
as discussed above. See "-- Federal Savings Institution Regulation -- Qualified
Thrift Lender Test" for a discussion of the requirements of a "qualified thrift
lender." Upon First Deposit's acquisition of another savings association, First
Deposit would become a multiple savings and loan holding company, if the
acquired institution is held as a separate subsidiary, and would be subject to
extensive limitations on the types of business activities in which it could
engage. The Home Owners' Loan Act limits the activities of a multiple savings
and loan holding company and its non-insured institution subsidiaries primarily
to activities permissible for bank holding companies under Section 4(c)(8) of
the Bank Holding Company Act, as amended, subject to the prior approval of the
Office of Thrift Supervision, and to other activities authorized by Office of
Thrift Supervision regulation.
The Home Owners' Loan Act prohibits First Deposit, directly or indirectly,
or through one or more subsidiaries, from acquiring more than 5.0% of the voting
stock of another savings institution, or a savings and loan holding company,
without prior written approval of the Office of Thrift Supervision; from
acquiring or retaining, with certain exceptions, more than 5.0% of a non-
subsidiary holding company or savings association. The Home Owners' Loan Act
also prohibits First Deposit from acquiring more than 5.0% of a company engaged
in activities other than those authorized for savings and loan holding companies
by the Home Owners' Loan Act; or acquiring or retaining control of a depository
institution that is not insured by the Federal Deposit Insurance Corporation. In
evaluating applications by holding companies to acquire savings institutions,
the Office of Thrift Supervision must consider the financial and managerial
resources and future prospects of First Deposit and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.
The Office of Thrift Supervision is prohibited from approving any
acquisition that would result in a multiple savings and loan holding company
controlling savings institutions in more than one state, except:
104
. the approval of interstate supervisory acquisitions by savings and loan
holding companies; and
. the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions.
The states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
As a federally-chartered savings institution, we generally are not subject
to those provisions of Georgia law governing state-chartered financial
institutions or to the jurisdiction of the Georgia Department of Banking and
Finance. However, the Georgia Department of Banking and Finance interprets the
Georgia Bank Holding Company Act to require the prior approval of the Georgia
Department of Banking and Finance for any acquisition of control of any savings
institution located in Georgia. As a result, First Deposit will be required to
obtain the prior written consent of the Georgia Department of Banking and
Finance before it will be able to acquire our capital stock. The department
also interprets the Georgia Bank Holding Company Act to include savings and loan
holding companies as "bank holding companies." This interpretation gives the
Department the authority to make examinations of First Deposit and any
subsidiaries and to require periodic and other reports. Existing Georgia
Department of Banking and Finance regulations do not restrict our business
activities or investments or those of First Deposit.
Federal Securities Laws
First Deposit has filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933 for the registration of
the common stock to be issued in the conversion. First Deposit's common stock
has been registered with the Securities and Exchange Commission under the
Securities Exchange Act of 1934. First Deposit is subject to the information,
proxy solicitation, insider trading restrictions and other requirements under
the Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 of shares of the common
stock to be issued in the conversion does not cover the resale of such shares.
Persons who are not affiliates of First Deposit may resell shares of the common
stock without registration.
105
RESTRICTIONS ON ACQUIRING DOUGLAS FEDERAL
OR FIRST DEPOSIT
General
The plan of conversion provides for our conversion from the mutual to the
stock form of organization and, in connection therewith, a new federal stock
charter and bylaws to be adopted by our members. The plan of conversion also
provides for the concurrent formation of a holding company. See "The
Conversion." Certain plans provisions in First Deposit's Articles of
Incorporation and Bylaws and in its management remuneration plans entered into
in connection with the conversion, together with provisions of Georgia corporate
law, may have anti-takeover effects. In addition, regulatory restrictions may
make it difficult for persons or companies to acquire control of either Douglas
Federal or First Deposit.
Restrictions in First Deposit's Articles of Incorporation and Bylaws
A number of provisions of First Deposit's Articles of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
shareholders. The following discussion is a general summary of the material
provisions of First Deposit's Articles of Incorporation and Bylaws and certain
other statutory and regulatory provisions relating to stock ownership and
transfers, the Board of Directors and business combinations, which might be
deemed to have a potential "anti-takeover" effect. These provisions may have
the effect of discouraging a future takeover attempt which the Board of
Directors does not approve but which individual First Deposit shareholders may
deem to be in their best interests or in which shareholders may receive a
substantial premium for their shares over then current market prices. As a
result, shareholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of the current Board of Directors or management of First Deposit more difficult.
The following description of certain of the provisions of the Articles of
Incorporation and Bylaws of First Deposit is necessarily general and reference
should be made in each case to such Articles of Incorporation and Bylaws, which
are incorporated herein by reference. See "Additional Information" as to how to
obtain a copy of these documents.
Board of Directors. The Board of Directors of First Deposit is divided
into three classes, each of which shall contain approximately one-third of the
whole number of members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of directors being elected each
year. First Deposit's Bylaws provide that the Board shall have from three to
twenty-five members and that the vote of the holders of at least 80.0% of the
shares entitled to vote or two-thirds of the directors then in office is
required to change the size of the Board. First Deposit's Articles of
Incorporation provide for the initial Board of eight directors. The Bylaws
provide that any vacancy occurring on the Board, including a vacancy created by
an increase in the number of directors or resulting from death, resignation,
retirement, disqualification, removal from office or other cause, may be filled
for the remainder of the unexpired term by a majority vote of the directors then
in office. In addition, the Bylaws provide that any director may be removed
for cause by the holders of a majority of the outstanding voting shares of First
Deposit, but may only be removed without cause by the holders of 80.0% of the
outstanding voting shares of First Deposit. The classified Board is intended to
provide for continuity of the Board of Directors and to make it more difficult
and time consuming for a shareholder group to fully use its voting power to gain
control of the Board of Directors without the consent of two-thirds of the
incumbent Board of Directors of First Deposit.
106
In the absence of these provisions, the vote of the holders of a majority
of the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders' choice.
Cumulative Voting. The Articles of Incorporation and Bylaws do not provide
for cumulative voting in elections of directors. Elimination of cumulative
voting rights will help to ensure continuity and stability of the Board by
making it more difficult for the holders of a relatively small number of shares
to elect their nominee to the Board.
Mergers, Consolidations and Sales of Assets. First Deposit's Articles of
Incorporation require the approval of the holders of 80.0% of the outstanding
stock of First Deposit entitled to vote for mergers or consolidations, and for
sales, leases or exchanges of all or substantially all of First Deposit's assets
unless the transaction is approved by two-thirds of the members of the Boards of
Directors. This provision could tend to make the acquisition of First Deposit
more difficult to accomplish without the cooperation or favorable recommendation
of First Deposit's Board of Directors.
As holder of all of our outstanding stock after consummation of the
conversion, First Deposit generally will be able to authorize a merger,
consolidation or other business combination involving us without the approval of
the shareholders of First Deposit.
Shares. The Articles of Incorporation authorize the issuance of 10,000,000
shares of common stock and 10,000,000 shares of preferred stock. The shares of
common stock and preferred stock were authorized in an amount greater than that
to be issued in the conversion to provide First Deposit's Board of Directors
with as much flexibility as possible to effect, among other transactions,
financings, acquisitions, stock dividends, stock splits and employee stock
options. However, these additional authorized shares may also be used by the
Board of Directors consistent with its fiduciary duty to deter future attempts
to gain control of First Deposit. The Board of Directors also has sole
authority to determine the terms of any one or more series of preferred stock,
including voting rights, conversion rates, and liquidation preferences. As a
result of the ability to fix voting rights for a series of preferred stock, the
Board has the power, to the extent consistent with its fiduciary duty, to issue
a series of preferred stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
First Deposit's Board of Directors currently has no plans for the issuance of
additional shares, other than the issuance of additional shares under to the
terms of the employee stock ownership plan and the restricted stock program and
upon exercise of stock options to be issued under the terms of the stock option
plan, all of which are to be established and presented to shareholders at the
first annual meeting after the conversion.
Business Combinations With Interested Shareholders. Georgia law imposes
certain restrictions on business combinations between First Deposit and large
shareholders. Georgia law generally prohibits a "business combination" between
First Deposit or a subsidiary and an "interested shareholder" within five years
after the person or entity becomes an interested shareholder. An "interested
shareholder" is generally defined as the beneficial owner of 10.0% of a
company's capital stock. Three exceptions to the above prohibition are:
. before the person or entity becoming an interested shareholder, the
business combination pursuant to which such person or entity became an
interested shareholder shall have been approved by First Deposit's
Board;
. upon consummation of the transaction in which the interested shareholder
became such, the interested shareholder holds at least 90.0% of the
common stock of First Deposit; or
107
. after becoming an interested shareholder, he or she acquires additional
shares resulting in ownership of at least 90.0% of the common stock of
First Deposit and obtains the approval of a majority of the remaining
shares.
The restrictions described above may prevent highly leveraged takeovers and
certain coercive acquisition tactics. They also prevent a substantial
shareholder from engaging in transactions with First Deposit that may not be in
the best interests of First Deposit.
Georgia law also requires that business combinations with interested
shareholders must meet one of three criteria designed to protect minority
shareholders:
. the transaction must be unanimously approved by the continuing directors
of First Deposit;
. the transaction must be approved by two-thirds of the continuing
directors and a majority of shares held by shareholders other than the
interested shareholder; or
. the terms of the transaction must meet specified fair pricing criteria
and certain other tests that are intended to ensure that all
shareholders receive a fair price and equivalent consideration for their
shares regardless of when they sell their shares to an acquiring party.
The above requirement is designed to protect shareholders against the inequities
of certain tactics that have been used in hostile takeover attempts. For
example, in "two-tier" transactions, the acquiring party usually tenders in cash
at a substantial premium for a major stock interest in the target corporation.
After acquiring this initial interest in the corporation, the acquiring party
may acquire total ownership of the corporation by effecting a "freeze-out"
merger that forces minority shareholders to receive cash or other consideration
for their shares of the acquired corporation. As a result, minority
shareholders who do not participate in the initial tender may receive a lower
price or less desirable form of consideration than was received by shareholders
that tendered. The "fair price" provisions of Georgia law are designed to
discourage transactions of this kind and to encourage negotiated acquisitions in
which all shareholders will be more likely to receive equal treatment.
Evaluation of Offers. First Deposit's Articles of Incorporation further
provide that the Board of Directors of First Deposit, when evaluating any offer
of another person to (i) make a tender or exchange offer for any equity security
of First Deposit, (ii) merge or consolidate First Deposit with another
corporation or entity, or (iii) purchase or otherwise acquire all or
substantially all of the properties and assets of First Deposit, shall, in
determining what is in the best interest of First Deposit and its shareholders,
give due consideration to all relevant factors, including, without limitation,
(A) the social and economic effects of acceptance of such offer on First
Deposit's customers and our present and future account holders, borrowers and
employees; on the communities in which Douglas Federal and First Deposit operate
or are located; and (B) the consideration being offered by the other party in
relation to the then-current value of First Deposit in a freely-negotiated
transaction and in relation to the Board of Directors' then estimate of the
future value of First Deposit as an independent entity. By having these
standards in First Deposit's Articles of Incorporation, the Board of Directors
may be in a stronger position to oppose such a transaction if the Board
concludes that the transaction would not be in the best interest of First
Deposit, even if the price offered is significantly greater than the then market
price of any equity security of First Deposit.
Amendment of Articles of Incorporation and Bylaws. Amendments to First
Deposit's Articles of Incorporation or Bylaws changing or removing the
provisions that:
108
. require a classified Board of Directors;
. require a super-majority vote of the shareholders to change the number
of directors, remove a director without cause or approve a merger or
sale of First Deposit;
. eliminate personal liability of directors; or
. allow the board to consider factors in addition to price when evaluating
acquisitions offers
must be approved by the affirmative vote of the holders of at least 80.0% of the
issued and outstanding stock of First Deposit unless two-thirds of the Board
approves the amendment.
Certain Bylaw Provisions. The Bylaws of First Deposit require a
shareholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a shareholder meeting to give at least 30
days advance notice to the Secretary of First Deposit. The notice provision
requires a shareholder who desires to raise new business to provide certain
information to First Deposit concerning the nature of the new business, the
shareholder and the shareholder's interest in the business matter. Similarly, a
shareholder wishing to nominate any person for election as a director must
provide First Deposit with certain information concerning the nominee and the
proposing shareholder.
Dissenters' Rights of Appraisal. After the conversion, the rights of
appraisal of dissenting shareholders of First Deposit will be governed by
Georgia law. Pursuant thereto, a shareholder of a Georgia corporation generally
has the right to dissent from any merger or consolidation involving the
corporation or the sale of all or substantially all of the corporation's assets,
subject to specified procedural requirements. However, no such appraisal rights
are available for the shares of any class or series of a corporation's capital
stock if:
. as of the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting of shareholders to act upon
the agreement of merger or consolidation, such shares were either listed
on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers or held of record by more than 2,000
shareholders, or
. the corporation is the surviving corporation of a merger and the merger
did not require the approval of the corporation's shareholders, unless
in either case, the holders of such stock are required by an agreement
of merger or consolidation to accept for that stock something other
than: (a) shares of stock of the corporation surviving or resulting from
the merger or consolidation; (b) shares of stock of any other
corporation that, at the effective date of the merger, will be listed on
a national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers or held of record by more than 2,000 shareholders;
(c) cash in lieu of fractional shares of a corporation described in
clause (a) or (b) above; or (d) any combination of the shares of stock
and cash in lieu of fractional shares described in clauses (a) through
(c) above.
109
Anti-Takeover Effects of First Deposit's Articles of Incorporation and Bylaws
and Management Remuneration Plans Adopted in Conversion
The provisions described above are intended to reduce First Deposit's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the employment agreements, restricted stock program or stock
option plan to be established may also discourage takeover attempts by
increasing the costs to be incurred by Douglas Federal and First Deposit in the
event of a takeover. See "Management of Douglas Federal -- Employment
Agreements."
First Deposit's Board of Directors believes that the provisions of the
Articles of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of First Deposit and its shareholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of First Deposit and its
shareholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at a price that reflects the true value of First Deposit
and that otherwise is in the best interest of all shareholders.
Restrictions in Our New Charter and Bylaws
Although we are not aware of any effort to obtain control of us after the
conversion, we believe that it is appropriate to adopt certain provisions
permitted by federal regulations to protect our interests and that of our
shareholders from any hostile takeover. Such provisions may, indirectly,
inhibit a change in control of First Deposit, as our sole shareholder. See "Risk
Factors -- Our Charter and Bylaws contain anti-takeover provisions that could
discourage acquisitions of control."
Our federal stock Charter will contain a provision whereby acquiring or
offering to acquire beneficial ownership of more than 10.0% of the issued and
outstanding shares of any class of our equity securities by any person, either
directly or through an affiliate thereof, will be prohibited for a period of
five years following the date of completion of the conversion. Any stock in
excess of 10.0% acquired in violation of the federal stock Charter provision
will not be counted as outstanding for voting purposes. This limitation shall
not apply to any transaction in which we form a holding company without a change
in the respective beneficial ownership interests of our shareholders other than
pursuant to the exercise of any dissenter or appraisal rights. In the event
that holders of revocable proxies for more than 10.0% of the shares of the
common stock of First Deposit seek, among other things, to elect one-third or
more of First Deposit's Board of Directors, to cause First Deposit's
shareholders to approve the acquisition or corporate reorganization of First
Deposit or to exert a continuing influence on a material aspect of the business
operations of First Deposit, which actions could indirectly result in a change
in our control, our Board of Directors will be able to assert this provision of
our federal stock Charter against such holders. Although our Board of Directors
is not currently able to determine when and if it would assert this provision,
our Board of Directors, in exercising its fiduciary duty, may assert this
provision if it were deemed to be in the best interests of Douglas Federal,
First Deposit and First Deposit's shareholders. It is unclear, however, whether
this provision, if asserted, would be successful against such persons in a proxy
contest which could result in a change in our control indirectly through a
change in control of First Deposit. Finally, for five years, shareholders will
not be permitted to call a special meeting of shareholders relating to a change
of our control or a charter amendment or to cumulate their votes in the election
of directors. Furthermore, the staggered terms of the Board of Directors could
have an anti-takeover effect by making it more
110
difficult for a majority of shares to force an immediate change in the Board of
Directors since only one-third of the Board is elected each year. The purpose of
these provisions is to assure stability and continuity of our management in the
years immediately following the conversion.
Although we have no arrangements, understandings or plans at the present
time, except as described in "Description of Capital Stock of Douglas Federal,"
for the issuance or use of the shares of undesignated preferred stock proposed
to be authorized, our Board of Directors believes that the availability of such
shares will provide us with increased flexibility in structuring possible future
financings and acquisitions and in meeting other corporate needs which may
arise. In the event of a proposed merger, tender offer or other attempt to gain
control of us of which our Board of Directors does not approve, it may be
possible for our Board of Directors to authorize the issuance of one or more
series of preferred stock with rights and preferences which could impede the
completion of such a transaction. An effect of the possible issuance of such
preferred stock, therefore, may be to deter a future takeover attempt. Our Board
of Directors does not intend to issue any preferred stock except on terms which
the Board deems to be in our best interest and that of our then existing
shareholders.
Regulatory Restrictions
The plan of conversion prohibits any person, before the completion of the
conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the plan or the common stock
to be issued upon their exercise. The plan also prohibits any person, before
the completion of the conversion, from offering, or making an announcement of an
offer or intent to make an offer, to purchase such subscription rights or common
stock.
For three years following the conversion, Office of Thrift Supervision
regulations prohibit any person from acquiring or making an offer to acquire
more than 10.0% of the stock of any converted savings institution, except for:
. offers that, if consummated, would not result in the acquisition by such
person during the preceding 12-month period of more than 1.0% of such
stock;
. offers for up to 25.0% in the aggregate by the ESOP or our other tax
qualified plans; or
. offers which are not opposed by our Board of Directors and which receive
the prior approval of the Office of Thrift Supervision.
Such prohibition is also applicable to the acquisition of the stock of
First Deposit. Such acquisition may be disapproved by the Office of Thrift
Supervision if it finds, among other things, that the proposed acquisition
would:
. frustrate the purposes of the provisions of the regulations regarding
conversions;
. be manipulative or deceptive;
. subvert the fairness of the conversion;
. be likely to result in injury to the savings institution;
111
. not be consistent with economical home financing;
. otherwise violate law or regulation; or
. not contribute to the prudent deployment of the savings institution's
conversion proceeds.
In the event that any person, directly or indirectly, violates this regulation,
the securities beneficially owned by such person in excess of 10.0% shall not be
counted as shares entitled to vote and shall not be voted by any person or
counted as voting shares in connection with any matters submitted to a vote of
shareholders. The definition of beneficial ownership for this regulation extends
to persons holding revocable or irrevocable proxies for First Deposit's stock
under circumstances that give rise to a conclusive or rebuttable determination
of control under the Office of Thrift Supervision regulations.
In addition, any proposal to acquire 10.0% of any class of equity security
of First Deposit generally would require approval by the Office of Thrift
Supervision under the Change in Bank Control Act. The Office of Thrift
Supervision requires all persons seeking control of a savings institution and,
therefore, indirectly its holding company, to obtain regulatory approval before
offering to obtain control. Federal law generally provides that no "person,"
acting directly or indirectly or through or in concert with one or more other
persons, may acquire directly or indirectly "control," as that term is defined
in Office of Thrift Supervision regulations, of a federally-insured savings
institution without giving at least 60 days' written notice to the Office of
Thrift Supervision and providing the Office of Thrift Supervision an opportunity
to disapprove the proposed acquisition. Such acquisitions of control may be
disapproved if it is determined, among other things, that the:
. acquisition would substantially lessen competition;
. financial condition of the acquiring person might jeopardize the
financial stability of the savings institution or prejudice the
interests of its depositors; or
. competency, experience or integrity of the acquiring person or the
proposed management personnel indicates that it would not be in the
interest of the depositors or the public to permit the acquisition of
control by such person.
Such change in control restrictions on the acquisition of holding company stock
are not limited to three years after conversion but will apply for as long as
the regulations are in effect. Persons holding revocable or irrevocable proxies
may be deemed to be beneficial owners of such securities under Office of Thrift
Supervision regulations and therefore prohibited from voting all or the portion
of such proxies in excess of the 10.0% aggregate beneficial ownership limit.
Such regulatory restrictions may prevent or inhibit proxy contests for control
of First Deposit or Douglas Federal which have not received prior regulatory
approval.
112
DESCRIPTION OF CAPITAL STOCK OF FIRST DEPOSIT
General
First Deposit is authorized to issue 10,000,000 shares of common stock
having no par value per share and 10,000,000 shares of preferred stock having no
par value per share. Based on the sale of common stock in connection with the
conversion, First Deposit currently expects to issue up to 1,449,000 shares of
common stock, or 1,666,350 in the event of an increase of 15.0% in the estimated
price range, and no shares of preferred stock in the conversion. Except as
discussed above in "Restrictions on Acquiring Douglas Federal or First Deposit,"
each share of First Deposit's common stock will have the same relative rights
as, and will be identical in all respects with, each other share of common
stock. Upon payment of the purchase price for the common stock, in accordance
with the plan of conversion, all such stock will be duly authorized, fully paid
and non-assessable.
The common stock of First Deposit will represent non-withdrawable capital,
will not be an account of an insurable type, and will not be insured by the
Federal Deposit Insurance Corporation.
Common Stock
Dividends. First Deposit can pay dividends out of statutory surplus or
from certain net profits if, as and when declared by its Board of Directors.
First Deposit's payment of dividends is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy" and "Regulation and
Supervision." First Deposit's shareholders will be entitled to receive and
share equally in such dividends as its Board of Directors may declare out of
funds legally available therefor. If First Deposit issues preferred stock, the
holders thereof may have a priority over the holders of the common stock with
respect to dividends.
Voting Rights. Upon conversion, the holders of common stock of First
Deposit will possess exclusive voting rights in First Deposit. They will elect
First Deposit's Board of Directors and act on such other matters as are required
to be presented to them under Georgia law or First Deposit's Articles of
Incorporation or as are otherwise presented to them by the Board of Directors.
Except as discussed in "Restrictions on Acquiring Douglas Federal and First
Deposit," each holder of common stock will be entitled to one vote per share and
will not have any right to cumulate votes in the election of directors. If
First Deposit issues preferred stock, holders of the preferred stock may also
possess voting rights. Certain matters may require an 80.0% shareholder vote.
See "Restrictions on Acquiring Douglas Federal and First Deposit."
Liquidation. In the event of the liquidation, dissolution or winding up of
First Deposit, the holders of its common stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all of
the assets of First Deposit available for distribution. If preferred stock is
issued, the holders thereof may have a priority over the holders of the common
stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the common stock of First Deposit will not
be entitled to preemptive rights with respect to any shares which may be issued.
The common stock is not redeemable by First Deposit.
113
Preferred Stock
None of the shares of First Deposit's authorized preferred stock will be
issued in the conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without shareholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the common stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
114
DESCRIPTION OF THE CAPITAL STOCK OF DOUGLAS FEDERAL
General
Our federal stock Charter, to be effective upon the conversion, authorizes
the issuance of capital stock consisting of 5,000,000 shares of common stock,
par value $1.00 per share, and 1,000,000 shares of preferred stock, par value
$1.00 per share, which preferred stock may be issued in series and classes
having such rights, preferences, privileges and restrictions as our Board of
Directors may determine. Each share of our common stock will have the same
relative rights as, and will be identical in all respects with, each other share
of common stock. After the conversion, our Board of Directors will be
authorized to approve the issuance of common stock up to the amount authorized
by the federal stock Charter without the approval of our shareholders. First
Deposit will hold all of our issued and outstanding common stock as our sole
shareholder. Our capital stock will represent non-withdrawable capital, will
not be an account of an insurable type, and will not be insured by the Federal
Deposit Insurance Corporation.
Common Stock
Dividends. The holders of our common stock will be entitled to receive and
to share equally in such dividends as our Board of Directors may declare out of
funds legally available therefor, subject to the preferences of holders of the
outstanding shares of any class of stock having preference over such common
stock as to the payment of dividends. See "Dividend Policy" for certain
restrictions on the payment of dividends and "Federal and State Taxation --
Federal Taxation" for a discussion of the consequences of the payment of cash
dividends from income appropriated to bad debt reserves.
Voting Rights. Immediately after the conversion, the holders of our common
stock will possess exclusive voting rights. Each holder of shares of common
stock will be entitled to one vote for each share held, subject to the right of
shareholders to cumulate their votes for the election of directors. During the
five-year period after the effective date of the conversion, cumulation of votes
will not be permitted. See "Restrictions on Acquiring Douglas Federal and First
Deposit -- Anti-Takeover Effects of First Deposit's Articles of Incorporation
and Bylaws and Management Remuneration Plans Adopted in Conversion."
Liquidation. In the event of our liquidation, dissolution or winding up,
the holders of common stock will be entitled to receive, after payment of all of
our debts, deposits and other liabilities, and distribution of the balance in
the special liquidation account to eligible account holders and supplemental
eligible account holders, all of our assets available for distribution in cash
or in kind. If preferred stock is issued after the conversion, the holders
thereof may also have priority over the holders of common stock in the event of
our liquidation or dissolution.
Preemptive Rights; Redemption. Holders of our common stock will not be
entitled to preemptive rights with respect to any shares which may be issued.
The common stock will not be subject to redemption. Upon our receipt of the
full specified purchase price therefor, the common stock will be fully paid and
non-assessable.
Preferred Stock
None of the shares of our authorized preferred stock will be issued in the
conversion. Such stock may be issued with such preferences and designations as
our Board of Directors may from time to time
115
determine. Our Board of Directors may issue preferred stock with voting,
dividend, liquidation and conversion rights which could dilute the voting power
of the holders of common stock and may assist management in impeding an
unfriendly takeover or attempted change in control.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is The Registrar and
Transfer Company.
EXPERTS
Our consolidated financial statements as of December 31, 1998 and 1997, and
for the years ended December 31, 1998 and December 31, 1997, have been included
herein in reliance upon the report of Mauldin & Jenkins, LLC, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
Ferguson & Company has consented to the publication herein of the summary
of its report to Douglas Federal and First Deposit setting forth its opinion as
to the estimated market value of the common stock upon conversion and its
opinion with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the common stock and the federal income tax consequences of
the conversion will be passed upon for us by Womble Carlyle Sandridge & Rice,
PLLC, Atlanta, Georgia, our special counsel. Georgia income tax consequences
will be passed upon for us by Mauldin & Jenkins, LLC. Certain legal matters
will be passed upon for Trident Securities by Muldoon, Murphy & Faucette LLP,
Washington, D.C.
WHERE YOU CAN FIND MORE INFORMATION
First Deposit has filed with the Securities and Exchange Commission
("Commission") a registration statement under the Securities Act of 1933 with
respect to the common stock offered hereby. As permitted by the rules and
regulations of the Commission, this prospectus does not contain all the
information contained in the registration statement. Such information,
including the Appraisal Report, which is an exhibit to the Registration
Statement, can be examined without charge at the public reference facilities of
the Commission located at 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of such material can be obtained from the Commission at prescribed rates.
Please call the Commission at 1-800-SEC-0330 for further information on the
public reference rooms.
In addition, the Commission maintains a web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, including
First Deposit. The conversion valuation Appraisal Report may also be inspected
by our members at our offices during normal business hours. This prospectus
contains a description of the material terms and features of all material
contracts, reports or exhibits to the registration statement required to be
described; however, the statements contained in this prospectus as to the
contents of any contract or other document filed as an exhibit to the
registration statement are, of necessity, brief descriptions thereof and are not
necessarily complete; each such statement is qualified by reference to such
contract or document.
116
We have filed an application for conversion with the Office of Thrift
Supervision. The rules and regulations of the Office of Thrift Supervision,
allow us to omit certain information contained in that application from this
prospectus. The application may be examined at the principal office of the
Office of Thrift Supervision, 1700 G Street, Washington, D.C. 20552 and at the
office of the Regional Director of the Office of Thrift Supervision located at
1475 Peachtree Street, N.E., Atlanta, Georgia 30309.
First Deposit has filed with the Office of Thrift Supervision an
Application to Form a Holding Company. This prospectus omits certain
information contained in this application. The application may be inspected at
the offices of the Office of Thrift Supervision, 1700 G Street, N.W.,
Washington, D.C. 20552.
In connection with the conversion, First Deposit has registered its common
stock with the Commission under Section 12(g) of the Securities Exchange Act of
1934, and, First Deposit and the holders of its stock must comply with the proxy
solicitation rules, reporting requirements and restrictions on stock purchases
and sales by directors, officers and greater than 10.0% shareholders, the annual
and periodic reporting and certain other requirements of the Securities Exchange
Act of 1934. Under the plan of conversion , First Deposit has undertaken that
it will not terminate such registration for a period of at least three years
following the conversion.
A copy of the plan of conversion, Articles of Incorporation and the Bylaws
of First Deposit and our Charter and Bylaws are available without charge from
us. Our principal office is located at 8458 Campbellton Street, Douglasville,
Georgia 30134-1803, and our telephone number at that address is (770) 942-
5108.
117
DOUGLAS FEDERAL BANK, FSB
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
INDEPENDENT AUDITOR'S REPORT............................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets........................................ F-3
Consolidated statements of income.................................. F-4
Consolidated statements of comprehensive income.................... F-5
Consolidated statements of retained earnings....................... F-6
Consolidated statements of cash flows.............................. F-7 and F-8
Notes to consolidated financial statements......................... F-9-F-30
All schedules are omitted because they are not required or applicable, or the
required information is shown in the financial statements or notes thereto.
The financial statements of First Deposit Bancshares, Inc. have been omitted
because First Deposit Bancshares, Inc. has not yet issued any stock, has no
assets and no liabilities, and has not conducted any business other than of an
organizational nature.
These financial statements have been prepared in accordance with Regulation SB
of the Securities and Exchange Commission.
F-1
INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------
To the Board of Directors
Douglas Federal Bank, FSB and Subsidiary
Douglasville, Georgia
We have audited the accompanying consolidated balance sheets
of Douglas Federal Bank, FSB and subsidiary as of December 31, 1998 and 1997,
and the related consolidated statements of income, comprehensive income,
retained earnings, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Douglas
Federal Bank, FSB and subsidiary as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ MAULDIN & JENKINS, LLC
Atlanta, Georgia
February 12, 1999
F-2
DOUGLAS FEDERAL BANK, FSB
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
==================================================================================================================
ASSETS 1998 1997
------ -------------------- --------------------
Cash and due from banks $ 7,556,511 $ 5,663,428
Federal funds sold 715,000 65,000
Securities held-to-maturity (fair value $1,071,369
and $4,405,084) 1,042,000 4,374,402
Securities available-for-sale 3,706,925 2,666,245
Loans held for sale 188,350 380,962
Loans receivable, net 83,188,926 74,048,813
Other real estate owned 228,402 352,942
Premises and equipment 1,777,472 1,828,898
Real estate held for development and sale 1,744,502 1,468,812
Accrued interest receivable 475,315 472,995
Other assets 268,589 277,312
-------------------- --------------------
TOTAL ASSETS $ 100,891,992 $ 91,599,809
==================== ====================
LIABILITIES AND RETAINED EARNINGS
---------------------------------
Deposits
Noninterest-bearing demand $ 3,826,066 $ 2,281,599
Interest-bearing demand and savings 31,350,310 24,958,708
Time deposits 50,509,550 48,636,575
-------------------- --------------------
Total deposits 85,685,926 75,876,882
Federal Home Loan Bank advances 5,000,000 6,000,000
Accrued expenses and other liabilities 543,709 813,229
-------------------- --------------------
TOTAL LIABILITIES 91,229,635 82,690,111
-------------------- --------------------
Commitments and contingent liabilities
Retained earnings, substantially restricted 9,632,457 8,852,711
Accumulated other comprehensive income 29,900 56,987
-------------------- --------------------
Total retained earnings 9,662,357 8,909,698
-------------------- --------------------
TOTAL LIABILITIES AND RETAINED EARNINGS $ 100,891,992 $ 91,599,809
==================== ====================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
DOUGLAS FEDERAL BANK, FSB
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1998 1997
-------------- --------------
INTEREST INCOME
Mortgage loans $ 6,472,776 $ 6,084,240
Other loans 97,671 96,631
Taxable securities 362,076 346,192
Interest-bearing deposits and Federal funds sold 229,780 160,391
-------------- --------------
TOTAL INTEREST INCOME 7,162,303 6,687,454
-------------- --------------
INTEREST EXPENSE
Deposits 3,921,464 3,544,616
Federal Home Loan Bank advances 304,986 238,584
-------------- --------------
TOTAL INTEREST EXPENSE 4,226,450 3,783,200
-------------- --------------
NET INTEREST INCOME 2,935,853 2,904,254
PROVISION FOR LOAN LOSSES 107,805 60,000
-------------- --------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,828,048 2,844,254
-------------- --------------
OTHER INCOME
Service charges on deposit accounts 203,420 169,093
Loan servicing income 42,137 48,226
Gain on sale of securities available-for-sale 274,018 0
Gain on sale of loans 85,880 125,379
Other operating income 158,949 69,647
-------------- --------------
TOTAL OTHER INCOME 764,404 412,345
-------------- --------------
OTHER EXPENSES
Salaries and employee benefits 1,127,935 1,168,571
Equipment and occupancy expenses 310,030 276,637
Other operating expenses 969,928 776,076
-------------- --------------
TOTAL OTHER EXPENSES 2,407,893 2,221,284
-------------- --------------
INCOME BEFORE INCOME TAXES 1,184,559 1,035,315
INCOME TAX EXPENSE 404,813 385,729
-------------- --------------
NET INCOME $ 779,746 $ 649,586
============== ==============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
DOUGLAS FEDERAL BANK, FSB
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
---------- ----------
NET INCOME $ 779,746 $ 649,586
---------- ----------
OTHER COMPREHENSIVE INCOME (LOSS) :
Unrealized gains (losses) on securities available-for-sale:
Unrealized holding gains arising during period,
net of taxes of $93,097 and $29,355, respectively 142,804 56,987
Adjustment for gains realized
net income, net of taxes of $104,127 and
$--, respectively (169,891) -
---------- ----------
OTHER COMPREHENSIVE INCOME (LOSS) (27,087) 56,987
---------- ----------
COMPREHENSIVE INCOME $ 752,659 $ 706,573
========== ==========
F-5
DOUGLAS FEDERAL BANK, FSB
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1998 AND 1997
________________________________________________________________________________
ACCUMULATED
OTHER TOTAL
RETAINED COMPREHENSIVE RETAINED
EARNINGS INCOME EARNINGS
----------- ---------- -----------
BALANCE, DECEMBER 31, 1996 $ 8,203,125 $ - $ 8,203,125
Net income 649,586 - 649,586
Other comprehensive income - 56,987 56,987
----------- ---------- -----------
BALANCE, DECEMBER 31, 1997 8,852,711 56,987 8,909,698
Net income 779,746 - 779,746
Other comprehensive loss - (27,087) (27,087)
----------- ---------- -----------
BALANCE, DECEMBER 31, 1998 $ 9,632,457 $ 29,900 $ 9,662,357
=========== ========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
DOUGLAS FEDERAL BANK, FSB
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- ----------------------------------------------------------------------------------------------------------------------
1998 1997
------------------- -------------------
OPERATING ACTIVITIES
Net income $ 779,746 $ 649,586
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 177,844 156,092
Provision for loan losses 107,805 60,000
Deferred income taxes (55,884) (8,269)
Gain on sale of other real estate owned (4,558) (20,666)
Net realized gains on sales of securities
available-for-sale (274,018) -
(Increase) decrease in loans held for sale, net 192,612 (75,376)
Gain on sale of land (113,682) (10,000)
(Increase) decrease in accrued interest receivable (2,320) 35,191
Other operating activities (193,881) 131,993
------------------- -------------------
Net cash provided by operating activities 613,664 918,551
------------------- -------------------
INVESTING ACTIVITIES
Purchases of securities available-for-sale (2,672,935) (2,579,902)
Proceeds from maturities of securities available-for-sale 994,052 -
Proceeds from sales of securities available-for-sale 874,104 -
Proceeds from maturities of securities held-to-maturity 3,332,402 843,772
Increase in loans, net (9,436,299) (5,810,522)
Net increase in Federal funds sold (650,000) -
Purchase of premises and equipment (128,619) (355,788)
Proceeds from sales of premises and equipment 2,200 -
Proceeds from sales of other real estate owned 325,547 269,712
Investment in other real estate owned (8,069) (43,683)
Investment in real estate held for development and sale (626,684) -
Purchase of real estate held for development and sale - (1,489,812)
Proceeds from sales of real estate held for
development and sale 464,676 31,000
------------------- -------------------
Net cash used in investing activities (7,529,625) (9,135,223)
------------------- -------------------
FINANCING ACTIVITIES
Net increase in deposits 9,809,044 6,422,788
Net increase (decrease) in Federal Home Loan Bank
advances (1,000,000) 5,250,000
------------------- -------------------
Net cash provided by financing activities 8,809,044 11,672,788
------------------- -------------------
Net increase in cash and due from banks 1,893,083 3,456,116
Cash and due from banks at beginning of year 5,663,428 2,207,312
------------------- -------------------
Cash and due from banks at end of year $ 7,556,511 $ 5,663,428
=================== ===================
F-7
DOUGLAS FEDERAL BANK, FSB
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------
1998 1997
------------- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for:
Interest $ 4,205,701 $ 3,823,587
Income taxes $ 568,691 $ 334,519
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING ACTIVITIES
Transfer of loans to other real estate owned $ 188,381 $ 310,868
Unrealized (gains) losses on securities available-for-sale $ 38,117 $ (86,342)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-8
DOUGLAS FEDERAL BANK, FSB
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POlICIES
NATURE OF BUSINESS
Douglas Federal Bank, FSB (the "Company") is a federally chartered
thrift with operations in Douglasville, Douglas County, Georgia. The
Company provides a full range of banking services in its primary
market area of Douglas County, Georgia and the surrounding counties.
Pinehurst Corp. was incorporated in July 1995 and is a wholly-owned
subsidiary of the Company. Pinehurst Corp. was organized for the
purpose of developing and selling real estate in its primary market
area of Douglas County.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its subsidiary. Significant intercompany transactions and
accounts are eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND DUE FROM BANKS
Cash on hand, cash items in process of collection and amounts due from
banks are included in cash and due from banks. At December 31, 1998
and 1997, cash and due from banks included interest-bearing due from
bank accounts in the amounts of $6,683,371 and $4,670,875,
respectively.
The Company maintains amounts due from banks which, at times, may
exceed Federally insured limits. The Company has not experienced any
losses in such accounts.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES
Securities are classified based on management's intention on the date
of purchase. Securities which management has the intent and ability to
hold to maturity are classified as held-to-maturity and reported at
amortized cost. All other debt securities are classified as available-
for-sale and carried at fair value with net unrealized gains and
losses included in retained earnings, net of tax. Marketable equity
securities are classified as available-for-sale and carried at fair
value with net unrealized gains and losses included in equity, net of
tax. Equity securities without a readily determinable fair value are
classified as available-for-sale and carried at cost.
Interest and dividends on securities, including amortization of
premiums and accretion of discounts, are included in interest income.
Realized gains and losses from the sale of securities are determined
using the specific identification method.
LOANS HELD FOR SALE
Loans held for sale consist of mortgage loans which are carried at the
lower of aggregate cost or fair value. The determination of fair value
includes consideration of outstanding commitments from investors,
related origination fees and costs, and commitment fees paid. Gains
and losses are recognized at settlement dates and are determined by
the difference between the selling price and the carrying value of the
loans sold. The Company sells certain mortgage loans to third party
investors. The Company's practice is to originate these mortgage loans
subject to existing purchase commitments from third party investors.
LOANS
Loans are carried at their principal amounts outstanding less deferred
loan fees and costs and the allowance for loan losses. Interest income
on loans is credited to income based on the principal amount
outstanding.
Loan origination fees and certain direct costs incurred in originating
loans are deferred and recognized as income over the contractual life
of the loan.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS (CONTINUED)
The allowance for loan losses is maintained at a level that management
believes to be adequate to absorb losses specifically identified in
the loan portfolio and probable losses inherent in other loans in the
loan portfolio. Management's determination of the adequacy of the
allowance is based on specific allocations of identified classified
loans and specific allocations based on past loan loss experience and
general allocations based on current economic conditions, volume,
growth, composition of the loan portfolio, and other risks inherent in
the portfolio. This evaluation is inherently subjective as it requires
material estimates that are susceptible to significant change
including the amounts and timing of future cash flows expected to be
received on impaired loans. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the
Company's allowance for loan losses, and may require the Company to
record additions to the allowance based on their judgment about
information available to them at the time of their examinations.
The accrual of interest on loans is discontinued when a loan is 90
days or more past due or when, in management's opinion, the borrower
may be unable to meet payments as they become due. When accrual of
interest is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash
payments are received.
A loan is considered to be impaired when it is probable the Company
will be unable to collect all principal and interest payments due in
accordance with the terms of the loan agreement. Individually
identified impaired loans are measured based on the present value of
payments expected to be received, using the contractual loan rate as
the discount rate. Alternatively, measurement may be based on
observable market prices or, for loans that are solely dependent on
the collateral for repayment, measurement may be based on the fair
value of the collateral. If the recorded investment in the impaired
loan exceeds the measure of fair value, a valuation allowance is
established as a component of the allowance for loan losses. Changes
to the valuation allowance are recorded as a component of the
provision for loan losses.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed by the straight-line and
accelerated methods over the estimated useful lives of the assets.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other Real Estate Owned
Other real estate owned represents properties acquired
through foreclosure. Other real estate owned is held for
sale and is carried at the lower of the recorded amount of
the loan or fair value of the properties less estimated
selling costs. Any write-down to fair value at the time of
transfer to other real estate owned is charged to the
allowance for loan losses. Subsequent gains or losses on
sale and any subsequent adjustment to the value are
recorded as other expenses.
Real Estate Held for Development and Sale
Real estate held for development and sale are carried at
the lower of cost or net realizable value. Carrying costs
associated with the properties under development are
capitalized as part of the construction costs during the
construction period.
Sales of real estate are recognized upon closing. The
recognition of gains is dependent upon and determined by
the terms and conditions of the sale and whether the
Company has provided financing to facilitate such sales. If
the transaction does not meet the initial investment
requirements of Statement of Financial Accounting Standards
("SFAS") No. 66, "Accounting for Sales of Real Estate",
income recognition is deferred until such requirements are
met. Gains recognized or deferred are based on the proceeds
from sale, less selling costs and the carrying value of the
real estate. Any losses are recognized at time of sale.
Income Taxes
Income tax expense consists of current and deferred taxes.
Current income tax provisions approximate taxes to be paid
or refunded for the applicable year. Deferred income tax
assets and liabilities are determined using the balance
sheet method. Under this method, the net deferred tax asset
or liability is determined based on the tax effects of the
differences between the book and tax bases of the various
balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.
Recognition of deferred tax balance sheet amounts is based
on management's belief that it is more likely than not that
the tax benefit associated with certain temporary
differences, tax operating loss carryforwards and tax
credits will be realized. A valuation allowance would be
recorded for those deferred tax items for which it is more
likely than not that realization would not occur.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes (Continued)
The Company and the subsidiary file a consolidated income
tax return. Each entity provides for income taxes based on
its contribution to income taxes of the consolidated group.
Profit-Sharing Plan
Profit-sharing plan costs are based on a percentage of
individual employee's salary, not to exceed the amount that
can be deducted for Federal income tax purposes.
Reclassifications
Certain balance sheet and income statement items for the
year ended December 31, 1997 have been reclassified, with
no effect on total assets or net income, to be consistent
with classifications adopted for the year ended December
31, 1998.
Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This statement establishes standards
for reporting and display of comprehensive income and its
components in the financial statements. This statement
requires that all items that are required to be recognized
under accounting standards as components of comprehensive
income be reported in a financial statement that is
displayed in equal prominence with the other financial
statements. The Company has elected to report comprehensive
income in a separate financial statement titled
"Consolidated Statements of Comprehensive Income". SFAS No.
130 describes comprehensive income as the total of all
components of comprehensive income including net income.
This statement uses other comprehensive income to refer to
revenues, expenses, gains and losses that under generally
accepted accounting principles are included in
comprehensive income but excluded from net income.
Currently, the Company's other comprehensive income
consists of items previously reported directly in equity
under SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". As required by SFAS No. 130,
the financial statements for the prior year have been
reclassified to reflect application of the provisions of
this statement. The adoption of this statement did not
affect the Company's financial position, results of
operations or cash flows.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Developments
In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement is required to be
adopted for fiscal years beginning after June 15, 1999.
However, the statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The
Company expects to adopt this statement effective January
1, 2000. SFAS No. 133 requires the Company to recognize all
derivatives as either assets or liabilities in the balance
sheet at fair value. For derivatives that are not
designated as hedges, the gain or loss must be recognized
in earnings in the period of change. For derivatives that
are designated as hedges, changes in the fair value of the
hedged assets, liabilities, or firm commitments must be
recognized in earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings,
depending on the nature of the hedge. The ineffective
portion of a derivative's change in fair value must be
recognized in earnings immediately. Management has not yet
determined what effect the adoption of SFAS No. 133 will
have on the Company's earnings or financial position.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. SECURITIES
The amortized cost and fair value of securities are summarized as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
Securities Available-for-Sale
December 31, 1998:
U. S. Government and
agency securities $ 2,491,538 $ 13,800 $ (1,126) $ 2,504,212
Freddie Mac stock 178,014 20,252 - 198,266
FNMA stock 275,748 15,299 - 291,047
Federal Home Loan
Bank stock 713,400 - - 713,400
---------------- ---------------- ---------------- ----------------
$ 3,658,700 $ 49,351 $ (1,126) $ 3,706,925
================ ================ ================ ================
December 31, 1997:
U. S. Government and
agency securities $ 1,487,401 $ 12,161 $ - $ 1,499,562
Freddie Mac stock 145,748 22,062 - 167,810
FNMA stock 233,354 52,119 - 285,473
Federal Home Loan
Bank stock 713,400 - - 713,400
---------------- ---------------- ---------------- ----------------
$ 2,579,903 $ 86,342 $ - $ 2,666,245
================ ================ ================ ================
Securities Held-to-Maturity
December 31, 1998:
FHLMC Mortgage-backed
securities $ 1,042,000 $ 29,369 $ - $ 1,071,369
================ ================ ================ ================
December 31, 1997:
U. S. Government and
agency securities $ 3,000,509 $ - $ (13,164) $ 2,987,345
FHLMC Mortgage-backed
securities 1,373,893 43,846 - 1,417,739
---------------- ---------------- ---------------- ----------------
$ 4,374,402 $ 43,846 $ (13,164) $ 4,405,084
================ ================ ================ ================
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. SECURITIES (Continued)
The amortized cost and fair value of securities as of December
31, 1998 by contractual maturity are shown below. Maturities may
differ from contractual maturities of mortgage-backed securities
because the mortgages underlying the securities may be called or
prepaid with or without penalty. Therefore, these securities and
equity securities are not included in the maturity categories in
the following summary.
Securities Available-for-Sale Securities Held-to-Maturity
--------------------------------- ---------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------- ---------------- ---------------- ---------------
Due from one year to five years $ 1,991,538 $ 2,005,338 $ - $ -
Due from five years to ten years 500,000 498,874 - -
Mortgage-backed securities - - 1,042,000 1,071,369
Equity securities 1,167,162 1,202,713 - -
--------------- ---------------- ---------------- ---------------
$ 3,658,700 $ 3,706,925 $ 1,042,000 $ 1,071,369
=============== ================ ================ ===============
Securities with a carrying value of $751,475 and $1,021,296 at
December 31, 1998 and 1997, respectively, were pledged to secure
public deposits and for other purposes.
For the year ended December 31, 1998, gross gains on sales of
securities available-for-sale were $274,018. There were no sales
of securities for the year ended December 31, 1997.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 3. LOANS RECEIVABLE
The composition of loans receivable is summarized as follows:
December 31,
-------------------------------------
1998 1997
----------------- ----------------
Commercial $ 1,268,000 $ 871,000
Real estate - construction 6,765,000 5,323,000
Real estate - one-to-four family 69,327,272 62,183,691
Real estate - home equity 3,547,000 3,124,000
Real estate - commercial 2,529,000 2,501,000
Consumer and other loans 962,000 1,136,000
----------------- ----------------
84,398,272 75,138,691
Deferred fees and costs (209,346) (224,320)
Allowance for loan losses (1,000,000) (865,558)
----------------- ----------------
Loans receivable, net $ 83,188,926 $ 74,048,813
================= ================
Changes in the allowance for loan losses are as follows:
December 31,
----------------------------------
1998 1997
--------------- ---------------
Balance, beginning of year $ 865,558 $ 784,062
Provision for loan losses 107,805 60,000
Loans charged off (1,423) -
Recoveries of loans previously charged off 28,060 21,496
--------------- ---------------
Balance, end of year $ 1,000,000 $ 865,558
=============== ===============
The total recorded investment in impaired loans was $982,942
and $1,082,100 at December 31, 1998 and 1997, respectively.
There were no impaired loans that had related allowances for
loan losses determined in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". The
average recorded investment in impaired loans for 1998 and
1997 was $1,017,236 and $1,050,250, respectively. Interest
income on impaired loans of $77,544 and $94,763 was recognized
for cash payments received for the years ended 1998 and 1997,
respectively.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. LOANS RECEIVABLE (CONTINUED)
The Company has granted loans to certain related parties, including
directors, executive officers, and their related entities. The interest
rates on these loans were substantially the same as rates prevailing at
the time of the transaction and repayment terms are customary for the
type of loan involved. Changes in related party loans for the year
ended December 31, 1998 are as follows:
Balance, beginning of year $ 181,274
Advances 145,000
Repayments (176,455)
--------------
Balance, end of year $ 149,819
==============
As of December 31, 1998 and 1997, the Company was servicing loans for
others with approximate balances of $14,657,911 and $13,728,351,
respectively.
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31,
-----------------------------------
1998 1997
---------------- ---------------
Land $ 980,194 $ 980,194
Buildings 728,593 712,360
Equipment 1,298,685 1,188,500
---------------- ---------------
3,007,472 2,881,054
Accumulated depreciation (1,230,000) (1,052,156)
---------------- ---------------
$ 1,777,472 $ 1,828,898
================ ===============
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. DEPOSITS
The amount of time deposits of $100,000 and over was $12,756,042 and
$14,041,171 at December 31, 1998 and 1997, respectively. Deposits in
excess of $100,000 are not insured by the FDIC, amounts which totaled
$1,256,042 and $1,941,171 as of December 31, 1998 and 1997,
respectively.
BALANCE WEIGHTED AVERAGE RATE
DECEMBER 31, AT DECEMBER 31,
---------------------------------- ----------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
Noninterest bearing demand $ 3,826,066 $ 2,281,599 - % - %
Interest bearing demand and savings 31,350,310 24,958,708 3.96% 3.51%
Certificates of deposit 50,509,550 48,636,575 5.60% 5.80%
---------------- ---------------- ---------------- ----------------
$ 85,685,926 $ 75,876,882 4.75% 4.87%
================ ================ ================ ================
At December 31, 1998, scheduled maturities of time deposits are as
follows:
Years ended December 31,
1999 $ 38,960,580
2000 6,548,662
2001 1,858,931
2002 2,133,964
2003 936,047
Thereafter 71,366
-----------------
$ 50,509,550
=================
Interest expense on deposits is summarized as follows:
DECEMBER 31,
----------------------------------
1998 1997
---------------- ----------------
Transactions accounts $ 387,983 $ 271,805
Savings accounts 696,085 575,295
Certificates of deposit 2,837,396 2,697,516
================ ================
$ 3,921,464 $ 3,544,616
================ ================
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances consist of the following:
DECEMBER 31,
----------------------------------
1998 1997
---------------- ----------------
Advance from the Federal Home Loan Bank with interest at 5.90%,
due on July 3, 2000. $ 1,000,000 $ -
Advance from the Federal Home Loan Bank with interest at 5.29%,
due on September 18, 2000. 1,000,000 -
Advance from the Federal Home Loan Bank with interest at 5.96%,
due on July 2, 2001. 1,000,000 -
Advance from the Federal Home Loan Bank with interest at 5.63%,
due on August 28, 2001. 1,000,000 -
Advance from the Federal Home Loan Bank with interest at 5.21%,
due on October 1, 2001. 1,000,000 -
Advance from the Federal Home Loan Bank with interest at 6.41%,
due on September 14, 1998. - 1,000,000
Variable rate advance from the Federal Home Loan Bank
at .25% plus the overnight investment rate.
Matured on December 31, 1998. - 5,000,000
================ ================
$ 5,000,000 $ 6,000,000
================ ================
The advances from the Federal Home Loan Bank are collateralized by a
blanket floating lien on qualifying first mortgages and the Company's Federal
Home Loan Bank stock.
Aggregate maturities of Federal Home Loan Bank advances at December 31,
1998 are as follows:
2000 $ 2,000,000
2001 3,000,000
-----------------
$ 5,000,000
=================
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering all employees,
subject to certain minimum age and service requirements. The
contributions were $117,799 and $126,500 for the years ended December
31, 1998 and 1997, respectively.
NOTE 8. INCOME TAXES
Income tax expense consists of the following:
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
Current $ 460,697 $ 393,998
Deferred (55,884) (8,269)
------------- -------------
Income tax expense $ 404,813 $ 385,729
============= =============
The Company's income tax expense differs from the amounts computed by
applying the Federal income tax statutory rates to income before income
taxes. A reconciliation of the differences is as follows:
DECEMBER 31,
------------------------------------------------------
1998 1997
------------------------- -------------------------
Amount Percent Amount Percent
------------ ---------- ------------ ----------
Tax provision at statutory rate $ 402,750 34 % $ 352,007 34 %
State income tax 19,632 2 19,394 2
Other (17,569) (2) 14,328 1
----------- ---------- ------------ ----------
Income tax expense $ 404,813 34 % $ 385,729 37 %
=========== ========== ============ ==========
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. INCOME TAXES (CONTINUED)
The components of deferred income taxes are as follows:
DECEMBER 31,
-------------------------------
1998 1997
------------- -------------
Deferred tax assets:
Loan loss reserves $ 169,408 $ 107,560
------------- -------------
Deferred tax liabilities:
Depreciation 40,119 20,705
FHLB stock 42,401 42,401
Other - 13,450
Securities available-for-sale 18,325 29,356
------------- -------------
100,845 105,912
------------- -------------
Net deferred tax assets $ 68,563 $ 1,648
============= =============
NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES
The Company enters into firm commitments to sell mortgage loans which
it has originated at agreed upon prices. The sales price for these
loans are based on market rates at the time of the commitment. The
Company generally has ten days after the loan closing to provide the
investor with the loan documentation, at which time the investor will
fund the loan. The investor bears the interest rate risk on the loan
from the time of the commitment until funding. The Company's risk is
limited to specific recourse provisions within the agreement with the
investor and its ability to provide the required loan documentation to
the investor within the commitment period.
The Company sells mortgage loans to investors under various blanket
agreements. Under the agreements, investors generally have a limited
right of recourse to the Company for normal representations and
warranties and, in some cases, for delinquencies within the first three
to six months which lead to loan default and foreclosure. Management
believes that the risk of loss to the Company as a result of these
provisions is insignificant.
As of December 31, 1998 and 1997, the Company had commitments to sell
loans of $188,350 and $380,962, respectively.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
The Company enters into residential construction and commercial loan
commitments to fund loans to its customers at prime based interest
rates in the normal course of business. These instruments involve
credit risk in excess of the amount recognized in the financial
statements.
In the normal course of business, the Company has entered into off-
balance sheet financial instruments which are not reflected in the
financial statements. These financial instruments consist of
commitments to extend credit. Such financial instruments are included
in the financial statements when funds are disbursed or the instruments
become payable. These instruments involve, to varying degrees, elements
of credit risk in excess of the amount recognized in the consolidated
balance sheet.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual amount of those instruments. A
summary of the Company's commitments is as follows:
DECEMBER 31,
-------------------------------------
1998 1997
------------------ ----------------
Unfunded mortgage loan commitments $ 1,374,567 $ 784,762
Construction loan commitments 4,172,033 3,443,407
Other commitments to extend credit 1,418,996 1,635,955
------------------ ----------------
$ 6,965,596 $ 5,864,124
================== ================
As of December 31, 1998, variable rate commitments to make loans or
fund outstanding lines of credit amounted to approximately $1,418,996
and fixed rate commitments amounted to $5,546,600. The interest rates
on variable rate commitments ranged from 8.00% to 10.50% and interest
rates on fixed rate commitments ranged from 7.00% to 10.50% as of
December 31, 1998.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Commitments to extend credit generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many
of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The credit risk involved in issuing these financial
instruments is essentially the same as that involved in extending loans
to customers. The Company evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on
management's credit evaluation of the customer. Collateral held varies
but may include real estate and improvements, marketable securities,
accounts receivable, inventory, equipment, and personal property.
In the normal course of business, the Company is involved in various
legal proceedings. In the opinion of management of the Company, any
liability resulting from such proceedings would not have a material
effect on the Company's financial statements.
YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year.
Systems that do not properly recognize the year "2000" could generate
erroneous data or cause systems to fail. The Company is heavily
dependent on computer processing and telecommunication systems in the
daily conduct of business activities. In addition, the Company must
rely on intermediaries, vendors and customers to appropriately modify
their systems in order that all may continue normal operations and
operate without significant disruptions. The Company has conducted a
review of its computer systems to identify the systems that could be
affected by the Year 2000 issue. The Company presently believes that,
with modifications to its computer systems and conversions to new
systems, the Year 2000 issue will not pose significant operational
problems for the Company or have a material adverse effect on future
operating results. However, absolute assurance cannot be given that;
(1) the modifications and conversions will remedy all deficiencies, (2)
failure of any of the Company's systems will not have a material impact
on operations, or (3) failure of any other companies' systems with whom
the Company conducts business will not have a material impact on
operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 10. Concentrations of Credit
The Company originates primarily commercial, residential, and
consumer loans to customers in Douglas County and surrounding
counties. The ability of the majority of the Company's
customers to honor their contractual loan obligations is
dependent on the economy in their primary market area.
Ninety-seven percent of the Company's loan portfolio is
concentrated in loans secured by real estate, of which a
substantial portion is secured by real estate in the Company's
primary market area. In addition, a substantial portion of the
other real estate owned and real estate held for development
and sale is located in those same markets. Accordingly, the
ultimate collectibility of the loan portfolio and the recovery
of the carrying amount of real estate owned are susceptible to
changes in market conditions in the Company's primary market
area.
The Company, as a matter of policy, does not generally extend
credit to any single borrower or group of related borrowers in
excess of $1,320,000.
NOTE 11. REGULATORY MATTERS
The Company is subject to various regulatory capital
requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital
guidelines that involve quantitative measures of the assets,
liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company's capital
amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company to maintain minimum
amounts and ratios of Total and Tier I capital to
risk-weighted assets, Tier I capital to total adjusted assets,
core capital to total adjusted assets, and tangible capital to
total adjusted assets. Management believes, as of December 31,
1998, the Company meets all capital adequacy requirements to
which it is subject.
As of December 31, 1998, the most recent notification from the
FDIC categorized the Company as well capitalized under the
regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Company must maintain
minimum Total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the following table. There are
no conditions or events since that notification that
management believes have changed the Company's category.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. Regulatory Matters (Continued)
The Company's actual capital amounts and ratios are presented in the
following tables.
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------------ ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- --------- -------------- --------- ------------- ----------
(Dollars in Thousands)
-----------------------------------------------------------------------------
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets):
Consolidated $ 8,513 15.08% $ 4,515 8.00% $ 5,644 10.00%
Tier I Capital
(to Risk Weighted Assets):
Consolidated $ 7,804 13.83% $ 2,258 4.00% $ 3,387 6.00%
Tier I Capital
(to Total Adjusted Assets):
Consolidated $ 7,804 7.88% $ 3,961 4.00% $ 4,952 5.00%
Core Capital
Consolidated $ 7,804 7.88% $ 2,971 3.00% $ - -
Tangible Capital
Consolidated $ 7,804 7.88% $ 1,485 1.50% $ - -
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets):
Consolidated $ 7,920 15.32% $ 4,136 8.00% $ 5,171 10.00%
Tier I Capital
(to Risk Weighted Assets):
Consolidated $ 7,271 14.06% $ 2,068 4.00% $ 3,103 6.00%
Tier I Capital
(to Total Adjusted Assets):
Consolidated $ 7,271 8.47% $ 3,434 4.00% $ 4,292 5.00%
Core Capital
Consolidated $ 7,271 8.08% $ 2,699 3.00% $ - -
Tangible Capital
Consolidated $ 7,271 8.08% $ 1,350 1.50% $ - -
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. Regulatory Matters (Continued)
A reconciliation of GAAP capital at December 31, 1998 is as
follows:
Total Tier I Tangible
------------- -------------- -------------
(Dollars in Thousands)
-------------------------------------------
GAAP capital $ 9,662 $ 9,662 $ 9,662
Accumulated other comprehensive income (30) (30) (30)
Allowable allowance for loan losses 709 - -
Investment in subsidiary (1,828) (1,828) (1,828)
------------- -------------- -------------
$ 8,513 $ 7,804 $ 7,804
============= ============== =============
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments. In
cases where quoted market prices are not available, fair values are
based on estimates using discounted cash flow models. Those models are
significantly affected by the assumptions used, including the discount
rates and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. The use of different
methodologies may have a material effect on the estimated fair value
amounts. Also, the fair value estimates presented herein are based on
pertinent information available to management as of December 31, 1998
and 1997. Such amounts have not been revalued for purposes of these
financial statements since those dates and, therefore, current
estimates of fair value may differ significantly from the amounts
presented herein.
Cash and Due From Banks, and Federal Funds Sold:
The carrying amounts of cash and due from banks, interest-bearing
deposits in banks, and Federal funds sold approximate their fair
value.
Available-for-Sale and Held-to-Maturity Securities:
Fair values for securities are based on available quoted market
prices. The carrying values of equity securities with no readily
determinable fair value approximate fair values.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Loans Held for Sale:
The carrying amounts of loans held for sale approximate their fair
values.
Loans:
For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. For other loans, the fair values are estimated using
discounted cash flow models, using current market interest rates
offered for loans with similar terms to borrowers of similar credit
quality. Fair values for impaired loans are estimated using
discounted cash flow models or based on the fair value of the
underlying collateral.
Deposits:
The carrying amounts of demand deposits, savings deposits, and
variable-rate certificates of deposit approximate their fair values.
Fair values for fixed-rate certificates of deposit are estimated
using discounted cash flow models, using current market interest
rates offered on certificates with similar remaining maturities.
Accrued Interest:
The carrying amounts of accrued interest approximate their fair
values.
Federal Home Loan Bank Advances:
The fair value of the Company's Federal Home Loan Bank advances are
estimated using discounted cash flow models, using current market
interest rates offered on similar borrowings.
Off-Balance Sheet Instruments:
Fair values of the Company's off-balance sheet financial instruments
are based on fees charged to enter into similar agreements. However,
commitments to extend credit and standby letters of credit do not
represent a significant value to the Company until such commitments
are funded. The Company has determined that these instruments do not
have a distinguishable fair value and no fair value has been
assigned.
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows:
December 31, 1998 December 31, 1997
------------------------------------ -----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ----------------- ----------------- ----------------
Financial assets:
Cash and due from
banks, and
Federal funds sold $ 8,271,511 $ 8,271,511 $ 5,728,428 $ 5,728,428
Securities 3,706,925 3,706,925 2,666,245 2,666,245
available-for-sale
Securities held-to-maturity 1,042,000 1,071,369 4,374,402 4,405,084
Loans held for sale 188,350 188,350 380,962 380,962
Loans 83,188,926 83,017,000 74,048,813 77,350,000
Accrued interest receivable 475,315 475,315 472,995 472,995
Financial liabilities:
Deposits $ 85,685,926 $ 86,515,376 $ 75,876,882 $ 75,949,307
Other borrowings 5,000,000 5,000,000 6,000,000 6,000,000
Accrued interest payable 134,156 134,156 113,407 113,407
NOTE 13. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total
revenue are as follows:
December 31,
-------------------------------------
1998 1997
----------------- -----------------
Computer service $ 113,399 $ 84,415
NOW account expenses 124,676 135,670
Conversion losses 90,000 -
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14. PLAN OF CONVERSION
On February 9, 1999, Douglas Federal Bank's Board of Directors
adopted a plan of conversion ("Plan") to convert from a federally
chartered mutual savings bank to a federally chartered stock savings
bank, subject to approval by Douglas Federal Bank's members. The
Plan, which includes the formation of a thrift holding company,
First Deposit Bancshares, Inc. ("First Deposit"), is subject to
approval by the OTS and includes the filing of a registration
statement with the Securities and Exchange Commission.
The Plan is expected to be accomplished by the sale of common stock
of First Deposit and the acquisition of all of the capital stock of
Douglas Federal Bank by First Deposit in exchange for a portion of
the net proceeds of the conversion. First Deposit's common stock
will be offered to various eligible account holders, to an Employee
Stock Ownership Plan, to other supplemental eligible depositors, and
to other members in a subscription offering. Shares of First
Deposit's common stock not subscribed for in the subscription
offering, if any, may be offered for sale in a community offering,
as determined by the Board of Directors of Douglas Federal bank.
At the time of conversion, Douglas Federal Bank will establish a
liquidation account in an amount equal to its retained earnings as
reflected in the latest balance sheet used in the final conversion
prospectus. The liquidation account will be maintained for the
benefit of eligible account holders and supplemental eligible
account holders (collectively, "eligible depositors") who continue
to maintain their deposit accounts in Douglas Federal Bank after
conversion. In the event of a complete liquidation of Douglas
Federal Bank (and only in such event), eligible depositors who
continue to maintain accounts shall be entitled to receive
distribution from the liquidation account before any liquidation may
be made with respect to common stock.
Douglas Federal Bank may not declare or pay a cash dividend if the
effect thereof would cause its equity to be reduced below either the
amount required for the liquidation account or the regulatory
capital requirements imposed by the OTS.
Conversion costs will be deducted from the proceeds of sale of
common stock and recorded as a reduction to equity. If the
conversion is not completed, all costs will be charged to
expense.
F-30
You should rely only on the information contained in this prospectus or that we
have referred to you. We have not authorized anyone to provide you with
information that is different. This prospectus does not constitute an offer to
sell, or a the solicitation of an offer to buy, any of the shares of common
stock offered hereby, to any person in any jurisdiction in which such offer or
solicitation is unlawful. Neither the delivery of this prospectus nor any sale
made hereunder shall under any circumstances create any implication that the
information herein is correct as of any time after the date hereof or that there
has been no change in the affairs of Douglas Federal or First Deposit since such
date.
FIRST DEPOSIT BANCSHARES, INC.
(Holding Company for Douglas Federal Bank, a Federal Savings Bank)
1,449,000 Shares
Common Stock
PROSPECTUS
TRIDENT SECURITIES
Dated May 14, 1999
Dealer Prospectus Delivery Obligation
Until August 12, 1999 (90 days after the date of this prospectus), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
Interests in
Douglas Federal Bank Employee's
Savings and Profit-Sharing Plan
and
Offering of 1,449,000 Shares of
First Deposit Bancshares, Inc.
Common Stock, No Par Value
This prospectus supplement relates to the offer and sale to participants in
Douglas Federal Bank Employee's Savings and Profit-Sharing Plan (the "Plan") of
participation interests and shares of common stock, no par value per share, of
First Deposit Bancshares, Inc. ("First Deposit").
The Board of Directors of Douglas Federal ("Douglas Federal") has adopted a
plan that will convert the structure of Douglas Federal from a mutual savings
institution to a stock savings institution. As part of the conversion, First
Deposit has been established to acquire all of the stock of Douglas Federal and
simultaneously offer First Deposit common stock to the public under the purchase
priorities in Douglas Federal's plan of conversion. Plan participants may
direct the Plan's trustee to invest funds in their Plan accounts in a fund
holding only First Deposit common stock. Based upon the value of the Plan
assets at May 6, 1999, the Plan's trustee could purchase up to 119,058 shares of
First Deposit common stock at the purchase price of $10.00 per share. This
prospectus supplement relates to the election of a Plan participant to invest
all or a portion of their Plan funds in a fund holding only First Deposit common
stock.
The prospectus dated May 14, 1999 of First Deposit, which is attached to
this prospectus supplement, includes detailed information regarding the
conversion, First Deposit common stock and the financial condition, results of
operations and business of Douglas Federal. This prospectus supplement provides
information regarding the Plan. You should read this prospectus supplement
together with the prospectus and keep both for future reference.
Please refer to "Risk Factors" beginning on page 9 of the prospectus.
The date of this Prospectus Supplement is May 14, 1999.
These securities have not been approved or disapproved by the Securities and
Exchange Commission, the Office of Thrift Supervision, or any other federal
agency or any state securities commission, nor has such commission, office or
other agency or any state securities commission passed upon the accuracy or
adequacy of this prospectus supplement. Any representation to the contrary is a
criminal offense.
The shares of common stock offered hereby are not savings accounts or deposits
and are not federally insured or guaranteed by the Bank Insurance Fund or the
Savings Association Insurance
Fund of the Federal Deposit Insurance Corporation or any other government
agency, nor are the shares of First Deposit common stock guaranteed by First
Deposit or Douglas Federal. The entire amount of a purchaser's principal is
subject to loss.
No person has been authorized to give any information or to make any
representations other than those contained in the prospectus or this prospectus
supplement, and, if given or made, such information or representations must not
be relied upon as having been authorized by Douglas Federal or the Plan. This
prospectus supplement does not constitute an offer to sell or solicitation of an
offer to buy any securities in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this prospectus supplement and the prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of Douglas Federal or the Plan since the date
hereof, or that the information herein contained or incorporated by reference is
correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
The Offering................................................................. 1
Securities Offered...................................................... 1
Election to Purchase First Deposit Common Stock in the Conversion of
Douglas Federal......................................................... 1
Value of Participation Interests........................................ 2
Method of Directing Transfer............................................ 2
Time for Directing Transfer............................................. 2
Irrevocability of Transfer Direction.................................... 2
Direction to Purchase Common Stock After the Conversion................. 2
Purchase Price of First Deposit Common Stock............................ 2
Nature of a Participant's Interest in First Deposit Common Stock........ 3
Voting and Tender Rights of First Deposit Common Stock.................. 3
Description of the Plan...................................................... 4
Introduction............................................................ 4
Eligibility and Participation........................................... 4
Contributions Under the Plan............................................ 4
Investment of Contributions............................................. 7
Benefits Under the Plan................................................. 9
Withdrawals and Distributions from the Plan............................. 9
Administration of the Plan.............................................. 11
Reports to Plan Participants............................................ 11
Plan Administrator...................................................... 11
Amendment and Termination............................................... 11
Merger, Consolidation or Transfer....................................... 12
Federal Income Tax Consequences......................................... 12
ERISA and Other Qualification........................................... 14
Restrictions on Resale.................................................. 14
SEC Reporting and Short-Swing Profit Liability.......................... 14
Legal Opinions.......................................................... 14
THE OFFERING
Securities Offered
The securities offered in connection with this prospectus supplement are
participation interests in the Plan and shares of First Deposit common stock.
Based on the value of the Plan assets as of May 6, 1999, the Plan may acquire up
to 119,058 shares (assuming the actual purchase price is $10.00 per share) of
First Deposit common stock to hold in the First Deposit Stock Fund. Only
employees of Douglas Federal may participate in the Plan. The interests offered
under this prospectus supplement and the sale of shares by First Deposit are
conditioned on the completion of the conversion of Douglas Federal. Your
ability to invest in the First Deposit Stock Fund is also limited by the
purchase priorities contained in Douglas Federal's plan of conversion.
This prospectus supplement contains information about the Plan. The
attached prospectus contains information about the conversion of Douglas Federal
and the financial condition, results of operations and business of Douglas
Federal. The address of the principal executive office of Douglas Federal is
8458 Campbellton Street, Douglasville, Georgia 30134-1803. The telephone number
of Douglas Federal is (770) 942-5108.
Election to Purchase First Deposit Common Stock in the Conversion of Douglas
Federal
You may direct the Plan's trustee to invest all or part of the funds in
your Plan account in the First Deposit Stock Fund. Based upon your election, to
the extent shares are available, the Plan's trustee will purchase First Deposit
common stock in the conversion offering. If there are not sufficient shares of
First Deposit common stock available to fill all subscriptions and some or all
of your funds cannot be used to purchase First Deposit common stock, the trustee
will apportion the First Deposit common stock among the subscribers and will
return the remaining funds to your Plan account for investment in your most
recent investment choices on record at Pentegra Group. You do not have to
invest any of your funds in the First Deposit Stock Fund. If you do not elect
to invest in the First Deposit Stock Fund, your Plan account will be invested,
at your election, in the other investment options of the Plan.
If you elect to invest your funds in the First Deposit Stock Fund, you will
generally be able to sell your shares at any time. You may reinvest the
proceeds of a sale of shares in any of the other investment options offered by
the Plan. At this time, we do not anticipate that you will be able to purchase
additional shares of First Deposit through the Plan.
Your ability to invest in the First Deposit Stock Fund is based on your
status as an eligible account holder or supplemental eligible account holder of
Douglas Federal. You are an eligible account holder if you had an account with
Douglas Federal of $50.00 or more on December 31, 1997. You are a supplemental
eligible account holder if you had an account with Douglas Federal of $50.00 or
more on March 31, 1999. If you are not an eligible account holder or
supplemental eligible account holder, you may be eligible to invest in the First
Deposit Stock Fund if you were a depositor of Douglas Federal as of May 1, 1999
or if you were a borrower from Douglas Federal with an outstanding loan on
January 1, 1990 which was still outstanding on May 1, 1999. Persons in this
category are referred to as other members of Douglas Federal.
Eligible account holders, supplemental eligible account holders or other
members may not purchase more than $350,000 of First Deposit common stock in the
subscription offering. If you fall into one of the subscription offering
categories, you have subscription rights to purchase shares of First Deposit
common stock in the subscription offering and you may use funds in the Plan
account to pay for First Deposit common stock for which you subscribe.
1
Value of Participation Interests
As of May 6, 1999, the market value of the assets of the Plan equaled
$1,190,588. The Plan administrator has informed each participant of the value
of his or her account in the Plan as of March 31, 1999. The value of Plan assets
represents past contributions by you and Douglas Federal to the Plan, plus or
minus earnings or losses on the contributions, less previous withdrawals and
loans. The assets of the Plan are valued on a daily basis.
Method of Directing Transfer
The last two pages of this Prospectus Supplement are a form for you to
direct an investment in the First Deposit Stock Fund (the "401(k) Plan
Investment Form"). If you wish to invest all or part (in whole percentages of
at least 1%) of your Plan account in the First Deposit Stock Fund, you need to
complete the attached form. If you do not wish to make such an election, you do
not need to take any action.
Time for Directing Transfer
The deadline for submitting your direction to invest funds in the First
Deposit Stock Fund is June 22, 1999. If you want to invest in the First Deposit
Stock Fund, you must return the attached form to Patricia Owen of Douglas
Federal by 12:00 p.m. on June 22, 1999.
Irrevocability of Transfer Direction
Your direction to invest your Plan funds in the First Deposit Stock Fund
cannot be changed after you have turned in your form. However, you will be able
to direct the reinvestment of your Plan account after the conversion under the
Plan, as explained below.
Direction To Purchase Common Stock After The Conversion
After the conversion, you will be able to direct that a certain percentage
(in multiples of not less than 1%) of the net value of your interests in the
trust fund established for the Plan be transferred to the First Deposit Stock
Fund and invested in First Deposit common stock, or to the other investment
funds available under the Plan. Alternatively, you may direct that a certain
percentage of your interest in the First Deposit Stock Fund be transferred to
the trust fund to be invested in accordance with the terms of the Plan. You
will be permitted to direct that future contributions made to the Plan by or on
your behalf will be invested in First Deposit common stock. Special
restrictions apply to transfers directed by officers, directors and principal
shareholders of Douglas Federal who are subject to the provisions of Section
16(b) of the Securities Exchange Act of 1934, as amended.
Purchase Price of First Deposit Common Stock
The trustee will pay $10.00 per share for shares of First Deposit common
stock. This price is the price that will be paid by all other persons who
purchase shares of First Deposit common stock in the conversion offering. The
First Deposit common stock the trustee purchases after the conversion will not
exceed "adequate consideration" as defined in Section 3(18) of the Employee
Retirement Income Security Act of 1974, as amended.
2
Nature of a Participant's Interest in First Deposit Common Stock
The trustee will hold First Deposit common stock in the name of the Plan.
You have an allocable interest in the Plan's investment funds but not in any
particular assets of the Plan. Accordingly, a specific number of shares of
First Deposit common stock will not be directly attributable to your Plan
account. Gains and losses are allocated to your Plan account based on the units
you hold in the First Deposit Stock Fund. Therefore, earnings with respect to
your Plan account should not be affected by the investments of other Plan
participants.
Voting and Tender Rights of First Deposit Common Stock
The trustee generally will exercise voting and tender rights attributable
to all First Deposit common stock the trust fund holds as directed by Plan
participants with interests in the First Deposit Stock Fund. With respect to
each matter as to which holders of First Deposit common stock have a right to
vote, each Plan participant will be allocated a number of voting instruction
rights reflecting such Plan participant's proportionate interest in the First
Deposit Stock Fund. The number of shares of First Deposit common stock held in
the First Deposit Stock Fund that are voted in the affirmative and negative on
each matter shall be proportionate to the number of voting instruction rights
exercised in the affirmative and negative, respectively. In the event of a
tender offer for First Deposit common stock, the Plan provides that each Plan
participant will be allotted a number of tender instruction rights reflecting
such Plan participant's proportionate interest in the First Deposit Stock Fund.
The percentage of shares of First Deposit common stock held in the First Deposit
Stock Fund that will be tendered will be the same as the percentage of the total
number of tender instruction rights that are exercised in favor of tendering.
The remaining shares of First Deposit common stock held in the First Deposit
Stock Fund will not be tendered. The Plan makes provision for Plan participants
to exercise their voting instruction rights and tender instruction rights on a
confidential basis.
3
DESCRIPTION OF THE PLAN
Introduction
Douglas Federal established the Plan effective May 1, 1999. The Plan is a
cash or deferred arrangement established in accordance with the requirements
under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986
(the "Code"). The Plan will be submitted to the Internal Revenue Service in a
timely manner for a determination that the Plan is qualified under Section
401(a) of the Internal Revenue Code, and that its related trust(s) are qualified
under Section 501(a) of the Internal Revenue Code.
Douglas Federal intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Internal Revenue
Code. Douglas Federal will adopt any amendments to the Plan that may be
necessary to ensure the qualified status of the Plan under the Internal Revenue
Code and applicable Treasury Regulations.
The Plan is an "individual account plan" other than a "money purchase
pension plan" within the meaning of the Employee Retirement Income Security Act
of 1974 ("ERISA"). As such, the Plan is subject to all of the provisions of
Title I (Protection of Employee Benefit Rights) and Title II (Amendments to the
Internal Revenue Code Relating to Retirement Plans) of ERISA, except the funding
requirements contained in Part 3 of Title I of ERISA which by their terms do not
apply to an individual account plan (other than a money purchase pension plan).
The Plan is not subject to Title IV (Plan Termination Insurance) of ERISA.
Neither the funding requirements contained in Part 3 of Title I of ERISA nor the
plan termination insurance provisions contained in Title IV of ERISA will be
extended to Plan participants or beneficiaries under the Plan.
Applicable federal law imposes substantial restrictions on your right to
withdraw amounts held under the Plan before your termination of employment with
Douglas Federal. Federal law may also impose a 10% excise tax on withdrawals
you make from the Plan before you reach age 59 1/2 regardless of whether the
withdrawal occurs during or after your employment with Douglas Federal.
Reference to Full Text of Plan. The following portions of this prospectus
supplement provide an overview of the material provisions of the Plan. Douglas
Federal qualifies this overview in its entirety by reference to the full text of
the Plan. You may obtain copies of the full Plan document by sending a request
to Patricia Owen at Douglas Federal. You should carefully read the full text of
the Plan document to understand your rights and obligations under the Plan.
Eligibility and Participation
If you are age 21 or older, you may participate in the Plan after you work
for Douglas Federal for one year. You must, however, work for at least 1,000
hours during your first year of employment. If you are not age 21, but work
1,000 hours during your first year of employment, your participation will be
postponed until you turn 21. Employees covered by a collective bargaining
agreement, which does not expressly provide for their coverage under the Plan
and certain nonresident aliens are not eligible to participate in the Plan.
Contributions Under the Plan
401(k) Plan Contributions. Each Plan participant may elect to reduce his
or her compensation pursuant to a "salary reduction election" by an amount not
to exceed the limitation on contributions
4
permitted by the Plan and the Internal Revenue Code and have that amount
contributed to the Plan on his or her behalf. Such elective contributions are
credited to a separate elective account for each participant. See "Limitations
on Contributions" below. For purposes of the Plan, "compensation" includes the
compensation an employee receives from Douglas Federal for the calendar year
before any reductions pursuant to the salary reduction election. "Compensation"
includes salary, elective contributions, wages, overtime, commissions, bonuses
and wage continuation payments to an employee who is absent due to an illness or
disability of a short-term nature. "Compensation" does not include expense
allowances, severance pay, fees, contributions other than elective contributions
made to the Plan and contributions Douglas Federal makes to any other pension,
insurance welfare or other employee benefit plan. As of January 1, 1998, the
annual compensation of each Plan participant taken into account under the Plan
is limited to $160,000 (adjusted for increases in the cost of living as
permitted by the Internal Revenue Code). Generally, a Plan participant may elect
to modify the amount contributed to the Plan under such participant's salary
reduction election not more often than twice each year by providing written
notice to the Plan Administrator within a reasonable time before commencement of
the first day of the payroll period for which the modification is to become
effective. However, special restrictions apply to persons subject to Section 16
of the Securities Exchange Act of 1934. Douglas Federal transfers elective
contributions to the Plan's trustee. Douglas Federal will make no employer match
contributions to the Plan.
Notwithstanding the preceding, a Plan participant who receives a hardship
distribution under the terms of the Plan may not be eligible to make additional
contributions under a salary reduction election or have matching contributions
made on his behalf for a period of 12 months after the receipt of the hardship
distribution.
Profit Sharing Contributions. Douglas Federal may make profit-sharing
contributions to the Plan on an annual basis on behalf of eligible participants,
but has no obligation to make such contributions. Such amounts are credited to
each participant's Plan account in the same ratio as each Plan participant's
compensation for that year bears to the total compensation of all participants
entitled to share in the contribution for that year. After the conversion, at
its discretion, Douglas Federal may credit to the Plan a participant's account
in Douglas Federal's Employee Stock Ownership Plan. A participant is eligible
year-end, if he or she has completed 12 months of continuous service and worked
at least 1000 hours during the previous 12 months.
Limitations on Annual Additions and Benefits. Pursuant to the requirements
of the Internal Revenue Code, the Plan provides that the amount of contributions
allocated to each Plan participant's Plan account and separate elective account
during any Plan Year may not exceed the lesser of 25% of the Plan participant's
(S) 415 compensation for the Plan Year or $30,000 (adjusted for increases in the
cost of living as permitted by the Internal Revenue Code). A Plan participant's
(S) 415 compensation is a Plan participant's compensation, excluding amounts
Douglas Federal contributes to the Plan or to any other plan of deferred
compensation or any distributions from a plan of deferred compensation. In
addition, annual additions shall be limited to the extent necessary to prevent
exceeding the limitations set forth in the Internal Revenue Code for all of the
qualified defined benefit plans and defined contribution plans Douglas Federal
maintains. To the extent that these limitations would be exceeded by reason of
excess annual additions with respect to a participant, such excess will be
disposed of as follows:
any excess amount in the Plan participant's Plan account will be used
to reduce Douglas Federal's contributions for such participant in the
next Plan Year, and each succeeding Plan Year, if necessary;
if an excess amount still exists, and the Plan participant is not
---
covered by the Plan at the end of the Plan Year, the excess amount
will be held unallocated in a suspense account
5
which will then be applied to reduce Douglas Federal's future
contributions for all remaining participants in the next Plan Year,
and each succeeding Plan Year, if necessary;
if a suspense account is in existence at any time during the Plan
Year, it will not share in any earnings or losses of the trust fund.
Limitation on 401(k) Plan Contributions. The annual amount of deferred
compensation under a salary reduction election of a Plan participant (when
aggregated with any elective deferrals of the Plan participant under a
simplified employee pension plan or a tax-deferred annuity) may not exceed
$7,000, adjusted for increases in the cost of living as permitted by the
Internal Revenue Code (the limitation for 1999 is $10,000). Contributions in
excess of this limitation ("excess deferrals") will be included in the Plan
participant's gross income for federal income tax purposes in the year they are
made. In addition, any such excess deferral will again be subject to federal
income tax when distributed by the Plan to the Plan participant, unless the
excess deferral (together with any income allocable thereto) is distributed to
the Plan participant not later than the first April 15th following the close of
the taxable year in which the excess deferral is made. Any income on the excess
deferral that is distributed not later than such date shall be treated, for
federal income tax purposes, as earned and received by the Plan participant in
the taxable year in which the excess deferral is made.
Limitation on Plan Contributions for Highly Compensated Employees.
Sections 401(k) and 401(m) of the Internal Revenue Code limit the amount of
deferred compensation that may be made to the Plan in any Plan Year on behalf of
Highly Compensated Employees (defined below) in relation to the amount of
deferred compensation made by or on behalf of all other employees eligible to
participate in the Plan. Specifically, the actual deferral percentage (i.e., the
average of the ratios, calculated separately for each eligible employee in each
group, by dividing the amount of deferred compensation credited to the Plan
participant's separate elective account by such eligible employee's compensation
for the Plan Year) of the Highly Compensated Employees may not exceed the
greater of (i) 125% of the actual deferral percentage of all other eligible
employees, or (ii) the lesser of (x) 200% of the actual deferral percentage of
all other eligible employees, or (y) the actual deferral percentage of all other
eligible employees plus two percentage points. In addition, the actual
contribution percentage for such Plan Years (i.e., the average of the ratios
calculated separately for each eligible employee in each group, by dividing the
amount of voluntary employee and employer matching contributions credited to the
Plan participant's Plan account and the Plan participant's separate elective
account by such eligible employee's compensation for the Plan Year) of the
Highly Compensated Employees may not exceed the greater of (i) 125% of the
actual contribution percentage of all other eligible employees, or (ii) the
lesser of (x) 200% of the actual contribution percentage of all other eligible
employees, or (y) the actual contribution percentage of all other eligible
employees plus two percentage points.
In general, a Highly Compensated Employee includes any employee who (1) was
a five percent owner of Douglas Federal at any time during the year or preceding
year; or (2) had compensation for the preceding year in excess of $80,000 and,
if Douglas Federal so elects, was in the top 20% of employees by compensation
for such year. The dollar amounts in the foregoing sentence are for 1998. Such
amounts are adjusted annually to reflect increases in the cost of living.
In order to prevent the disqualification of the Plan, any amount
contributed by Highly Compensated Employees that exceed the average deferral
limitation in any Plan Year ("excess aggregate contributions"), together with
any income allocable thereto, must be distributed to such Highly Compensated
Employees before the close of the following Plan Year. However, Douglas Federal
will be subject to a 10% excise tax on any excess contributions unless such
excess contributions, together with any income allocable thereto, either are
recharacterized or are distributed before the close of the following Plan Year.
Top-Heavy Plan Requirements. If for any Plan Year the Plan is a Top-Heavy
Plan (as defined below), then
. Douglas Federal may be required to make certain minimum contributions to
the Plan on behalf of non-key employees (as defined below), and
. certain additional restrictions would apply with respect to the
combination of annual additions to the Plan and projected annual
benefits under any defined benefit plan Douglas Federal maintains.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year if, as of the last day of the preceding Plan Year, the aggregate balance of
the Plan accounts of Plan participants who are key employees exceeds 60% of the
aggregate balance of the Plan accounts of all Plan participants. Key employees
generally include any employee who, at any time during the Plan Year or any of
the four preceding Plan Years, is (1) an officer of Douglas Federal having
annual compensation in excess of $60,000 who is in an administrative or policy-
making capacity, (2) one of the ten employees having annual compensation in
excess of $30,000 and owning, directly or indirectly, the largest interests in
Douglas Federal, (3) a 5% owner of Douglas Federal, (i.e., owns directly or
indirectly more than 5% of the outstanding stock of Douglas Federal, or stock
possessing more than 5% of the total combined voting power of all stock of
Douglas Federal) or (4) a 1% owner of Douglas Federal having annual compensation
in excess of $150,000. The dollar amounts in the foregoing sentence are for
1998.
Investment of Contributions
All amounts credited to your Plan account are held in trust. A trustee
appointed by the Board of Directors of Douglas Federal administers the trust and
invests the Plan assets.
The Plan offers the following investment choices:
S&P 500 Stock Fund - A passively managed, diversified equity portfolio
with the objective of simulating the performance of
the Standard & Poor's Composite Index of 500 stocks.
An investment in this fund provides an opportunity
for investment growth generally consistent with that
of widely traded common stocks, but with a
corresponding risk of decline in value.
Stable Value Fund - A portfolio of fixed income contracts managed with
the objective of maximizing income at minimum risk of
capital. Contributions are invested in fixed income
instruments including but not limited to group
annuity contracts issued by insurance companies.
S&P MidCap Stock Fund - A passively managed, diversified portfolio of stocks
with the objective of replicating the performance of
the S&P MidCap Index. An investment in this fund
provides an opportunity for investment return
generally consistent with that of smaller to medium
sized company stocks, with an above average potential
for increase or decrease in value.
International Stock Fund - A diversified portfolio of stocks of established
international companies that offers the benefit of
investment in foreign markets with the potential risk
reduction of broad diversification.
7
Government Bond Fund - A government instrument fund with the objective of
maximizing income at minimum risk of capital with
underlying investments in obligations issued or
guaranteed by the United States government or
agencies or instrumentalities thereof.
Money Market Fund - a diversified fund of high-quality, short-term
instruments issued by banks, corporations and the
U.S. Government and its agencies. An investment in
this fund achieves competitive, short-term rates of
return while preserving the value of principal.
Asset Plus Asset Allocation Fund - A diversified fund consisting of stable value
securities to reduce short-term risk and a broad
range of large domestic and international companies
to capture growth potential.
Growth and Income Asset Allocation Fund - a diversified fund investing in
domestic and international stocks, government
securities and stable value investments to pursue
long-term appreciation and short-term stability.
Growth Asset Allocation Fund - a diversified fund investing in a broad range of
domestic and international stocks with the potential
of high growth.
The Plan also provides that in addition to the funds described above, a
Plan participant may direct the Plan's trustee to invest all or a portion of his
or her Plan account or separate elective account in the First Deposit Stock
Fund.
Once per business day a participant may elect (in increments of 1%), to
have both past and future contributions and additions to the Plan participant's
separate elective account invested either in the First Deposit Stock Fund or
among such other funds. Plan participants may also elect to have past
contributions to their Plan accounts invested in either the First Deposit Stock
Fund or among such other funds. Plan participants' Plan accounts may be
invested in First Deposit common stock under the proposed terms of Douglas
Federal's Employee Stock Ownership Plan. Because investment allocations only
are required to be made in increments of 1%, Plan participants can invest their
Plan accounts in each of the six available investment funds.
A Plan participant who receives a loan from the Plan has a separate account
established under the Plan. The amount of the loan is obtained from the
Investment Funds in which the borrower's Plan accounts are invested on a pro-
rata basis according to the terms of the Plan, except that no funds may come
from amounts invested in the First Deposit Stock Fund. The balance of a Plan
participant's loan account represents the unpaid principal and interest (if any)
of such Plan participant's loan from the Plan. Repayments of principal and
payments of interest on loans are invested by the trustee in the same manner as
if the repayment were a contribution.
The Plan participants' interest in the First Deposit Stock Fund consists of
units whose value is related to a pro rata portion of the net asset value
("NAV") of the First Deposit Stock Fund. The NAV is determined daily and all
realized and unrealized gains, dividends, and expenses are used to calculate the
NAV. For purposes of such valuation, all of the trust's assets are valued at
their fair market value.
The First Deposit Stock Fund. The First Deposit Stock Fund will consist of
investments in First Deposit common stock made on and after the consummation of
the conversion. Each Plan participant's proportionate undivided beneficial
interest in the First Deposit Stock Fund is measured by units. Each day a unit
value will be calculated by determining the market value of the First Deposit
common stock
8
actually held and adding to that any cash held by the trustee. This total will
be divided by the number of units outstanding to determine the unit value of the
First Deposit Stock Fund.
On the occasion of the payment of a cash dividend, the unit value will be
determined before the dividend is distributed. The trustee may use the dividend
to purchase additional shares of First Deposit common stock, thereby increasing
the total value of the First Deposit Stock Fund, and the value of each unit.
The Board of Directors of First Deposit may consider a policy of paying cash
dividends on the First Deposit common stock in the future; however, no decision
as to the amount or timing of cash dividends, if any, has been made. The
trustee will, to the extent practicable, use all amounts held by it in the First
Deposit Stock Fund to purchase shares of First Deposit common stock. It is
expected that all purchases will be made at prevailing market prices. Under
certain circumstances, the trustee may be required to limit the daily volume of
shares purchased. Pending investment in First Deposit common stock, assets held
in the First Deposit Stock Fund will be placed in bank deposits and other short-
term investments.
Any brokerage commissions, transfer fees and other expenses incurred in the
sale and purchase of First Deposit common stock for the First Deposit Stock Fund
will be paid out of a cash account managed by the trustee. Therefore, although
Plan participants' Plan accounts will not be directly adjusted for such fees,
the market value of their Plan accounts will be reduced.
As of the date of this prospectus supplement, none of the shares of First
Deposit common stock have been issued or are outstanding and there is no
established market for the First Deposit common stock. Accordingly, there is no
record of the historical performance of the First Deposit Stock Fund.
Performance will be dependent upon a number of factors, including the financial
condition and profitability of First Deposit and Douglas Federal and market
conditions for the First Deposit common stock generally. See "Market for the
Common Stock" in the Prospectus.
Investments in the First Deposit Stock Fund may involve certain special
risks in investments in First Deposit common stock. For a discussion of these
risk factors, see "Risk Factors" in the prospectus.
Benefits Under The Plan
A Plan participant, at all times, has a fully vested, nonforfeitable
interest in his or her separate elective account and the earnings thereon under
the Plan. A Plan participant vests in his or her Plan account according to the
following schedule:
Years Vested
of Service Percentage
---------- ----------
0-1 Years................................... 0%
2 Years..................................... 20%
3 Years..................................... 40%
4 Years..................................... 60%
5 Years..................................... 80%
6 Years or more............................. 100%
Withdrawals And Distributions From The Plan
Applicable federal law requires the Plan to impose substantial restrictions
on the right of a Plan participant to withdraw amounts held for his or her
benefit under the Plan prior to the Plan participant's
9
attainment of age 59 1/2 unless a Plan participant retires as permitted under
the Plan, regardless of whether such a withdrawal occurs during his or her
employment with Douglas Federal.
Withdrawals Prior to Termination of Employment. Subject to the hardship
distribution rules under the Plan, a Plan participant may withdraw all or a
portion of his or her
. separate elective account and
. the vested interest in his or her Plan account.
The hardship distribution requirements ensure that Plan participants have a true
financial need before a withdrawal may be made.
A Plan participant may make a withdrawal from his or her separate elective
account and Plan account after he or she turns 59 1/2 . A Plan participant
after attaining age 59 1/2 may withdraw contributions to his or her separate
elective account and contributions to the vested portion of his or her Plan
account at any time. However, such withdrawals may not be made more often than
two times during any Plan Year.
Distribution Upon Retirement, Disability or Termination of Employment.
Payment of benefits to a Plan participant who retires, incurs a disability, or
otherwise terminates employment generally shall be made in a lump sum cash
payment as soon as administratively feasible after such termination of
employment if the vested value of the Plan participant's Plan account is $3,500
or less. If the vested portion of the Plan participant's Plan account balance
is greater than $3,500, the Plan participant may request a distribution (subject
to the minimum distribution rules) in a lump sum payment: (a) as soon as
administratively possible after termination, (b) as of any Valuation Date up to
13 months after termination or (c) as of the date the Plan participant attains
normal retirement age. At the request of the Plan participant, the distribution
may include an in kind distribution of First Deposit common stock equal to the
number of shares that can be purchased with the Plan participant's balance in
the First Deposit Stock Fund. Benefit payments ordinarily shall be made not
later than 60 days following the end of the Plan Year in which occurs the latest
of the Plan participant's:
. termination of employment;
. the attainment of age 65; or
. 10th anniversary of commencement of participation in the Plan; but in no
event later than April 1 following the calendar year in which the Plan
participant attains age 70 1/2.
However, if the vested portion of the Plan participant's Plan account balances
exceeds $3,500, no distribution shall be made from the Plan before the Plan
participant's attaining age 65 unless the Plan participant elects to receive an
earlier distribution.
Distribution upon Death. A participant who dies before the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse shall have his benefits paid to the surviving spouse
in a lump sum as soon as administratively possible following the date of his
death, unless the Plan participant elected before his death or the beneficiary
so elects within 90 days of the Plan participant's death, to receive such
distribution in a lump sum payment as of any Valuation Date which occurs within
one year of the Plan participant's death. With respect to an unmarried Plan
participant, and in the case of a married Plan participant with spousal consent
to the
10
designation of another beneficiary, payment of benefits to the beneficiary of a
deceased participant shall be made in the form of a lump-sum payment in cash or
in First Deposit common stock in the same manner described above as to a Plan
participant with a surviving spouse.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Internal Revenue Code), benefits payable under the Plan shall
not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any
kind, either voluntary or involuntary, and any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any
rights to benefits payable under the Plan shall be void.
Administration of The Plan
The trustee with respect to the Plan is the named fiduciary of the Plan for
purposes of Section 402 of ERISA. Douglas Federal appoints the trustee to serve
at its pleasure. The current trustee of the Plan is The Bank of New York.
The trustee receives, holds and invests the contributions to the Plan in
trust and distributes them to Plan participants and beneficiaries in accordance
with the terms of the Plan and the directions of the Plan administrator. The
trustee is responsible for investment of the assets of the trust fund.
Reports To Plan Participants
The Plan administrator will furnish to each Plan participant a statement at
least quarterly showing (i) the balance in the Plan participant's Plan account
as of the end of that period, (ii) the amount of contributions allocated to such
participant's Plan account for that period, and (iii) the adjustments to such
Plan participant's Plan account to reflect earnings or losses (if any).
Plan Administrator
Pursuant to the terms of the Plan, the Plan is administered by one or more
persons who are appointed by and who serve at the pleasure of Douglas Federal.
Currently, the Plan administrator is the Retirement Committee of Douglas Federal
consisting of John L. King, J. David Higgins and Mona Vieira. The administrator
is responsible for administering the Plan, interpreting the provisions of the
Plan, prescribing procedures for filing applications for benefits, preparing and
distributing information explaining the Plan, maintaining Plan records, books of
account and all other data necessary for the proper administration of the Plan,
and preparing and filing all returns and reports relating to the Plan which are
required to be filed with the U.S. Department of Labor and the IRS, and for
making all required disclosures to Plan participants, beneficiaries and others
under Sections 104 and 105 of ERISA.
Amendment and Termination
Douglas Federal intends to continue the Plan indefinitely. Nevertheless,
Douglas Federal may terminate the Plan at any time. If the Plan is terminated in
whole or in part, then regardless of other provisions in the Plan, each employee
affected by such termination shall have a fully vested interest in his or her
Plan accounts. Douglas Federal reserves the right to make, from time to time,
any amendment or amendments to the Plan which do not cause any part of the trust
to be used for, or diverted to, any purpose other than the exclusive benefit of
participants or their beneficiaries or estates; provided,
11
however, that Douglas Federal may make any amendment it determines necessary or
desirable, with or without retroactive effect, to comply with ERISA.
Merger, Consolidation Or Transfer
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the trust fund assets to another plan, the Plan requires that
each Plan participant would (if either the Plan or the other plan then
terminated) receive a benefit immediately after the merger, consolidation or
transfer which is equal to or greater than the benefit he would have been
entitled to receive immediately before the merger, consolidation or transfer (if
the Plan had then terminated).
Federal Income Tax Consequences
The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Internal Revenue Code and
is not intended to be a complete or definitive description of the federal income
tax consequences of participating in or receiving distributions from the Plan.
The summary is necessarily general in nature and does not purport to be
complete. Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. PARTICIPANTS ARE URGED TO
CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY DISTRIBUTION FROM THE PLAN AND
TRANSACTIONS INVOLVING THE PLAN.
The Plan will be submitted to the IRS in a timely manner for a
determination that it is qualified under Section 401(a) and 401(k) of the
Internal Revenue Code, and that the related trust is exempt from tax under
Section 501(a) of the Internal Revenue Code. A plan that is "qualified" under
these sections of the Internal Revenue Code is afforded special tax treatment,
including the following: (1) the sponsoring employer is allowed an immediate
tax deduction for the amount contributed to the Plan each year; (2) participants
pay no current income tax on amounts contributed by the employer on their
behalf; and (3) earnings of the plan are tax-deferred thereby permitting the
tax-free accumulation of income and gains on investments. The Plan will be
administered to comply in operation with the requirements of the Internal
Revenue Code as of the applicable effective date of any change in the law.
Douglas Federal expects to adopt in a timely manner any amendments to the Plan
that may be necessary to maintain the qualified status of the Plan under the
Internal Revenue Code. Following such an amendment, Douglas Federal will submit
the Plan to the IRS for a determination that the Plan, as amended, continues to
qualify under Sections 401(a) and 501(a) of the Internal Revenue Code and that
it continues to satisfy the requirements for a qualified cash or deferred
arrangement under Section 401(k) of the Internal Revenue Code. Should the Plan
receive from the IRS an adverse determination letter regarding its tax exempt
status, all participants would generally recognize income equal to their vested
interest in the Plan, the Plan participants would not be permitted to transfer
amounts distributed from the Plan to an IRA or to another qualified retirement
plan, and Douglas Federal may be denied certain deductions taken with respect to
the Plan.
Lump Sum Distribution. A distribution from the Plan to a Plan participant
or the beneficiary of a Plan participant will qualify as a Lump Sum Distribution
if it is made: (i) within one taxable year of the Plan participant or
beneficiary; (ii) due to the Plan participant's death, disability or separation
from service, or after the Plan participant attains age 59 1/2; and (iii)
consists of the balance to the credit of the Plan participant under this Plan
and all other profit sharing plans, if any, Douglas Federal maintains. The
portion of any Lump Sum Distribution that is required to be included in the Plan
participant's or beneficiary's taxable income for federal income tax purposes
(the "total taxable amount") consists of the entire amount of such Lump Sum
Distribution less the amount of after-tax contributions, if any,
12
the Plan participant makes to any other profit sharing plans Douglas
Federal maintains which are included in such distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution that is attributable to participation after 1973 in this Plan or in
any other profit-sharing plan Douglas Federal maintains (the "ordinary
income portion") will be taxable generally as ordinary income for federal income
tax purposes. However, a Plan participant who has completed at least five years
of participation in this Plan before the taxable year in which the distribution
is made, or a beneficiary who receives a Lump Sum Distribution due to the Plan
participant's death (regardless of the period of the Plan participant's
participation in this Plan or any other profit-sharing plan Douglas Federal
maintains), may elect to have the ordinary income portion of such Lump Sum
Distribution taxed according to a special averaging rule ("five-year
averaging"). The election of the special averaging rules may apply only to one
Lump Sum Distribution the Plan participant or beneficiary receives, provided
such amount is received on or after the Plan participant turns 59 1/2 and the
recipient elects to have any other Lump Sum Distribution from a qualified plan
received in the same taxable year taxed under the special averaging rule. Under
a special grandfather rule, individuals who turned 50 by 1986 may elect to have
their Lump Sum Distribution taxed under either the five-year averaging rule or
under the prior law ten-year averaging rule. Such individuals also may elect to
have that portion of the Lump Sum Distribution attributable to the Plan
participant's pre-1974 participation in the Plan taxed at a flat 20% rate as
gain from the sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum Distribution
includes First Deposit common stock, the distribution generally will be taxed in
the manner described above, except that the total taxable amount will be reduced
by the amount of any net unrealized appreciation with respect to such First
Deposit common stock, i.e., the excess of the value of such common stock at the
time of the distribution over its cost or other basis of the securities to the
trust. The tax basis of such common stock to the Plan participant or
beneficiary for purposes of computing gain or loss on its subsequent sale will
be the value of the First Deposit common stock at the time of distribution less
the amount of net unrealized appreciation. Any gain on a subsequent sale or
other taxable disposition of such common stock, to the extent of the amount of
net unrealized appreciation at the time of distribution, will be considered
long-term capital gain regardless of the holding period of such common stock.
Any gain on a subsequent sale or other taxable disposition of the First Deposit
common stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered either short-term capital gain or long-term
capital gain depending upon the length of the holding period of the First
Deposit common stock. The recipient of a distribution may elect to include the
amount of any net unrealized appreciation in the total taxable amount of such
distribution to the extent allowed by the regulations to be issued by the IRS.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
Qualified Plan or to an IRA without regard to whether the distribution is a Lump
Sum Distribution or a Partial Distribution. Effective January 1, 1993, Plan
participants have the right to elect to have the trustee transfer all or any
portion of an "eligible rollover distribution" directly to another plan
qualified under Section 401(a) of the Internal Revenue Code or to an IRA. If
the Plan participant does not elect to have an "eligible rollover distribution"
transferred directly to another qualified plan or to an IRA, the distribution
will be subject to an mandatory federal withholding tax equal to 20% of the
taxable distribution. An "eligible rollover distribution" means any amount
distributed from the Plan except: (1) a distribution that is (a) one of a
series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Plan participant or the
joint lines of the Plan participant and his or her designated beneficiary, or
(b) for a specified period of ten years or more; (2) any amount that is
required to be distributed under the minimum distribution rules; and (3) any
other distributions excepted under applicable federal law. The tax law change
described above did not
13
modify the special tax treatment of Lump Sum Distributions, that are not rolled
over or transferred i.e., forward averaging, capital gains tax treatment and the
nonrecognition of net unrealized appreciation, discussed earlier.
ERISA and Other Qualification
As noted above, the Plan is subject to certain provisions of the Employee
Retirement Income Security Act of 1974, as amended, and will be submitted to the
IRS for a determination that it is qualified under Section 401(a) of the
Internal Revenue Code.
The foregoing is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Internal Revenue Code and
is not intended to be a complete or definitive description of the federal income
tax consequences of participating in or receiving distributions from the Plan.
Accordingly, each Plan participant is urged to consult a tax advisor concerning
the federal, state and local tax consequences of participating in and receiving
distributions from the Plan.
Restrictions on Resale
If you are an "affiliate" of First Deposit or Douglas Federal, you may be
subject to special rules under federal securities laws that affect your ability
to sell shares you hold in the First Deposit Stock Fund or to transfer funds in
the First Deposit Stock Fund to other Investment Funds. Directors, officers and
substantial shareholders of First Deposit are generally considered "affiliates."
Any person who may be an "affiliate" of Douglas Federal, may wish to consult
with counsel before transferring any First Deposit common stock they own. If you
are not considered an "affiliate" of Douglas Federal you may freely sell any
shares of First Deposit common stock distributed to them under the Plan, either
publicly or privately.
SEC Reporting and Short-Swing Profit Liability
If you are an officer, director or more than 10% owner of First Deposit,
you may be required to report purchases and sales of First Deposit common stock
through the Plan to the Securities and Exchange Commission. In addition, you
may be subject to special rules that provide for the recovery by First Deposit
of profits realized by an officer director or a more than 10% owner from the
purchase and sale or sale and purchase of the First Deposit common stock within
any six-month period. However, the rules exempt many transactions involving the
Plan from the reporting and profit recovery rules. You should consult with us
regarding the impact of these rules on your transactions involving First Deposit
common stock.
Legal Opinions
The validity of the issuance of the common stock of First Deposit will be
passed upon by Womble Carlyle Sandridge & Rice, PLLC, Atlanta, Georgia. Womble
Carlyle Sandridge & Rice, PLLC acted as special counsel for Douglas Federal in
connection with the conversion of Douglas Federal.
14
DOUGLAS FEDERAL BANK
401(k) PLAN INVESTMENT FORM
1. Plan Participant Data
_______________________________________________________________________________
Print your full name above (Last, first, middle initial) Social Security Number
________________________________________________________________________________
Street Address City State Zip
2. Instructions
The Douglas Federal Bank Employees' Savings and Profit Sharing Plan (the "Plan")
is giving participants a special opportunity to invest their account balances in
a new investment fund - the First Deposit Stock Fund - which is comprised of
common stock ("Common Stock") issued by First Deposit Bancshares, Inc. (the
"Company") in connection with the reorganization of Douglas Federal Bank into
the two-tier holding company form of organization. The percentage of a
participant's account transferred at the direction of the member into the First
Deposit Stock Fund will be used to purchase shares of Common Stock during the
Subscription and Community Offerings. Please review the Prospectus (the
"Prospectus") and the Prospectus Supplement (the "Supplement") before making any
decision.
In the event of an oversubscription in the Subscription and Community Offerings
so that the total amount you allocate to the First Deposit Stock Fund can not be
used by the trustee to purchase Common Stock, your account will be reinvested in
the other funds of the Plan as previously directed in your last investment
election.
To direct a transfer of all or part of the funds credited to your accounts to
the First Deposit Stock Fund, you should complete and file this form with
Patricia Owen, Secretary, Douglas Federal Bank, no later than June 22, 1999 at
12:00 noon. If you need any assistance in completing this form, please contact
Patricia Owen at (770) 942-5108. If you do not complete and return this form to
Patricia Owen by June 22, 1999 at 12:00 noon, the funds credited to accounts
under the Plan will continue to be invested in accordance with your prior
investment direction, or in accordance with the terms of the Plan if no
investment direction had been provided.
Investing in Common Stock entails some risks, and we encourage you to discuss
this investment decision with your investment advisor. The Plan trustee and the
Plan administrator are not authorized to make any representations about this
investment other than what appears in the Prospectus and Supplement, and you
should not rely on any information other than what is contained in the
Prospectus and Supplement. For a discussion of certain factors that should be
considered by each member as to an investment in the Common Stock, see "Risk
Factors" beginning on page 9 of the Prospectus. Any shares purchased by the
Plan pursuant to your election will be subject to the conditions or restrictions
otherwise applicable to Common Stock, as discussed in the Prospectus and
Supplement.
3. Investment Directions (Applicable to Accumulated Balances Only)
I hereby revoke any previous investment direction and now direct that the market
value of the units that I have invested in the following funds, to the extent
permissible, be transferred out of the specified fund
1
and invested (in whole percentages) in the First Deposit Stock Fund as follows:
Fund Percentage to be transferred
- ---- ----------------------------
S&P 500 Stock Fund _____%
Stable Value Fund _____%
S&P MidCap Stock Fund _____%
International Stock Fund _____%
Government Bond Fund _____%
Money Market Fund _____%
Asset Plus Asset Allocation Fund _____%
Growth and Income Asset Allocation Fund _____%
Growth and Income Asset Allocation Fund _____%
Growth Asset Allocation Fund _____%
Note: The total amount transferred may not exceed the total value of your
accounts.
4. Investment Directions (Applicable to Future Contributions Only)
I hereby revoke any previous investment instructions and now direct that any
future contributions and/or loan repayments, if any, made on my behalf by
Douglas Federal Bank, including those contributions and/or repayments received
by the Plan during the same reporting period as this form, be invested in the
following whole percentages.
Fund Percentage
- ---- ----------
S&P 500 Stock Fund _____%
Stable Value Fund _____%
S&P MidCap Stock Fund _____%
International Stock Fund _____%
Government Bond Fund _____%
Money Market Fund _____%
Asset Plus Asset Allocation Fund _____%
Growth and Income Asset Allocation Fund _____%
Growth Asset Allocation Fund _____%
Total (Important) 100%
5. Participant Signature and Acknowledgment - Required
By signing this Investment Form, I authorize and direct the Plan Administrator
and trustee to carry out my instructions. I acknowledge that I have been
provided with and read a copy of the Prospectus and Supplement relating to the
issuance of Common Stock. I am aware of the risks involved in the investment
2
in Common Stock, and understand that the trustee and Plan Administrator are not
responsible for my choice of investment.
PLAN PARTICIPANT'S SIGNATURE
- ----------------------------------- -----------------
Signature of Plan Participant Date
Pentegra Services, Inc. is hereby authorized to make the above listed change(s)
to this member's record.
- ----------------------------------- ----------------
Signature of Douglas Federal Bank Date
Authorized Representative
Please complete and return by 12:00 noon on Tuesday, June 22, 1999.
3