<PAGE>
As filed with the Securities and Exchange Commission on May 12, 1999
Registration No. 333-74637
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO
FORM SB-2
----------------------------------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------------------
FIRST DEPOSIT BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Georgia 6035 58-2443683
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation or organization) classification code number) identification number)
</TABLE>
8458 Campbellton Street
Douglasville, Georgia 30134-1803
(770) 942-5108
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices and principal place of
business)
------------------------------------------
J. David Higgins
President and Chief Executive Officer
8458 Campbellton Street
Douglasville, Georgia 30134-1803
(770) 942-5108
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Steven S. Dunlevie, Esq.
Elizabeth O. Derrick, Esq.
Womble Carlyle Sandridge & Rice, PLLC
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
PROSPECTUS
==========
[LOGO OF FIRST DEPOSIT BANCSHARES, INC. APPEARS HERE]
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
<TABLE>
<CAPTION>
Minimum Midpoint Maximum
----------- ----------- -----------
<S> <C> <C> <C>
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
</TABLE>
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 11 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 their 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 ______, 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) ___ ____.
TRIDENT SECURITIES
May __, 1999
<PAGE>
[Inside front cover of Prospectus]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Summary.................................................................................. 1
Risk Factors............................................................................. 9
Stock Pricing............................................................................ 16
Procedure For Purchasing Shares.......................................................... 19
Selected Consolidated Financial Information and Other Data............................... 21
Summary of Recent Developments........................................................... 23
Proposed Management Purchases............................................................ 27
Use of Proceeds.......................................................................... 28
Dividend Policy.......................................................................... 30
Market for the Common Stock.............................................................. 31
Capitalization........................................................................... 32
Regulatory Capital Compliance............................................................ 34
Pro Forma Data........................................................................... 36
The Conversion........................................................................... 39
First Deposit............................................................................ 54
Management's Discussion and Analysis of Financial Condition and Results of Operations.... 55
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........................................115
Description of the Capital Stock of Douglas Federal......................................117
Transfer Agent and Registrar.............................................................118
Experts..................................................................................118
Legal and Tax Opinions...................................................................118
Where You Can Find More Information......................................................118
Index to Financial Statements............................................................F-1
</TABLE>
<PAGE>
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
<PAGE>
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) _________.
The Companies
<TABLE>
<CAPTION>
<S> <C>
First Deposit Bancshares, Inc. We formed First Deposit to be the holding
8458 Campbellton Street company for Douglas Federal. To date, First
Douglasville, Georgia 30134-1803 Deposit has only conducted organizational
(770) 942-5108 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 We are a community-oriented financial
Bank institution that operates out of two offices in
8458 Campbellton Street western Georgia located in or around the
Douglasville, Georgia 30134-1803 towns of Douglasville and Lithia Springs,
(770) 942-5108 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."
</TABLE>
1
<PAGE>
The Conversion
What is the Conversion (page __) The conversion is a change in our
legal form 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 __) 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.
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Benefits of the Conversion to Presently, we do not have any
Management (page __) specific plans or arrangements for
diversification or expansion.
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 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
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 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.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 __) 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.
Number of Shares to be Sold (page __) 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.
</TABLE>
5
<PAGE>
Subscription Offering (page __) We have granted subscription rights
in the following order of priority to:
Important: Subscription rights are
not transferable, and persons with 1. Persons with $50 or more on
subscription rights may not deposit with us on
subscribe for shares for the benefit December 31, 1997.
of any other person. If you violate
this prohibition, you may lose your 2. Our employee stock ownership plan.
right to purchase shares and may face
criminal prosecution and/or other 3. Persons with $50 or more on
sanctions. deposit with us on March 31, 1999.
4. Our depositors on May 1, 1999 and
our borrowers on June 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 __,
1999.
Community Offering (page __) 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 __) The minimum purchase is 25 shares.
The maximum purchase in the
subscription
6
<PAGE>
offering by any person or group of
persons 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.
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 __) If you want to subscribe for shares,
Important: After we receive your you must complete a stock order form
order, you cannot cancel or change and send or deliver it to either
it without our consent. If First branch of Douglas Federal, together
Deposit intends to sell fewer than with full payment to us in the
1,071,000 shares or more than postage-paid envelope provided. You
1,666,350 shares, all subscribers must sign the certification that is
will be notified and given the part of the stock order form. We
opportunity to change or cancel must receive your stock order form on
their orders. If you do not respond or before June __, 1999.
to this notice, First Deposit will
return your funds promptly with You may pay for shares of common
interest. stock in cash, by check, or by
withdrawal from an account with
Douglas Federal.
Use of Proceeds (page __) First Deposit will pay us 50.0% of
the net offering proceeds or $6,888,500
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.
7
<PAGE>
First Deposit will keep the remainder
of the net proceeds for general
corporate purposes.
Purchases by Directors and Executive Our directors and executive officers
Officers (page __) 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
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 __) 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 __) First Deposit intends to pay a
quarterly cash dividend, but has not
yet determined the amount of such
dividend.
8
<PAGE>
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.
9
<PAGE>
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
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.
10
<PAGE>
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."
11
<PAGE>
Possible voting control by our directors and officers may make takeover attempts
difficult to achieve
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."
12
<PAGE>
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."
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
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."
13
<PAGE>
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.
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 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
14
<PAGE>
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.
15
<PAGE>
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 necessarily upon estimates and projections of a number of
matters, all of which may change.
16
<PAGE>
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 17, 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 $10 per
share. In using the table below the pro forma price to earnings ratios for us
should be compared to all of the group. However, comparison of our pro forma
price to book ratio is most relevant to recent conversions.
The comparative group includes twelve publicly traded thrifts with similar
size and operating characteristics. Two are from North Carolina, one is from
West Virginia, one is from New Mexico, and the other eight are from throughout
the Midwest, the region that contains the most thrifts with comparable
characteristics and size. The Georgia group includes the four publicly traded
thrifts in Georgia. The Southeast group includes the 33 publicly traded thrifts
located in the Southeast region.
The following information is offered to help you compare the common stock
offered in this offering to that of a comparative group of other thrift
institutions on a pro forma basis.
17
<PAGE>
<TABLE>
<CAPTION>
Price to Earnings Price to Tangible
Mk Value Ratio (1) Book Value Ratio
Price ($) ($Mil) (%) (%)
<S> <C> <C> <C> <C>
Douglas Federal Bank
- --------------------
Pro Forma Supermaximum....... 10.000 16.66 18.1 70.7
Pro Forma Maximum............ 10.000 14.49 16.3 66.8
Pro Forma Midpoint........... 10.000 12.60 14.7 62.8
Pro Forma Minimum............ 10.000 10.71 12.9 58.1
Comparative Group
- -----------------
Averages..................... 13.068 16.21 16.9 100.7
Medians...................... 13.313 15.71 15.7 93.5
Georgia Public Thrifts
- ----------------------
Averages..................... 14.656 120.20 15.5 192.7
Medians...................... 14.938 95.90 15.4 189.3
Southeast Region Public Thrifts
- -------------------------------
Averages..................... 14.592 76.26 16.5 129.3
Medians...................... 13.375 37.48 16.2 118.0
All Public Thrifts
- ------------------
Averages..................... 16.607 284.70 16.1 134.9
Medians...................... 14.750 42.37 15.3 121.9
Recent Thrift Conversions(2)
- --------------------------
Averages..................... 10.000 63.77 18.2 65.3
Medians...................... 10.000 60.31 15.3 66.4
</TABLE>
(1) Pro forma price to earnings ratios shown above for First Deposit are based
on appraisal earnings, which factors out non-recurring 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.
18
<PAGE>
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.
19
<PAGE>
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.
20
<PAGE>
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:
<TABLE>
<CAPTION>
At December 31,
--------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
(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
</TABLE>
___________
Selected Operating Data:
<TABLE>
<CAPTION>
Year ended
December 31,
--------------------------
1998 1997 1996
------ ------- ---------
<S> <C> <C> <C>
(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
====== ====== ======
</TABLE>
(1) Includes a one-time assessment of $396,910 in 1996 to recapitalize the
Savings Association Insurance Fund.
21
<PAGE>
Selected Financial Ratios:
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
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 3.27
Net interest margin(4)..................................... 3.21 3.41 3.54
Ratio of average interest-earning assets to average
interest-bearing liabilities.............................. 111.79 112.44 109.00
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
</TABLE>
_______________
(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.
22
<PAGE>
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 only of normal 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........ 990 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 $1,781
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
====== ======
23
<PAGE>
<TABLE>
<CAPTION>
At or For the
Three Months Ended
March 31,
----------------
1999 1998
------- -------
(In thousands)
Key Financial Ratios (1):
<S> <C> <C>
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......... - -
</TABLE>
___________________
(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 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."
24
<PAGE>
<TABLE>
<CAPTION>
At March 31, 1999
----------------------------
Percent of
Adjusted Total
Amount(1) Assets
------------- -------------
(Dollars in thousands)
<S> <C> <C>
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
</TABLE>
______________________________
(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. The Office of Thrift
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%
====== =======
25
<PAGE>
Comparison of Financial Condition at March 31, 1999 and December 31, 1998
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 1998 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.
26
<PAGE>
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.
<TABLE>
<CAPTION>
Aggregate
Purchase
Percent Price of
Total of Total Proposed
Name and Position with First Deposit Shares Outstanding Purchases
- --------------------------------------------------------------- ------- ------------ ----------
<S> <C> <C> <C>
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
======= ==== ==========
</TABLE>
________________
* 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.
27
<PAGE>
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.
<TABLE>
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)
<S> <C> <C> <C> <C>
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
</TABLE>
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
28
<PAGE>
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.
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."
29
<PAGE>
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,
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 dividend First Deposit could pay in the first quarter following the
conversion would be approximately $3.94 per share. 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.
30
<PAGE>
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.
31
<PAGE>
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."
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization of
First Deposit Based on the Sale of
--------------------------------------------------------------------------
Capitalization 1,071,000 Shares 1,260,000 Shares 1,449,000 Shares 1,666,350 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)
<S> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= =======
</TABLE>
(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."
(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
32
<PAGE>
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."
33
<PAGE>
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.
34
<PAGE>
<TABLE>
<CAPTION>
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 1,449,000 Shares 1,666,350 Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share (1)
------------------- ------------------- ------------------- -------------------
% of % of % of % of % of
Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2)
------ --------- -------- ---------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital under generally
accepted accounting
principles................. $9,662 9.58% $13,404 12.81% $14,108 13.39% $14,812 13.97% $15,621 14.62%
====== ======= ======= ======= =======
Tangible Capital:
Capital Level............ $7,804 7.88% $11,546 11.23% $12,250 11.84% $12,954 12.43% $13,763 13.11%
Requirement(4)........ 1,485 1.50 1,542 1.50 1,552 1.50 1,563 1.50 1,575 1.50
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess................ $6,319 6.38% $10,004 9.73% $10,698 10.34% $11,391 10.93% $12,188 11.61%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
Core Capital:
Capital Level(5)(7)......... $7,804 7.88% $11,546 11.23% $12,250 11.84% $12,954 12.43% $13,763 13.11%
Requirement(4).............. 2,971 3.00 3,083 3.00 3,104 3.00 3,125 3.00 3,150 3.00
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess................ $4,833 4.88% $ 8,463 8.23% $ 9,146 8.84% $ 9,829 9.43% $10,613 10.11%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
Risk-Based Capital(6):
Capital Level(5)(7)........ $8,513 15.08% $12,255 20.92% $12,959 21.97% $13,663 23.01% $14,472 24.19%
Requirement(4)............. 4,515 8.00 4,686 8.00 4,718 8.00 4,750 8.00 4,787 8.00
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess..................... $3,998 7.08% $ 7,569 12.92% $ 8,241 13.97% $ 8,913 15.01% $ 9,685 16.19%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
________________
(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."
35
<PAGE>
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 are based on the assumptions 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;
. that 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;
. that First Deposit will be taxed at an effective state and federal
income tax rate of 34.0%; and
. assumes 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."
36
<PAGE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
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...... (428) (504) (580) (667)
program.............................................. ---------- ---------- ---------- ----------
Estimated net proceeds as adjusted......................... $ 8,770 $ 10,404 $ 12,038 $ 13,918
========== ========== ========== ==========
Consolidated net income:
Historical earnings........................................ 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 earnings income................................. 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........... (428) (504) (580) (667)
program(2).......................................... ---------- ---------- ---------- ----------
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........... (0.40) (0.40) (0.40) (0.40)
program(2).......................................... ---------- ---------- ---------- ----------
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 per
share calculations......................................... 1,071,000 1,260,000 1,449,000 1,666,350
</TABLE>
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(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 $.94, $.83, $.74 and
$.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 lower 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.
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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 17, 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.
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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 net worth of the institution without any additional payment beyond the
amount of the deposit. A
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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.
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
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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 17, 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."
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
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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
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. 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 greater of the maximum amount permitted to be
purchased in the community offering, which is presently the greater of
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. $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
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. 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 __, 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 17, 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.
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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
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<PAGE>
officers and to the employee stock ownership plan. We will also reimburse
Trident Securities for its 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
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<PAGE>
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.
. 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
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<PAGE>
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
. 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.
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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:
. 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;
. neither eligible account holders nor supplemental eligible account
holders will recognize any gain or loss with respect to their deposit
accounts held with us due to the conversion, or due to acquiring their
interests in the liquidation account;
. 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.
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Mauldin & 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 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.
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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.
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.
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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.
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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.
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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.
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Quantitative Analysis
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
+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
</TABLE>
_______________
(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."
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Analysis of Net Interest Income
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.
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------
1998 1997
---------------------------- ----------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
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%
======= =======
</TABLE>
______________
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(1) Includes investment securities available-for-sale, investment securities
held-to-maturity, stock in Freddie Mac, Fannie Mae, and Federal Home Loan
Bank Atlanta.
(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
==== ==== ====
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
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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 loans
and consumer loans have gradually increased consistent with management's
marketing plans. 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 major type of classified and non-classified loan. The loss
factor is based on peer group information. In addition, the allowance for loan
losses is increased or decreased based on Douglas Federal's actual loss
experience, current economic conditions, volume, growth, composition of the loan
portfolio and other risks inherent in the loan portfolio. 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 80.00% at December 31, 1997. The
allowance for loan losses as a percentage of total loans at December 31, 1998
was 1.18% compared to 1.15% at December 31, 1997.
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
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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 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
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<PAGE>
result, the interest rate spread decreased from 2.86% to 2.67% while the net
interest margin decreased from 3.41% to 3.21%.
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 loans which carry a greater loss factor than one- to four-family
mortgage loans. 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
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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.
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.
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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.
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.
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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 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
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real estate. In addition, no commercial real estate borrower was identified as
mission critical during the Year 2000 assessment process.
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. 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
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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 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.
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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
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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 the 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,
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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.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------
1998 1997
------------------- -------------------
Percent Percent
Amount of Total Amount of Total
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
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
Consumer.......................................... 1,932 2.28 2,023 2.68
------- ------ ------- ------
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
======= =======
</TABLE>
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.
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------
One- to Construction Land and
Four- Commercial and Land Total
Family Real Estate Development Development Consumer Loans
-------- ----------- ------------ ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
(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 1,095 544 8 - 189 1,836
years........................
More than two years to five 2,692 449 20 132 1,233 4,526
years........................
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
=======
</TABLE>
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.
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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.
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The following table sets forth loan originations, purchases, sales, and
principal repayments for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended at
-----------------------
December 31,
-----------------------
1998 1997
----------- ----------
(In thousands)
<S> <C> <C>
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
======== ========
</TABLE>
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.
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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
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the borrower's ability to repay the loan may be impaired and the 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
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<PAGE>
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" assets include
those
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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 nonaccrual loans if such loans had continued to perform in accordance with
their contractual terms was
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$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
77
<PAGE>
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.
The following table sets forth activity in our allowance for loan losses
for the periods as indicated.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
1998 1997
------------------ ----------------
(Dollars in thousands)
<S> <C> <C>
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% 80.04%
======= ======
</TABLE>
____________
(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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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%
====== ====== ====== ==== ====== ======
</TABLE>
________________
(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
78
<PAGE>
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.
The following table sets forth certain information regarding the amortized
cost and fair value of our securities at the dates indicated.
79
<PAGE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------
1998 1997
------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------ --------- ------
(In thousands)
<S> <C> <C> <C> <C>
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
====== ====== ====== ======
</TABLE>
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.
<TABLE>
<CAPTION>
At December 31,
------------------------------------
1998 1997
------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------ --------- ------
(In thousands)
<S> <C> <C> <C> <C>
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
====== ====== ====== ======
</TABLE>
The following table sets forth our mortgage-backed securities activities
for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
(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
====== ======
</TABLE>
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.
80
<PAGE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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%
======== ======== ===== ===== ==== ====
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------
More than Ten Years Average Total
-------------------- -------------------------
Weighted Remaining Weighted
Carrying Average Years to Carrying Market Average
Amount Yield Maturity Amount Value Yield
--------- --------- --------- -------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
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%
========= ======== ==== ====== ====== ====
</TABLE>
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,
81
<PAGE>
liquidity and 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.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
1998 1997
------------------------------ -------------------------------
Percent Weighted Percent Weighted
of Total Average of Total Average
Balance Deposits Rate Balance Deposits Rate
-------- --------- --------- -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
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% $75,877 100.0% 4.87%
======= ====== ==== ======= ===== ====
</TABLE>
________________
(1) Based on remaining maturity of certificates.
(2) Includes retirement accounts such as IRA and Keogh accounts.
82
<PAGE>
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:
<TABLE>
<CAPTION>
At or For the Year Ended
December 31,
--------------------------
1998 1997
------------ ------------
(Dollars In thousands)
<S> <C> <C>
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%
</TABLE>
83
<PAGE>
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.
84
<PAGE>
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."
85
<PAGE>
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.
<TABLE>
<CAPTION>
Director Term
Name Age (1) Position(s) Held With Us Since Expires
- ---- ------- ------------------------ -------- -------
<S> <C> <C> <C> <C>
Alpha A. Fowler, Jr. 78 Chairman and Chief Executive 1960 2000
Officer
J. David Higgins 61 President, Treasurer and Director 1990 2001
John L. King 46 Senior Vice President, Controller and 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
</TABLE>
________________
(1) As of February 10, 1999.
Executive Officers Who Are Not 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.
86
<PAGE>
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.
87
<PAGE>
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.
<TABLE>
<CAPTION>
Annual Compensation All Other Compensation
----------------------- ----------------------
Name and Principal Position Year Salary Bonus
- --------------------------- ---- ------- --------
<S> <C> <C> <C> <C>
Alpha A. Fowler, Jr. 1998 $53,000 $ 5,000 $ 8,745(1)
Chairman and Chief Executive Officer
J. David Higgins 1998 $79,000 $25,000 $13,035(1)
President and Treasurer
</TABLE>
_______________
(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;
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. 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 short 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 (as defined below) 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 term. All the employment
agreements will become effective as of June 17, 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.
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
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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.
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.
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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 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;
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. 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 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
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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 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
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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 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."
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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.
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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, 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."
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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.
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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 and loan association" as
that term is defined in the Internal Revenue Code, or
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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 meet our liquidity
requirements. See "Management's Discussion and Analysis of
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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.
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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
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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 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
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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.
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.
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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.
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.
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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. 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
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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:
. 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.
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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.
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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;
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. 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
. 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
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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:
. 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
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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.
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
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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 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.
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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;
. 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
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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.
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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.
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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.
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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
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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 which 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.
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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.
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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 ___, 1999
Dealer Prospectus Delivery Obligation
Until ___________________________ _____, 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.
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DOUGLAS FEDERAL BANK, FSB
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1998 AND 1997
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
DOUGLAS FEDERAL BANK, FSB
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
==================================================================================================================
ASSETS 1998 1997
------ -------------------- --------------------
<S> <C> <C>
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
==================== ====================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
DOUGLAS FEDERAL BANK, FSB
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
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
============== ==============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
DOUGLAS FEDERAL BANK, FSB
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
F-5
<PAGE>
DOUGLAS FEDERAL BANK, FSB
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1998 AND 1997
________________________________________________________________________________
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
RETAINED COMPREHENSIVE RETAINED
EARNINGS INCOME EARNINGS
----------- ---------- -----------
<S> <C> <C> <C>
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
=========== ========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
DOUGLAS FEDERAL BANK, FSB
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
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
=================== ===================
</TABLE>
F-7
<PAGE>
DOUGLAS FEDERAL BANK, FSB
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1998 1997
------------- ---------------
<S> <C> <C>
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)
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-8
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. SECURITIES
The amortized cost and fair value of securities are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
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
================ ================ ================ ================
</TABLE>
F-15
<PAGE>
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.
<TABLE>
<CAPTION>
Securities Available-for-Sale Securities Held-to-Maturity
--------------------------------- ---------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
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
=============== ================ ================ ===============
</TABLE>
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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 3. LOANS RECEIVABLE
The composition of loans receivable is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997
----------------- ----------------
<S> <C> <C>
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
================= ================
</TABLE>
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
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
=============== ===============
</TABLE>
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
<PAGE>
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:
<TABLE>
<S> <C>
Balance, beginning of year $ 181,274
Advances 145,000
Repayments (176,455)
--------------
Balance, end of year $ 149,819
==============
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
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
================ ===============
</TABLE>
F-18
<PAGE>
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.
<TABLE>
<CAPTION>
BALANCE WEIGHTED AVERAGE RATE
DECEMBER 31, AT DECEMBER 31,
---------------------------------- ----------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
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%
================ ================ ================ ================
</TABLE>
At December 31, 1998, scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
<S> <C>
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
=================
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
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
================ ================
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
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
================ ================
</TABLE>
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:
<TABLE>
<S> <C>
2000 $ 2,000,000
2001 3,000,000
-----------------
$ 5,000,000
=================
</TABLE>
F-20
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Current $ 460,697 $ 393,998
Deferred (55,884) (8,269)
------------- -------------
Income tax expense $ 404,813 $ 385,729
============= =============
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1998 1997
------------------------- -------------------------
Amount Percent Amount Percent
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
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 %
=========== ========== ============ ==========
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. INCOME TAXES (CONTINUED)
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
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
============= =============
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1998 1997
------------------ ----------------
<S> <C> <C>
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
================== ================
</TABLE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. Regulatory Matters (Continued)
The Company's actual capital amounts and ratios are presented in the
following tables.
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------------ ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- --------- -------------- --------- ------------- ----------
(Dollars in Thousands)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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% $ - -
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. Regulatory Matters (Continued)
A reconciliation of GAAP capital at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Total Tier I Tangible
------------- -------------- -------------
(Dollars in Thousands)
-------------------------------------------
<S> <C> <C> <C>
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
============= ============== =============
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------------ -----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
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
</TABLE>
NOTE 13. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total
revenue are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Computer service $ 113,399 $ 84,415
NOW account expenses 124,676 135,670
Conversion losses 90,000 -
</TABLE>
F-29
<PAGE>
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
<PAGE>
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 , 1999
These securities are not deposits or accounts
and are not insured or guaranteed.
Dealer Prospectus Delivery Obligation
Until , 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.
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Legal Fees and Expenses................................ $160,000
Printing, Postage and Mailing.......................... 110,000
Appraisal and Business Plan Fees and Expenses.......... 27,500
Conversion Agent Fees and Expenses..................... 10,000
Transfer Agent Fees and Stock Certificates............. 10,000
Accounting Fees and Expenses........................... 50,000
Blue Sky Fees and Expenses (including counsel fees).... 15,000
SEC Filing Fees........................................ 4,633
OTS Filing Fees........................................ 8,400
NASD Fees.............................................. 2,166
Underwriter's Fees and Expenses *...................... 262,248
Local Counsel.......................................... 5,000
Other Expenses......................................... 25,000
Miscellaneous.......................................... 50,000
--------
Total........................................ $739,947
__________
* Assumes sale of 1,666,350 shares at $10.00 per share.
All amounts are estimated, other than the filing fees.
Item 14. Indemnification of Directors and Officers
Indemnification of Directors and Officers of First Deposit
First Deposit's Bylaws contain certain indemnification provisions providing
that directors, officers, and employees or agents of First Deposit will be
indemnified against expenses actually and reasonably incurred by them if they
are successful on the merits of a claim or proceeding.
When a case or dispute is not ultimately determined on its merits (i.e., it
is settled), the indemnification provisions provide that First Deposit will
indemnify directors when they meet the applicable standard of conduct. The
applicable standard of conduct is met if the director acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the best
interests of First Deposit, and with respect to an employee benefit plan, for a
purpose the director believed in good faith to be in the interests of the
participants and beneficiaries of the plan. The standard of conduct with respect
to any criminal action or proceeding is met if the director had no reasonable
cause to believe his or her conduct was unlawful. Whether the applicable
standard of conduct has been met is determined by the Board of Directors, the
shareholders or independent legal counsel in each specific case.
II-1
<PAGE>
First Deposit can also provide for greater indemnification than that set
forth in the Bylaws if it chooses to do so, subject to approval by First
Deposit's shareholders. First Deposit may not, however, indemnify a director for
liability arising out of circumstances which constitute exceptions to limitation
of a director's liability for monetary damages.
First Deposit may purchase and maintain insurance on behalf of any director
against any liability asserted against such person and incurred by him or her in
any such capacity, whether or not First Deposit would have had the power to
indemnify against such liability.
In addition, Article 11 of First Deposit's Articles of Incorporation,
subject to certain exceptions, eliminates the potential personal liability of a
director for monetary damages to First Deposit and to the shareholders of First
Deposit for breach of any duty as a director. There is no elimination of
liability for (a) a breach of duty involving appropriation of a business
opportunity of First Deposit, (b) an act or omission not in good faith or
involving intentional misconduct or a knowing violation of law, (c) a
transaction from which the director derives an improper material tangible
personal benefit, or (d) as to any payment of a dividend or approval of a stock
repurchase that is illegal under the Georgia Business Corporation Code. The
Articles of Incorporation do not eliminate or limit the right of First Deposit
or its shareholders to seek injunctive or other equitable relief not involving
monetary damages.
The engagement letter dated January 26, 1999, between Douglas Federal and
Ferguson & Company provides for the indemnification of Ferguson & Company and
its employees under certain circumstances, in connection with the appraisal
services rendered under the terms of that engagement letter. The engagement
letter dated February 3, 1999 between Douglas Federal and Trident Securities
provides for the indemnification of Trident Securities and its controlling
persons under certain circumstances, in connection with the conversion and
Trident Securities' engagement under the engagement letter. The Sales Agency
Agreement to be entered into between Trident Securities and First Deposit will
provide for the indemnification of Trident Securities, its affiliates, and their
respective officers, directors, employees, agents and controlling persons under
certain circumstances.
Item 15. Recent Sales of Unregistered Securities.
The only securities to be sold by First Deposit before effectiveness of
this registration statement will be of 10 shares of common stock to be issued to
its sole shareholder, Douglas Federal Bank, a Federal Savings Bank, for $10.00
per share, which shares will be canceled upon consummation of the conversion.
Because the shares will be sold to only one entity and were sold only to
facilitate the organization of First Deposit, the sale will be exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) thereof.
Item 16. Exhibits and Financial Statement Schedules:
The exhibits and financial statement schedules filed as a part of this
registration statement are as follows:
(a) List of Exhibits
*1.1 Engagement Letter with Trident Securities
1.2 Form of Sales Agency Agreement with Trident Securities
II-2
<PAGE>
*2.1 Plan of Conversion, as amended
*3.1 Articles of Incorporation of First Deposit
*3.2 Bylaws of First Deposit
*3.3 Federal Stock Charter and Stock Bylaws of Douglas Federal Bank, a
Federal Savings Bank
4.1 Form of Common Stock Certificate of First Deposit
*5.1 Opinion of Womble Carlyle Sandridge & Rice, PLLC, regarding
legality of securities being registered
*8.1 Form of Federal Tax Opinion
8.2 Form of State Tax Opinion
*8.3 Opinion of Ferguson & Company as to the value of subscription
rights for tax purposes
*10.1 Employee Stock Ownership Plan of Douglas Federal Bank
*10.2 Proposed Form of 1999 Stock Option and Incentive Plan
*10.3 Proposed Form of Management Recognition Plan
*10.4 Employment Agreement by and between Douglas Federal Bank and
Alpha A. Fowler, Jr.
*10.5 Employment Agreement by and between Douglas Federal Bank and J.
David Higgins
*10.6 Employment Agreement by and between Douglas Federal Bank and John
L. King
*10.7 Employment Agreement by and between Douglas Federal Bank and
Michael Coggin
*10.8 Employment Agreement by and between Douglas Federal Bank and
Patricia Owen
*23.1 Consent of Womble Carlyle Sandridge & Rice, PLLC (contained in
opinion filed as Exhibit 5.1)
23.2 Consent of Mauldin & Jenkins LLC
*23.3 Consent of Ferguson & Company
*24.1 Power of Attorney
*27.1 Financial Data Schedule
*99.2 Proxy Statement for Special Meeting of Members of Douglas
Federal Bank and Form of Proxy
II-3
<PAGE>
*99.3 Miscellaneous Solicitation and Marketing Materials
**99.4 Appraisal Report of Ferguson & Company
____________
* Previously filed with this Registration Statement
** Exempt from electronic filing; paper copy filed with Form SE
(b) Financial Statement Schedules.
No financial statement schedules are filed because the required information
is not applicable or is included in the consolidated financial statements or
related notes.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement ( or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-4
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the questions whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 2 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Douglasville, State of Georgia on May 11, 1999.
FIRST DEPOSIT BANCSHARES, INC.
By: /s/ J. David Higgins
------------------------------------------------
J. David Higgins, President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Danny A. Belyeu* Chairman of the Board May 11, 1999
- --------------------------------
Danny A. Belyeu
/s/ Alpha A. Fowler, Jr. Vice Chairman of the Board May 11, 1999
- --------------------------------
Alpha A. Fowler, Jr.
/s/ J. David Higgins President, Chief Executive May 11, 1999
- -------------------------------- Officer, Treasurer and Director
J. David Higgins (Principal Executive Officer)
/s/ John L.King* Senior Vice President, Chief May 11, 1999
- -------------------------------- Financial Officer (Principal
John L. King Financial and Accounting Officer)
and Director
/s/ Mac C. Abercrombie, Jr.* Director May 11, 1999
- --------------------------------
Mac C. Abercrombie, Jr.
/s/ Joseph H. Fowler* Director May 11, 1999
- --------------------------------
Joseph H. Fowler
/s/ Carlton H. Boyd* Director May 11, 1999
- --------------------------------
Carlton H. Boyd
/s/ John B. Zellars* Director May 11, 1999
- --------------------------------
John B. Zellars
</TABLE>
*By: /s/ J. David Higgins
----------------------------------
J. David Higgins, Attorney-In-Fact
II-6
<PAGE>
EXHIBIT 1.2
FIRST DEPOSIT BANCSHARES, INC.
1,071,000 to 1,449000 Shares
(as may be increased to 1,666,350 shares)
Common Stock
(No Par Value Per Share)
Purchase Price: $10.00 Per Share
SALES AGENCY AGREEMENT
----------------------
Trident Securities, Inc.
4601 Six Forks Road, Suite 400
Raleigh, North Carolina 27609
Dear Sirs:
First Deposit Bancshares, Inc., a Georgia corporation ("Company"), and
Douglas Federal Bank, A Federal Savings Bank, a federally chartered and insured
savings bank ("Bank," in mutual or stock form as the context may require),
hereby confirm, as of May ___, 1999, their respective agreements with Trident
Securities, Inc. together with its successors and assigns as contemplated in
Section 13 hereof (collectively, "Trident"), a broker-dealer registered with the
Securities and Exchange Commission ("Commission") and a member of the National
Association of Securities Dealers, Inc. ("NASD"), as follows:
1. Introduction. The Bank intends to convert from a federally chartered
------------
mutual savings bank to a federally chartered capital stock savings bank as a
wholly owned subsidiary of the Company (together with the Offerings, as defined
below, the issuance of shares of common stock of the Bank to the Company and the
incorporation of the Company, the "Conversion") pursuant to a plan of conversion
adopted by the Bank's Board of Directors on February 9, 1999 and amended on
March 31, 1999 and April 26, 1999 ("Plan"). In accordance with the Plan, the
Company is offering shares of its common stock, no par value per share ("Common
Stock"), pursuant to nontransferable subscription rights in a subscription
offering ("Subscription Offering") to certain depositors and borrowers of the
Bank and to the Bank's tax-qualified employee benefit plans (i.e., the Bank's
Employee Stock Ownership Plan ("ESOP")). Any shares of the Common Stock not
sold in the Subscription Offering are being offered to the general public in a
Community Offering ("Community Offering"), with preference given to natural
persons who are permanent residents of Douglas and Paulding Counties, Georgia
("Local Community") (the Subscription and Community Offerings are sometimes
referred to collectively as the "Subscription and Community Offering"), subject
to the right of the Company and the Bank, in their absolute discretion, to
reject orders in the Community Offering in whole or in part. It is anticipated
that shares of Common Stock not subscribed for in the Subscription and Community
Offering (if any) will be offered to certain members of the general public on a
best efforts basis by a selling group of broker dealers to be
<PAGE>
Trident Securities, Inc.
May , 1999
Page 2
formed and managed by Trident in a syndicated offering ("Syndicated Community
Offering") (the Subscription and Community Offering and the Syndicated Community
Offering are referred to collectively as the "Offerings"). In the Subscription
Offering (and the Community Offering and the Syndicated Community Offering, if
applicable), the Company is offering between 1,071,000 and 1,449,000 shares of
Common Stock ("Shares"), with the possibility of offering up to 1,666,350 shares
without a resolicitation of subscribers, as contemplated by Part 563b of Title
12 of the Code of Federal Regulations. Except for the ESOP, no person may
purchase shares with an aggregate purchase price of more than $375,000 and no
person or entity, together with associates of and persons acting in concert with
such person or other entity, may purchase more than $750,000 of Common Stock.
Trident has advised the Company and the Bank that it will utilize its best
efforts to assist the Company with the sale of the Shares in the Offerings.
Prior to the execution of this Agreement, the Company has delivered to Trident
the prospectus dated May ___, 1999 (as hereinafter defined) and all supplements
thereto, if any, to be used in the Offerings have also been delivered to Trident
(or if after the date of this Agreement, will be promptly delivered to Trident).
Such prospectus contains information with respect to the Company, the Bank and
the Shares.
2. Representations and Warranties.
------------------------------
(a) The Company and the Bank (including Pinehurst Properties, L.L.C.
("Subsidiary") in each instance where the Bank is referenced, unless
clearly inapplicable) jointly and severally represent and warrant to
Trident that:
(i) The Company has filed with the Commission a registration
statement, including exhibits and an amendment or amendments thereto,
on Form SB-2 (No. 333-74637), including a prospectus relating to the
Offerings, for the registration of the Shares under the Securities Act
of 1933, as amended ("Act"). Such registration statement has become
effective under the Act and no stop order has been issued with respect
thereto and no proceedings therefor have been initiated or, to the
Company's best knowledge, threatened by the Commission. Except as the
context may otherwise require, such registration statement, as amended
or supplemented, on file with the Commission at the time the
registration statement became effective, including the prospectus,
financial statements, schedules, exhibits and all other documents
filed as part thereof, as amended and supplemented, is herein called
the "Registration Statement," and the prospectus, as amended or
supplemented, on file with the Commission at the time the Registration
Statement became effective is herein called the "Prospectus," except
that if the prospectus filed by the Company with the Commission
pursuant to Rule 424(b) of the general rules and regulations of the
Commission under the Act ("SEC Regulations") differs from the form of
prospectus on file at the time the Registration Statement became
effective, the term "Prospectus"
<PAGE>
Trident Securities, Inc.
May , 1999
Page 3
shall refer to the Rule 424(b) prospectus from and after the time it
is filed with the Commission and shall include any amendments or
supplements thereto from and after their dates of effectiveness or
use, respectively. If any Shares remain unsubscribed following
completion of the Subscription Offering and, if any, the Community
Offering, the Company (i) will, if required by SEC Regulations,
promptly file with the Commission a post-effective amendment to such
Registration Statement relating to the results of the Subscription
Offering and, if any, the Community Offering, any additional
information with respect to the proposed plan of distribution and any
revised pricing information or (ii) if no such post-effective
amendment is required, will file with the Commission a prospectus or
prospectus supplement containing information relating to the results
of the Subscription and the Community Offerings and pricing
information pursuant to Rule 424(c) of the SEC Regulations, in either
case in a form reasonably acceptable to the Company and Trident.
(ii) The Bank has filed an Application for Approval of Conversion
on Form AC, including exhibits (as amended or supplemented, the "Form
AC" and together with the Form H-(e)1-S referred to below, the
"Conversion Application") with the Office of Thrift Supervision
("Office") under the Home Owners' Loan Act, as amended ("HOLA") and
the enforceable rules and regulations, including published policies
and actions, of the Office thereunder ("OTS Regulations"), which has
been approved by the Office; the Prospectus and the proxy statement
for the solicitation of proxies from members of the Bank for the
special meeting to approve the Plan ("Proxy Statement") included as
part of the Form AC have been approved for use by the Office. No
order has been issued by the Office preventing or suspending the use
of the Prospectus or the Proxy Statement; and no action by or before
the Office revoking such approvals is pending or, to the Bank's best
knowledge, threatened. The Company has filed with the Office the
Company's application on Form H-e(1)-S under the savings and loan
holding company provisions of the HOLA and the OTS Regulations, which
has been conditionally approved.
(iii) At the date of the Prospectus and at all times subsequent
thereto through and including the Closing Date (i) the Registration
Statement and the Prospectus (as amended or supplemented, if amended
or supplemented) complied and will comply as to form in all material
respects with the Act and the SEC Regulations, (ii) the Registration
Statement (as amended or supplemented, if amended or supplemented) did
not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and (iii) the Prospectus (as
amended or supplemented, if amended or supplemented) did not contain
any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which
<PAGE>
Trident Securities, Inc.
May , 1999
Page 4
they were made, not misleading. Representations or warranties in this
subsection shall not apply to statements or omissions made in reliance
upon and in conformity with written information about Trident
furnished to the Company or the Bank by or on behalf of Trident
expressly for use in the Registration Statement or Prospectus.
(iv) The Company is duly incorporated as a Georgia corporation
and the Bank is duly organized as a mutual savings bank under the laws
of the United States, and each of them is validly existing and in good
standing under the laws of the jurisdiction of its organization with
full power and authority to own its property and conduct its business
as described in the Prospectus; the Bank is a member of the Federal
Home Loan Bank of Atlanta; and the deposit accounts of the Bank are
insured by the Savings Association Insurance Fund ("SAIF")
administered by the Federal Deposit Insurance Corporation ("FDIC") up
to the applicable limits. Neither the Company nor the Bank is
required to be qualified to do business as a foreign corporation in
any jurisdiction where non-qualification would have a material adverse
effect on the Company and the Bank, taken as a whole. The Bank does
not own equity securities of or an equity interest in any business
enterprise, except as described in the Prospectus. Upon amendment of
the Bank's charter and bylaws as provided in the OTS Regulations and
completion of the sale by the Company of the Shares as contemplated by
the Prospectus and the Plan, (i) the Bank will convert to a federally
chartered capital stock savings bank with full power and authority to
own its property and conduct its business as described in the
Prospectus, (ii) all of the authorized and outstanding capital stock
of the Bank will be owned of record and beneficially by the Company,
and (iii) the Company will have no direct subsidiaries other than the
Bank.
(v) The Subsidiary is the only subsidiary of the Company and is
the duly authorized successor to Pinehurst Corp.; the Subsidiary is
duly organized as a Georgia limited liability company and is validly
existing and in good standing under the laws of the jurisdiction of
its organization with full power and authority to own its property and
conduct its business as described in the Prospectus; the Subsidiary is
not required to be qualified to do business as a foreign limited
liability company in any jurisdiction where non-qualification would
have a material adverse effect on the Subsidiary.
(vi) The Bank has good and marketable title to all assets
material to its business and to those assets described in the
Prospectus as owned by it, free and clear of all liens, charges,
encumbrances or restrictions, except as described in the Prospectus
and except as would not in the aggregate have a material adverse
effect on the Bank; and all of the leases and subleases material to
the operations or financial condition of the Bank, under which it
holds properties, including those described in the Prospectus, are in
full force and effect as described therein.
<PAGE>
Trident Securities, Inc.
May , 1999
Page 5
(vii) The Subsidiary has good and marketable title to all assets
material to its business and to those assets described in the
Prospectus as owned by it, free and clear of all liens, charges,
encumbrances or restrictions, except as described in the Prospectus
and except as would not in the aggregate have a material adverse
effect on the Subsidiary; and all of the leases and subleases material
to the operations or financial condition of the Subsidiary, under
which it holds properties, including those described in the
Prospectus, are in full force and effect as described therein.
(viii) The Bank has obtained all licenses, permits and other
governmental authorizations currently required for the conduct of its
business, all such licenses, permits and other governmental
authorizations are in full force and effect and the Bank is in all
material respects complying therewith, except where the failure to
hold or comply with such licenses, permits or governmental
authorizations would not have a material adverse effect on the Company
and the Bank, taken as a whole.
(ix) The Subsidiary has obtained all licenses, permits and other
governmental authorizations currently required for the conduct of its
business, all such licenses, permits and other governmental
authorizations are in full force and effect and the Subsidiary is in
all material respects complying therewith, except where the failure to
hold or comply with such licenses, permits or governmental
authorizations would not have a material adverse effect on the
Subsidiary.
(x) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
and validly authorized by all necessary corporate action on the part
of each of the Company and the Bank, and this Agreement has been
validly executed and delivered by, and is a valid and binding
obligation of, each of the Company and the Bank, enforceable in
accordance with its terms (except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium, reorganization or
similar laws relating to or affecting the enforcement of creditors'
rights generally or the rights of creditors of savings and loan
holding companies the accounts of whose subsidiary are insured by the
FDIC or by general equity principles, regardless of whether such
enforceability is considered in a proceeding in equity or at law, and
except to the extent that the provisions of Sections 8 and 9 hereof
may be unenforceable as against public policy or pursuant to Section
23A of the Federal Reserve Act, 12 U.S.C. Section 371c ("Section
23A")).
(xi) There is no litigation or governmental proceeding pending
or, to the best knowledge of the Company or the Bank, threatened
against or involving the Company, the Bank, or any of their respective
assets which individually or in the aggregate would reasonably be
expected to have a material adverse effect on the
<PAGE>
Trident Securities, Inc.
May , 1999
Page 6
condition (financial or otherwise), results of operations assets or
properties of the Company and the Bank, taken as a whole.
(xii) The Company and the Bank have received the opinion of
Womble Carlyle Sandridge & Rice, PLLC, counsel to the Company and the
Bank, with respect to federal income tax consequences of the
Conversion, to the effect that the Conversion will constitute a tax-
free reorganization under the Internal Revenue Code of 1986, as
amended; the Company and the Bank have received the opinion of Mauldin
& Jenkins, LLC with respect to the Georgia tax consequences of the
Conversion, to the effect that the Conversion will not be a taxable
transaction for the Bank or the Company under the laws of Georgia; and
the facts and representations upon which such entities relied upon in
rendering their respective opinion are accurate and complete.
(xiii) Each of the Company and the Bank has all such corporate
power, authority, authorizations, approvals and orders as may be
required to enter into this Agreement and to carry out the provisions
and conditions hereof, subject to the limitations set forth herein and
subject to the satisfaction of certain conditions imposed by the
Office in connection with its approvals of the Form AC and the
Application H-(e)1-S, and except as may be required under the "blue
sky" laws of various jurisdictions, and in the case of the Company, as
of the Closing Date, will have such approvals and orders to issue and
sell the Shares to be sold by the Company as provided herein, and in
the case of the Bank, as of the Closing Date, will have such approvals
and orders to issue and sell the shares of its common stock to be sold
to the Company as provided in the Plan, subject to the issuance of an
amended charter in the form required for federally chartered capital
stock savings banks ("Stock Charter"), the form of which Stock Charter
has been filed with the Form AC and approved by the Office.
(xiv) Neither the Company nor the Bank is in violation of any
rule or regulation of the Office or the FDIC that could reasonably be
expected to result in any enforcement action against the Company, the
Bank, or their officers or directors that would have a material
adverse effect on the condition (financial or otherwise), results of
operations, businesses, assets or properties of the Company and the
Bank, taken as a whole.
(xv) The consolidated financial statements and the related notes
or schedules which are included in the Registration Statement and are
part of the Prospectus fairly present the consolidated financial
condition, income, retained earnings and cash flows of the Bank at the
respective dates thereof and for the respective periods covered
thereby and comply as to form in all material respects with the
applicable accounting requirements of the SEC Regulations and the
<PAGE>
Trident Securities, Inc.
May , 1999
Page 7
applicable accounting regulations of the Office. Such financial
statements have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods
involved, except as set forth therein, and such financial statements
are in all material respects consistent with financial statements and
other reports filed by the Bank with supervisory and regulatory
authorities except as such generally accepted accounting principles
may otherwise require. The tables in the Prospectus accurately
present the information purported to be shown thereby at the
respective dates thereof and for the respective periods therein.
(xvi) There has been no material change in the financial
condition, results of operations or business, including assets and
properties, of the Company and the Bank, taken as a whole, since the
latest date as of which such condition is set forth in the Prospectus,
except as set forth therein; and the capitalization, assets,
properties and business of each of the Company and the Bank conform to
the descriptions thereof contained in the Prospectus. Neither the
Company nor the Bank has any material liabilities of any kind,
contingent or otherwise, except as set forth in the Prospectus.
(xvii) There has been no breach or default (or the occurrence of
any event which, with notice or lapse of time or both, would
constitute a default) under, or creation or imposition of any lien,
charge or other encumbrance upon any of the properties or assets of
the Company or the Bank pursuant to any of the terms, provisions or
conditions of, any agreement, contract, indenture, bond, debenture,
note, instrument or obligation to which the Company or the Bank is a
party or by which any of them or any of their respective assets or
properties may be bound or is subject, or violation of any
governmental license or permit or any enforceable published law,
administrative regulation or order or court order, writ, injunction or
decree, which breach, default, encumbrance or violation would have a
material adverse effect on the condition (financial or otherwise),
results of operations, businesses, assets or properties of the Company
and the Bank, taken as a whole; all agreements which are material to
the financial condition, results of operations or business, assets or
properties of the Company or the Bank are in full force and effect,
and no party to any such agreement has instituted or, to the best
knowledge of the Company or the Bank, threatened any action or
proceeding wherein the Company or the Bank would be alleged to be in
default thereunder.
(xviii) Neither the Company nor the Bank is in violation of its
respective articles of incorporation, charter or bylaws. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby by the Company and the Bank do not
conflict with or result in a breach of the respective articles of
incorporation, charter or bylaws of the Company or the Bank (in either
mutual or stock form) or constitute a material breach of or default
(or an event which,
<PAGE>
Trident Securities, Inc.
May , 1999
Page 8
with notice or lapse of time or both, would constitute a default)
under, give rise to any right of termination, cancellation or
acceleration contained in, or result in the creation or imposition of
any lien, charge or other encumbrance upon any of the properties or
assets of the Company or the Bank pursuant to any of the terms,
provisions or conditions of, any material agreement, contract,
indenture, bond, debenture, note, instrument or obligation to which
the Company or the Bank is a party or violate any governmental license
or permit or any enforceable published law, administrative regulation
or order or court order, writ, injunction or decree (subject to the
satisfaction of certain conditions imposed by the Office in connection
with its approval of the Conversion Application), which breach,
default, encumbrance or violation would have a material adverse effect
on the Company and the Bank, taken as a whole.
(xix) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus and prior to the
Closing Date (as hereinafter defined), except as otherwise may be
indicated or contemplated therein, neither the Company nor the Bank
has issued any securities which will remain issued and outstanding at
the Closing Date or incurred any liability or obligation, direct or
contingent, or borrowed money, except liabilities, obligations or
borrowings in the ordinary course of business, or entered into any
other transaction not in the ordinary course of business and
consistent with prior practices, which is material in light of the
business of the Company and the Bank, taken as a whole.
(xx) Upon consummation of the Conversion, the authorized, issued
and outstanding equity capital of the Company shall be within the
range set forth in the Prospectus under the caption "Capitalization,"
and no capital stock of the Company shall be outstanding immediately
prior to the Closing Date; the issuance and the sale of the Shares
have been duly authorized by all necessary corporate action of the
Company and the Bank and approved by the Office and, when issued and
paid for in accordance with the terms of the Plan, shall be validly
issued, fully paid and nonassessable and shall conform to the
description thereof contained in the Prospectus; the issuance of the
Shares is not subject to preemptive rights, except as set forth in the
Prospectus; and good title to the Shares will be transferred by the
Company to the purchasers thereof upon issuance thereof against
payment therefor, free and clear of all claims, encumbrances, security
interests and liens against the Company whatsoever. The certificates
representing the Shares will conform in all material respects with the
requirements of applicable laws and regulations. The issuance and sale
of the capital stock of the Bank to the Company has been duly
authorized by all necessary corporate action of the Bank and the
Company and has been approved by the Office (subject to the
satisfaction of various conditions imposed by the Office in connection
with its approval of the Conversion Application), and such capital
stock, when issued in accordance with the terms of the
<PAGE>
Trident Securities, Inc.
May , 1999
Page 9
Plan, will be fully paid and nonassessable and will conform to the
description thereof contained in the Prospectus.
(xxi) No approval of any regulatory or supervisory or other
public authority is required of the Company or the Bank in connection
with the execution and delivery of this Agreement or the issuance of
the Shares, except for the declaration of effectiveness of any
required post-effective amendment by the Commission and approval
thereof by the Office and approval of the Company's Application
H-(e)1-S, the issuance of the Stock Charter by the Office and as may
be required under the "blue sky" laws of various jurisdictions.
(xxii) All contracts and other documents required to be filed as
exhibits to the Registration Statement or the Conversion Application
have been filed with the Commission or the Office, as the case may be.
(xxiii) Mauldin & Jenkins, LLC, which has audited the
consolidated financial statements of the Bank at December 31, 1998 and
1997 and for the years ended December 31, 1998 and 1997 included in
the Prospectus, is an independent public accountant with respect to
the Company and the Bank within the meaning of the Code of
Professional Ethics of the American Institute of Certified Public
Accountants and Title 12 of the Code of Federal Regulations, Section
571.2(c)(3).
(xxiv) For the past five years, or in the case of the Company,
such lesser period corresponding to the Company's existence, the
Company and the Bank have timely filed all required federal, state and
local tax returns, and no deficiency has been asserted with respect to
such returns by any taxing authorities, and the Company and the Bank
have paid all taxes that have become due and, to the best of their
knowledge, have made adequate reserves for known future tax
liabilities, except where any failure to make such filings, payments
and reserves, or the assertion of such a deficiency, would not have a
material adverse effect on the Company and the Bank, taken as a whole.
(xxv) All of the loans represented as assets of the Bank on the
most recent consolidated statement of financial condition of the Bank
included in the Prospectus meet or are exempt from all requirements of
federal, state or local law pertaining to lending, including without
limitation truth in lending (including the requirements of Regulation
Z and 12 C.F.R. Part 226 and Section 563.99), real estate settlement
procedures, consumer credit protection, equal credit opportunity and
all disclosure laws applicable to such loans, except for violations
which, if asserted, would not have a material adverse effect on the
Company and the Bank, taken as a whole.
<PAGE>
Trident Securities, Inc.
May , 1999
Page 10
(xxvi) To the best knowledge of the Company and the Bank, the
records of account holders, depositors and other members of the Bank
delivered to Trident by the Bank or its agent for use during the
Conversion are reliable and accurate.
(xxvii) Neither the Company nor the Bank nor, to the best
knowledge of the Company and the Bank, the employees of the Company or
the Bank, has made any payment of funds of the Company or the Bank
prohibited by law, and no funds of the Company or the Bank have been
set aside to be used for any payment prohibited by law.
(xxviii) To the best knowledge of the Company and the Bank, the
Company and the Bank are in compliance with all laws, rules and
regulations relating to the discharge, storage, handling and disposal
of hazardous or toxic substances, pollutants or contaminants and
neither the Company nor the Bank believes that the Company and
Association is subject to liability under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended, or any similar law, except for violations which, if asserted,
would not have a material adverse effect on the Company and the Bank,
taken as a whole. There are no actions, suits, regulatory
investigations or other proceedings pending or, to the best knowledge
of the Company or the Bank, threatened against the Company or the Bank
relating to the discharge, storage, handling and disposal of hazardous
or toxic substances, pollutants or contaminants. To the best
knowledge of the Company and the Bank, no disposal, release or
discharge of hazardous or toxic substances, pollutants or
contaminants, including petroleum and gas products, as any of such
terms may be defined under federal, state or local law, has been
caused by the Company or the Bank or, to the best knowledge of the
Company or the Bank, has occurred on, in or at any of the facilities
or properties of the Company or the Bank, except such disposal,
release or discharge which would not have a material adverse effect on
the Company and the Bank, taken as a whole.
(b) Trident represents and warrants to the Company and the Bank that:
(i) Trident is registered as a broker-dealer with the Commission
and a member of the NASD, and is in good standing with the Commission
and the NASD.
(ii) Trident is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation, with
full corporate power and authority to provide the services to be
furnished to the Company and the Bank hereunder.
(iii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
and validly authorized by all necessary action on the part of Trident,
and this Agreement is a legal, valid and
<PAGE>
Trident Securities, Inc.
May , 1999
Page 11
binding obligation of Trident, enforceable in accordance with its
terms (except as the enforceability thereof may be limited by
bankruptcy, insolvency, moratorium, reorganization or similar laws
relating to or affecting the enforcement of creditors' rights
generally or the rights of creditors of registered broker-dealers
accounts of whom may be protected by the Securities Investor
Protection Corporation or by general equity principles, regardless of
whether such enforceability is considered in a proceeding in equity or
at law, and except to the extent that the provisions of Sections 8 and
9 hereof may be unenforceable as against public policy).
(iv) Each of Trident, and to Trident's best knowledge, its
employees, agents and representatives who shall perform any of the
services required hereunder to be performed by Trident shall be duly
authorized and shall have all licenses, approvals and permits
necessary to perform such services, and Trident is a registered
selling agent in the jurisdictions listed in Exhibit A hereto and will
remain registered in such jurisdictions in which the Company is
relying on such registration for the sale of the Shares, until the
Conversion is consummated or terminated.
(v) The execution and delivery of this Agreement by Trident, the
fulfillment of the terms set forth herein and the consummation of the
transactions contemplated hereby shall not violate or conflict with
the corporate charter or bylaws of Trident or violate, conflict with
or constitute a breach of, or default (or an event which, with notice
or lapse of time, or both, would constitute a default) under, any
material agreement, indenture or other instrument by which Trident is
bound or under any governmental license or permit or any law,
administrative regulation, authorization, approval or order or court
decree, injunction or order, except for such violations, conflicts,
breaches or defaults that would not have a material adverse effect on
Trident.
(vi) All funds received by Trident to purchase the Common Stock
will be handled in accordance with Rule 15c2-4 under the Securities
Exchange Act of 1934, as amended ("Exchange Act").
(vii) There is not now pending or, to Trident's best knowledge,
threatened against Trident any action or proceeding before the
Commission, the NASD, any state securities commission or any state or
federal court concerning Trident's activities as a broker-dealer.
3. Employment of Trident; Sale and Delivery of the Shares. On the basis
------------------------------------------------------
of the representations and warranties herein contained, but subject to the terms
and conditions herein set forth, the Company and the Bank hereby employ Trident
as their agent to utilize its best efforts in assisting the Company with the
sale of the Shares by the Company in the Offerings. The employment of Trident
hereunder shall terminate (a) forty-five (45) days after the Offerings close,
<PAGE>
Trident Securities, Inc.
May , 1999
Page 12
unless the Company and the Bank, with the approval of the Office, are permitted
to extend such period of time, or (b) upon consummation of the Conversion,
whichever date shall first occur.
If the Company is unable to sell a minimum of 1,071,000 Shares of Common
Stock (or such lesser amount as the Office may permit) within the period herein
provided, this Agreement shall terminate, and the Company and the Bank shall
refund promptly to any person who has subscribed for any of the Shares, the full
amount which it may have received from them, together with interest as provided
in the Prospectus, and no party to this Agreement shall have any obligation to
the other party hereunder, except as set forth in Sections 6, 8(a) and 9 hereof.
Appropriate arrangements for placing the funds received from subscriptions for
Shares in a special interest-bearing account with the Bank until all Shares are
sold and paid for were made prior to the commencement of the Subscription and
Community Offering, with provision for prompt refund to the purchasers as set
forth above, or for delivery to the Company if all Shares are sold.
If all conditions precedent to the consummation of the Conversion are
satisfied, including the sale of all Shares required by the Plan to be sold, the
Company agrees to issue or have issued such Shares and to release for delivery
certificates to subscribers thereof for such Shares on the Closing Date against
payment to the Company by any means authorized pursuant to the Prospectus, at
the principal office of the Company or at such other place as shall be agreed
upon between the parties hereto. The date upon which Trident is paid the
compensation due hereunder is herein called the "Closing Date."
Trident agrees either (a) upon receipt of an executed order form of a
subscriber to forward the aggregate offering price of the Common Stock ordered
on or before twelve noon on the next business day following receipt or execution
of an order form by Trident to the Bank for deposit in a segregated account or
(b) to solicit indications of interest in which event (i) Trident will
subsequently contact any potential subscriber indicating interest to confirm the
interest and give instructions to execute and return an order form or to receive
authorization to execute the order form on the subscriber's behalf, (ii) Trident
will mail acknowledgments of receipt of orders to each subscriber confirming
interest on the business day following such confirmation, (iii) Trident will
debit accounts of such subscribers on the third business day ("debit date")
following receipt of the confirmation referred to in (i), and (iv) Trident will
forward completed order forms together with such funds to the Bank on or before
twelve noon on the next business day following the debit date for deposit in a
segregated account. Trident acknowledges that if the procedure in (b) is
adopted, subscribers' funds are not required to be in their accounts until the
debit date.
In addition to the expenses specified in Section 6 hereof, Trident shall
receive the following compensation for its services hereunder and reimbursement
of expenses:
(a) (i) a management fee of forty thousand dollars ($40,000), (ii) a
commission equal to 1.65% of the aggregate dollar amount of
Common Stock sold in the Subscription and Community Offering,
excluding any shares of Common
<PAGE>
Trident Securities, Inc.
May , 1999
Page 13
Stock sold to the Bank's directors, executive officers,
"associates" (as defined in the Plan) of the Bank's directors and
executive officers, and the ESOP; and (iii) if applicable, for
any stock sold in the Syndicated Community Offering by other NASD
member firms under selected dealer's agreements, the commission
shall not exceed a fee to be agreed upon jointly by Trident and
the Bank to reflect market requirements at the time of a stock
allocation in the Syndicated Community Offering. All such fees
are to be payable in same-day funds to Trident on the Closing
Date.
(b) Trident shall be reimbursed for reasonable allocable expenses,
including but not limited to travel, communications, legal fees
and expenses and postage, incurred by it whether or not the
Offerings are successfully completed; provided, however, that
neither the Company nor the Bank shall pay or reimburse Trident
for any of the foregoing expenses accrued after Trident shall
have notified the Company or the Bank of its election to
terminate this Agreement pursuant to Section 11 hereof or after
such time as the Company or the Bank shall have given notice in
accordance with Section 12 hereof that Trident is in breach of
this Agreement. Trident's reimbursable out of pocket expenses
will not exceed $10,000, excluding legal fees. Full payment to
defray Trident's reimbursable expenses shall be made in next-day
funds on the Closing Date or, if the Conversion is not completed
and is terminated for any reason, within ten (10) business days
of receipt by the Company of a written request from Trident for
reimbursement of its expenses. Trident acknowledges receipt of
$10,000 advance payment from the Bank which shall be credited
against the total reimbursement due Trident hereunder.
(c) Notwithstanding the limitations on reimbursement of Trident for
allocable expenses provided in the immediately preceding
paragraph (b), in the event that a resolicitation or other event
causes the Offerings to be extended beyond their original
expiration date, Trident shall be reimbursed for its allocable
expenses incurred during such extended period, provided that the
allowance for allocable expenses provided for in the immediately
preceding paragraph (b) above have been exhausted and subject to
the following: such reimbursement shall be in amount equal to the
product obtained by dividing $10,000 (original reimbursable out-
of-pocket expenses, excluding legal fees) by the total number of
days of the unextended Subscription Offering (calculated from the
date of the Prospectus to the intended close of the Subscription
Offering as stated in the Prospectus) and multiplying such
product by the number of days of the extension (that number of
days from the date of the supplemental prospectus used in the
extended Subscription Offering to the closing of the extension of
the Subscription Offering described in such supplemental
prospectus).
<PAGE>
Trident Securities, Inc.
May , 1999
Page 14
The Company shall pay any stock issue and transfer taxes which may be
payable with respect to the sale of the Shares. The Company and the Bank shall
also pay all expenses of the Conversion incurred by them or on their prior
approval including but not limited to their attorneys' fees, NASD filing fees,
and attorneys' fees relating to any required state securities laws research and
filings, telephone charges, air freight, rental equipment, supplies, transfer
agent charges, fees relating to auditing and accounting and costs of printing
all documents necessary in connection with the Conversion.
4. Offering. Subject to the provisions of Section 7 hereof, Trident is
--------
assisting the Company on a best efforts basis in offering a minimum of 1,071,000
and a maximum of 1,449,000 Shares, with the possibility of offering up to
1,666,350 Shares (except as the Office may permit to be decreased or increased)
in the Subscription and Community Offerings, and if necessary, the Syndicated
Community Offering. The Shares are to be offered to the public at the price set
forth on the cover page of the Prospectus and the first page of this Agreement.
5. Further Agreements. The Company and the Bank (including the
------------------
Subsidiary in each instance where the Bank is referenced, unless clearly
inapplicable) jointly and severally covenant and agree that:
(a) The Company shall deliver to Trident, from time to time, such
number of copies of the Prospectus as Trident reasonably may request. The
Company authorizes Trident to use the Prospectus in any lawful manner in
connection with the offer and sale of the Shares.
(b) The Company will notify Trident or its counsel immediately upon
discovery, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement becomes effective or any supplement
to the Prospectus has been filed, (ii) of the issuance by the Commission of
any stop order relating to the Registration Statement or of the initiation
or the threat of any proceedings for that purpose, (iii) of the receipt of
any notice with respect to the suspension of the qualification of the
Shares for offering or sale in any jurisdiction, and (iv) of the receipt of
any comments from the staff of the Commission relating to the Registration
Statement. If the Commission enters a stop order relating to the
Registration Statement at any time, the Company will make every reasonable
effort to obtain the lifting of such order at the earliest possible time.
(c) During the time when the Prospectus is required to be delivered
under the Act, the Company will comply with all requirements imposed upon
it by the Act, as now in effect and hereafter amended, and by the SEC
Regulations and the OTS Regulations, as from time to time in force, so far
as necessary to permit the continuance of offers and sales of or dealings
in the Shares in accordance with the provisions hereof and the Prospectus.
If, during the period when the Prospectus is required to be delivered in
connection with the offer
<PAGE>
Trident Securities, Inc.
May , 1999
Page 15
and sale of the Shares, any event relating to or affecting the Company or
the Bank shall occur as a result of which it is necessary, in the opinion
of counsel for Trident, with concurrence of counsel of the Company, to
amend or supplement the Prospectus in order to make the Prospectus not
false or misleading as to a material fact in light of the circumstances
existing at the time it is delivered to a purchaser of the Shares, the
Company shall prepare and furnish to Trident promptly a reasonable number
of copies of an amendment or amendments or of a supplement or supplements
to the Prospectus (in form and substance satisfactory to counsel for
Trident) which shall amend or supplement the Prospectus so that, as amended
or supplemented, the Prospectus shall not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make
the statements therein, in light of the circumstances existing at the time
the Prospectus is delivered to a purchaser of the Shares, not misleading.
The Company will not file or use any amendment or supplement to the
Registration Statement or the Prospectus of which Trident has not first
been furnished a copy or to which Trident shall reasonably object after
having been furnished such copy. For the purposes of this subsection the
Company and the Bank shall furnish such information with respect to
themselves as Trident from time to time may reasonably request.
(d) The Company has taken or will take all necessary action as may be
required to qualify or register the Shares for offer and sale by the
Company under the securities or blue sky laws of such jurisdictions as
Trident and either the Company or its counsel may agree upon; provided,
however, that the Company shall not be obligated to qualify as a foreign
corporation to do business under the laws of any such jurisdiction. In
each jurisdiction where such qualification or registration shall be
effected, the Company, unless Trident agrees that such action is not
necessary or advisable in connection with the distribution of the Shares,
shall file and make such statements or reports as are, or reasonably may
be, required by the laws of such jurisdiction.
(e) Appropriate entries will be made in the financial records of the
Bank sufficient to establish a liquidation account for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders in
accordance with the requirements of the Office.
(f) The Company will file a registration statement for the Common
Stock under Section 12(g) of the Exchange Act prior to completion of the
Conversion pursuant to the Plan and shall request that such registration
statement be effective upon completion of the Conversion. The Company
shall maintain the effectiveness of such registration for a minimum period
of three years or for such shorter period as may be required by applicable
law.
(g) The Company will make generally available to its security holders
as soon as practicable, but not later than 90 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the SEC Regulations) covering a twelve-month
period beginning not later than the first day of the
<PAGE>
Trident Securities, Inc.
May , 1999
Page 16
Company's fiscal quarter next following the effective date (as defined in
said Rule 158) of the Registration Statement.
(h) For a period of three (3) years from the date of this Agreement
(unless the Common Stock shall have been deregistered under the Exchange
Act), the Company will furnish to Trident, as soon as publicly available
after the end of each fiscal year, a copy of its annual report to
shareholders for such year; and the Company will furnish to Trident (i) as
soon as publicly available, a copy of each report or definitive proxy
statement of the Company filed with the Commission under the Exchange Act
or mailed to shareholders, and (ii) from time to time, such other public
information concerning the Company as Trident may reasonably request.
(i) The Company shall use the net proceeds from the sale of the Shares
consistently with the manner set forth in the Prospectus.
(j) The Company shall not deliver the Shares until each and every
condition set forth in Section 7 hereof has been satisfied, unless such
condition is waived in writing by Trident.
(k) The Company shall advise Trident, if necessary, as to the
allocation of deposits, in the case of Eligible Account Holders and
Supplemental Eligible Account Holders, and votes, in the case of Other
Members, and of the Shares in the event of an oversubscription and shall
provide Trident final instructions as to the allocation of the Shares
("Allocation Instructions") and such information shall be accurate and
reliable. Trident shall be entitled to rely on such instructions and shall
have no liability in respect of its reliance thereon, including without
limitation, no liability for or related to any denial or grant of a
subscription in whole or in part, except for such liability contemplated
under Section 8(b) of this Agreement.
(l) The Company and the Bank will take such actions and furnish such
information as are reasonably requested by Trident in order for Trident to
ensure compliance with the NASD's "Interpretation Relating to Free-Riding
and Withholding."
(m) At the Closing Date, the Company and the Bank will have completed
the conditions precedent to, and shall have conducted the Conversion in all
material respects in accordance with, the Plan, the OTS Regulations and all
other applicable laws, regulations, published decisions and orders,
including all terms, conditions, requirements and provisions precedent to
the Conversion imposed by the Office, or appropriate waivers shall have
been obtained.
6. Payment of Expenses. Whether or not the Conversion is consummated,
-------------------
the Company and the Bank shall pay or reimburse Trident for (a) all filing fees
paid or incurred by Trident in
<PAGE>
Trident Securities, Inc.
May , 1999
Page 17
connection with all filings with the NASD with respect to the Subscription and
Community Offerings and, (b) in addition, if the Company is unable to sell a
minimum of 1,071,000 Shares of Common Stock or such lesser amount as the Office
may permit or the Conversion is otherwise terminated, the Company and the Bank
shall reimburse Trident for allocable expenses incurred by Trident relating to
the offering of the Shares as provided in Section 3 hereof; provided, however,
that neither the Company nor the Bank shall pay or reimburse Trident for any of
the foregoing expenses accrued after Trident shall have notified the Company or
the Bank of its election to terminate this Agreement pursuant to Section 11
hereof or after such time as the Company or the Bank shall have given notice in
accordance with Section 12 hereof that Trident is in breach of this Agreement.
7. Conditions of Trident's Obligations. Except as may be waived by
-----------------------------------
Trident, the obligations of Trident as provided herein shall be subject to the
accuracy of the representations and warranties contained in Section 2 hereof as
of the date hereof and as of the Closing Date, to the performance by the Company
and the Bank of their obligations hereunder and to the following conditions:
(a) At the Closing Date, Trident shall receive the favorable opinion
of Womble Carlyle Sandridge & Rice, PLLC, counsel for the Company and the
Bank, dated the Closing Date, addressed to Trident, in form and substance
satisfactory to Trident and to the effect that:
(i) The Company is a corporation in existence under the laws of
the State of Georgia, and the Bank is a mutual savings bank in
existence under the laws of the Untied States, each having the
corporate power to execute, deliver and perform its respective
obligations under this Agreement and to carry on its business as now
conducted and as described in the Prospectus.
(ii) The Subsidiary is a limited liability company in existence
under the laws of the State of Georgia and is the successor entity to
Pinehurst Corp., with the power to perform its obligations and carry
on its business as now conducted and as described in the Prospectus;
(iii) The Bank is a member of the Federal Home Loan Bank of
Atlanta, and the deposit accounts of the Bank are insured by the SAIF
up to the applicable legal limits;
(iv) The activities of the Bank as described in the Prospectus
are permitted under federal and Georgia law to subsidiaries of a
Georgia business corporation;
(v) To the best knowledge of such counsel, the Subsidiary is the
only subsidiary corporation of the Bank; and the activities of the
Subsidiary are permitted under federal law to subsidiaries of a
federally-chartered savings bank;
<PAGE>
Trident Securities, Inc.
May , 1999
Page 18
(vi) The Plan complies with, and, to the best knowledge of such
counsel, the Conversion has been effected in all material respects in
accordance with, the HOLA and the OTS Regulations; to the best
knowledge of such counsel, all of the terms, conditions, requirements
and provisions with respect to the Plan and the Conversion imposed by
the Office, except with respect to the filing or submission of certain
required post-Conversion reports by the Company or the Bank, have been
complied with by the Company and the Bank in all material respects;
and, to the best knowledge of such counsel, no person has sought to
obtain regulatory or judicial review of the final action of the Office
in approving the Plan;
(vii) The Company has authorized capital stock as set forth in
the Registration Statement and the Prospectus;
(viii) The Company has authorized the issuance and sale of the
Shares by all necessary corporate action ; the Shares, upon receipt
of payment and issuance in accordance with the terms of the Plan, will
be validly issued, fully paid, nonassessable and, except as disclosed
in the Prospectus, free of preemptive rights; and purchasers of the
Shares from the Company, upon issuance thereof against payment
therefor, will acquire such Shares free and clear of all claims,
encumbrances, security interests and liens created by the Company;
(ix) The form of certificate used to evidence the Shares is in
proper form and complies in all material respects with the applicable
requirements of Georgia law the regulations of the Office;
(x) The Bank has authorized the sale of its capital stock to the
Company by all necessary corporate action, which sale has been
approved by the Office, and such capital stock, upon receipt of
payment and issuance in accordance with the terms of the Plan and the
Prospectus, will be validly issued, fully paid and nonassessable and
owned of record and beneficially by the Company;
(xi) Subject to the satisfaction of the conditions to the
Office's approval of the Conversion Application and the issuance by
the Office of the Bank's Stock Charter, no consent, approval,
authorization or other action by, or filing or registration with, any
governmental agency is required to be obtained or made by the Company
or the Bank for the execution and delivery of this Agreement, the
issuance of the Shares and the consummation of the Conversion;
(xii) The Company and the Bank have authorized the execution,
delivery and performance of this Agreement by all necessary corporate
action;
<PAGE>
Trident Securities, Inc.
May , 1999
Page 19
(xiii) The Plan has been duly adopted by the requisite vote of
the Board of Directors of the Bank and by the requisite vote of the
Board of Directors of the Company; and the Plan has been approved by
the requisite vote of the eligible voting member of the Bank at a duly
called meeting.
(xiv) The statements in the Prospectus under the captions
"Dividend Policy," "Regulation and Supervision," "Federal and State
Taxation," "Acquiring Douglas Federal or First Deposit,"
"Registration Requirements" and "Description of Capital Stock of First
Deposit," insofar as they are, or refer to, statements of law or legal
conclusions (excluding financial data included therein or omitted
therefrom, as to which an opinion need not be expressed), have been
prepared or reviewed by such counsel and are accurate in all material
respects;
(xv) The Conversion Application, the Registration Statement, the
Prospectus and the Proxy Statement, in each case as amended or
supplemented, comply as to form in all material respects with the
requirements of the Act, the SEC Regulations, the HOLA and the OTS
Regulations, as the case may be (except as to information with respect
to Trident included therein and financial statements, notes to
financial statements, financial tables and other financial and
statistical data, including the appraisal, included therein or omitted
therefrom, as to which no opinion need be expressed); to the best of
such counsel's knowledge, all documents and exhibits required to be
filed with the Conversion Application and the Registration Statement
have been so filed and the descriptions in the Conversion Application
and the Registration Statement of such documents and exhibits are
accurate in all material respects.
(xvi) The Form AC has been approved by the Office, and the
Prospectus and the Proxy Statement have been authorized for use by the
Office; the Registration Statement and any post-effective amendment
thereto has been declared effective by the Commission; no proceedings
are pending by or before the Commission or the Office seeking to
revoke or rescind the orders declaring the Registration Statement
effective or approving the Conversion Application or, to the best of
such counsel's knowledge, are contemplated or threatened (provided
that for this purpose such counsel need not regard any litigation or
governmental procedure to be "threatened" unless the potential
litigant or government authority has manifested to the management of
the Company or the Bank, or to such counsel, a present intention to
initiate such litigation or proceeding);
(xvii) The execution and delivery of this Agreement, and the
consummation of the Conversion by the Company and the Bank, do not
violate any provision of the Articles of Incorporation, Charter or
Bylaws of the Company or the Bank, do not violate or constitute a
breach of or default under any contract, agreement or
<PAGE>
Trident Securities, Inc.
May , 1999
Page 20
instrument described in the Prospectus, and, to the best knowledge of
such counsel, do not violate any applicable law, regulation or any
judgment or order of any government, governmental instrumentality or
court that is binding on the Company or the Bank or any of its assets,
properties or operations;
(xviii) To the best knowledge of such counsel, the Company, the
Bank and the Subsidiary have obtained all licenses, permits and other
governmental authorizations currently required for the conduct of its
respective business as such business is described in the Prospectus,
all such licenses, permits and other governmental authorizations are
in full force and effect and the Company, the Bank and the Subsidiary
are in all material respects complying therewith, except where the
failure to hold such licenses, permits or governmental authorizations
or the failure to so comply would not have a material adverse effect
on the Company, the Bank and the Subsidiary, taken as a whole;
(xix) To the best of such counsel's knowledge, there is no
action, suit proceedings, inquiry or investigation before or by any
court or governmental agency or body, now pending or threatened,
against either the Company, the Bank or the Subsidiary;
(xx) This agreement has been duly executed and delivered by the
Company and the Bank and is enforceable against the Bank and the
Company;
(xxi) To the best of such counsel's knowledge, the execution and
delivery of this Agreement and the consummation of the Conversion by
the Company and the Bank do not constitute a breach of or default (or
an event which, with notice or lapse of time or both, would constitute
a default) under, give rise to any right of termination, cancellation
or acceleration contained in, or result in the creation or imposition
of any lien, charge or other encumbrance upon any of the properties or
assets of the Company or the Bank pursuant to any of the terms,
provisions or conditions of, any agreement, contract, indenture, bond,
debenture, note, instrument or obligation to which the Company or the
Bank is a party or violate any governmental license or permit or any
enforceable published law, administrative regulation or order or court
order, writ, injunction or decree (except as may be required under the
Georgia "blue sky" laws as to which no opinion need be expressed),
which breach, default, encumbrance or violation would have a material
adverse effect on the Company and the Bank, taken as a whole; and
(xxii) To the best knowledge of such counsel, there has been no
material breach of any provision of the Company's, the Bank's or the
Subsidiary's respective articles of incorporation, charter or bylaws
or breach or default (or the occurrence of any event which, with
notice or lapse of time or both, would constitute a default)
<PAGE>
Trident Securities, Inc.
May , 1999
Page 21
under any agreement, contract, indenture, debenture, bond, note,
instrument or obligation to which the Company, the Bank or the
Subsidiary is a party or by which any of them or any of their
respective assets or properties may be bound, or any governmental
license or permit, or a violation of any enforceable published law,
administrative regulation or order, or court order, writ, injunction
or decree which breach, default, encumbrance or violation would have a
material adverse effect on the Company, the Bank and the Subsidiary,
taken as a whole.
In rendering such opinion, such counsel may rely as to matters of fact on
certificates of officers and directors of the Company, the Bank and the
Subsidiary and certificates of public officials delivered pursuant to this
Agreement. Such counsel may assume that any agreement is the valid and binding
obligation of any parties to such agreement other than the Company and the Bank.
Such opinion may be governed by, and interpreted in accordance with, the Legal
Opinion Accord ("Accord") of the ABA Section of Business Law (1991), and, as a
consequence, such opinion may be rendered subject to the qualifications,
exceptions, definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord. Further, references in such opinion
to such counsel's "knowledge" may be limited to "actual knowledge" as defined in
the Accord (or knowledge based on certificates). In addition, the "General
Qualifications" set forth in the Accord and other customary assumptions and
limitations may apply to such opinion. Such opinion may be limited to present
statutes, regulations and judicial interpretations and to facts as they
presently exist; in rendering such opinion, such counsel need assume no
obligation to revise or supplement them should the present laws be changed by
legislative or regulatory action, judicial decision or otherwise; and such
counsels need express no view, opinion or belief with respect to whether any
proposed or pending legislation, if enacted, or any regulations or any policy
statements issued by any regulatory agency, whether or not promulgated pursuant
to any such legislation, would affect the validity of the execution and delivery
by the Company and the Bank of this Agreement or the issuance of the Shares.
(b) At the Closing Date, Trident shall receive the letter of Womble
Carlyle Sandridge & Rice, PLLC, special counsel for the Company and the
Bank, dated the Closing Date, addressed to Trident, in form and substance
satisfactory to Trident and to the effect that: based on such counsel's
participation in conferences with representatives of the Company, the Bank,
the independent appraiser, the independent certified public accountants,
Trident and its counsel, review of documents and understanding of
applicable law (including the requirements of Form SB-2 and the character
of the Registration Statement contemplated thereby) and the experience such
counsel has gained in its practice under the Act, nothing has come to such
counsel's attention that would lead it to believe that the Registration
Statement, as amended (except as to information in respect of Trident
contained therein and except as to the appraisal, financial statements,
notes to financial statements, financial tables and other financial and
statistical data contained therein or omitted therefrom, as to which such
counsel need express no comment), at the time it became effective contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements made
therein not misleading, or that the Prospectus, as
<PAGE>
Trident Securities, Inc.
May , 1999
Page 22
amended or supplemented (except as to information in respect of Trident
contained therein and except as to the appraisal, financial statements,
notes to financial statements, financial tables and other financial and
statistical data contained therein or omitted therefrom as to which such
counsel need express no comment), at the time the Prospectus was filed with
the Commission under Rule 424(b), and at the Closing Date, contained any
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading (in making this statement such
counsel may state that it has not undertaken to verify independently the
information in the Registration Statement or Prospectus and, therefore,
does not assume any responsibility for the accuracy or completeness
thereof).
(c) Counsel for Trident shall have been furnished such documents as
they reasonably may require for the purpose of enabling them to review or
pass upon the matters required by Trident, and for the purpose of
evidencing the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions contained in this Agreement,
including but not limited to, resolutions of the Board of Directors of the
Company and the Bank regarding the authorization, execution and delivery of
this Agreement and the transactions contemplated by the Plan and this
Agreement.
(d) Prior to and at the Closing Date, in the reasonable opinion of
Trident, (i) there shall have been no material change in the condition
(financial or otherwise), business or results of operations of the Company
and the Bank, taken as a whole, since the latest date as of which
information is set forth in the Prospectus, except as referred to therein;
(ii) there shall have been no transaction entered into by the Company or
the Bank after the latest date as of which the financial condition of the
Company or the Bank is set forth in the Prospectus other than transactions
referred to or contemplated therein, transactions in the ordinary course of
business, and transactions which are not material to the Company and the
Bank, taken as a whole; (iii) neither the Company nor the Bank shall have
received from the Office or the Commission any direction (oral or written)
to make any change in the method of conducting their respective businesses
which is material to the business of the Company and the Bank, taken as a
whole, with which they have not complied; (iv) no action, suit or
proceeding, at law or in equity or before or by any federal or state
commission, board or other administrative agency, shall be pending or
threatened against the Company or the Bank or affecting any of their
respective assets, wherein an unfavorable decision, ruling or finding would
have a material adverse effect on the Company and the Bank, taken as a
whole; and (v) the Shares shall have been qualified or registered for
offering and sale by the Company under the "blue sky" laws of such
jurisdictions as Trident and the Company shall have agreed upon.
(e) At the Closing Date, Trident shall receive a certificate of the
principal executive officer and the principal financial officer of each of
the Company and the Bank, dated the Closing Date, to the effect that: (i)
they have examined the Prospectus and, at the
<PAGE>
Trident Securities, Inc.
May , 1999
Page 23
time the Registration Statement was declared effective by the Commission
and at the time the Prospectus was authorized by the Office for use, the
Prospectus did not contain an untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements therein,
in light of the circumstances under which they were made, not misleading
with respect to the Company or the Bank; (ii) since the date the
Registration Statement was declared effective by the Commission and since
the date the Prospectus became authorized by the Office for use, no event
has occurred which should have been set forth in an amendment or supplement
to the Prospectus which has not been so set forth, including specifically,
but without limitation, any material change in the business, condition
(financial or otherwise) or results of operations of the Company or the
Bank, and the conditions set forth in clauses (ii) through (v) inclusive of
subsection (d) of this Section 7 have been satisfied; (iii) no order has
been issued by the Commission or the Office to suspend the Offering or the
effectiveness of the Prospectus, and no action for such purposes has been
instituted or, to the best knowledge of such officers, threatened by the
Commission or the Office; (iv) to the best knowledge of such officers, no
person has sought to obtain review of the final actions of the Office and
division approving the Plan; and (v) all of the representations and
warranties contained in Section 2 of this Agreement are true and correct,
with the same force and effect as though expressly made on the Closing
Date.
(f) At the Closing Date, Trident shall receive, among other documents,
(i) copies of the letters from the Office authorizing the use of the
Prospectus and the Proxy Statement and the approval of the Conversion
Application (ii) a copy of the order of the Commission declaring the
Registration Statement effective; (iii) a copy of the letter from the
Office evidencing the corporate existence of the Bank; (iv) a copy of the
letter from the appropriate Georgia authority evidencing the incorporation
(and, if generally available from such authority, good standing) of the
Company; (v) a copy of the Company's articles of incorporation certified by
the appropriate Georgia governmental authority; (vi) a copy of the letter
from the Office approving the Bank's Stock Charter; (vii) copy of the
certificate from the FDIC certifying to the insured status by the Bank; and
(viii) copy of the letter to FHLB of Atlanta evidencing the Bank's
membership therein.
(g) As soon as available after the Closing Date, Trident shall receive
a certified copy of the Bank's Stock Charter as executed by the Office.
(h) Concurrently with the execution of this Agreement, Trident
acknowledges receipt of a letter from Mauldin & Jenkins, LLC, independent
certified public accountants, addressed to Trident, the Company and the
Bank, in substance and form satisfactory to Trident, with respect to the
consolidated financial statements of the Bank and other financial
information contained in the Prospectus.
(i) At the Closing Date, Trident shall receive a letter in form and
substance satisfactory to Trident from Mauldin & Jenkins, LLC, independent
certified public
<PAGE>
Trident Securities, Inc.
May , 1999
Page 24
accountants, dated the Closing Date and addressed to Trident, the Company
and the Bank, confirming the statements made by them in the letter
delivered by them pursuant to the preceding subsection as of a specified
date not more than five (5) business days prior to the Closing Date.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are, in the reasonable
opinion of Trident and its counsel, satisfactory to Trident. Any certificates
signed by an officer or director of the Company or the Bank prepared for
Trident's reliance and delivered to Trident or to counsel for Trident shall be
deemed a representation and warranty by the Company and the Bank to Trident as
to the statements made therein. If any condition to Trident's obligations
hereunder to be fulfilled prior to or at the Closing Date is not so fulfilled,
Trident may terminate this Agreement or, if Trident so elects, may waive any
such conditions which have not been fulfilled, or may extend the time of their
fulfillment. If Trident terminates this Agreement as aforesaid, the Company and
the Bank shall reimburse Trident for its expenses as provided in Section 3(b)
hereof.
8. Indemnification.
---------------
(a) The Company and the Bank jointly and severally agree to indemnify
and hold harmless Trident, its officers, directors, employees and agents
and each person, if any, who controls Trident within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, against any and all
loss, liability, claim, damage and expense whatsoever and shall further
promptly reimburse such persons for any legal or other expenses reasonably
incurred by each or any of them in investigating, preparing to defend or
defending against any such action, proceeding or claim (whether commenced
or threatened) arising out of or based upon (i) any misrepresentation by
the Company or the Bank in this Agreement or any breach of warranty by the
Company or the Bank with respect to this Agreement or arising out of or
based upon any untrue or alleged untrue statement of a material fact or the
omission or alleged omission of a material fact required to be stated or
necessary to make not misleading any statements contained in (A) the
Registration Statement or the Prospectus or (B) any application (including
the Form AC and the Form H-(e)1-S) or other document or communication (in
this Section 8 collectively called "Application") prepared or executed by
or on behalf of the Company or the Bank or based upon information furnished
by or on behalf of the Company or the Bank, whether or not filed in any
jurisdiction, to effect the Conversion or qualify the Shares under the
securities laws thereof or filed with the Office or Commission, unless such
statement or omission was made in reliance upon and in conformity with
information furnished to the Company or the Bank with respect to Trident by
or on behalf of Trident expressly for use in the Prospectus or any
amendment or supplement thereof or in any Application, as the case may be,
or (ii) the participation by Trident in the Conversion; provided, however,
that this indemnification agreement will not apply to any loss, liability,
claim, damage or expense found in a final judgment by a court of competent
jurisdiction to have resulted primarily from the bad faith, willful
misconduct
<PAGE>
Trident Securities, Inc.
May , 1999
Page 25
or gross negligence of Trident or any other party who may otherwise be
entitled to indemnification pursuant to this Section 8(a). This indemnity
shall be in addition to any liability the Company and the Bank may
otherwise have to Trident.
(b) The Company shall indemnify and hold harmless Trident, its
officers, directors, employees and agents and each person, if any, who
controls Trident within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act for any liability whatsoever arising out of (i)
the Allocation Instructions or (ii) any records of account holders,
depositors, borrowers and other members of the Bank delivered to Trident by
the Bank or its agents for use during the Conversion; provided, however,
that this indemnification agreement will not apply to any loss, liability,
claim, damage or expense found in a final judgment by a court of competent
jurisdiction to have resulted principally and directly from the bad faith,
willful misconduct or gross negligence of Trident or any other party who
may otherwise be entitled to indemnification pursuant to this Section 8(b).
This indemnity shall be in addition to any liability the Company and the
Bank may otherwise have to Trident.
(c) Trident agrees to indemnify and hold harmless the Company and the
Bank, their officers, directors and employees and each person, if any, who
controls the Company and the Bank within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, to the same extent as the
foregoing indemnity from the Company and the Bank to Trident, but only with
respect to (i) statements or omissions, if any, made in the Prospectus or
any amendment or supplement thereof, in any Application or to a purchaser
of the Shares in reliance upon, and in conformity with, written information
furnished to the Company or the Bank with respect to Trident by Trident
expressly for use in the Prospectus or in any Application; (ii) any
misrepresentation by Trident in Section 2(b) of this Agreement; or (iii)
any liability of the Company or the Bank which is found in a final judgment
by a court of competent jurisdiction (not subject to further appeal) to
have resulted principally and directly from gross negligence, bad faith or
willful misconduct of Trident.
(d) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with the
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to
such indemnified party under this Section 8 for any legal or other
<PAGE>
Trident Securities, Inc.
May , 1999
Page 26
expenses subsequently incurred by such indemnified party in connection with
the defense thereof other than the reasonable cost of investigation except
as otherwise provided herein. In the event the indemnifying party elects to
assume the defense of any such action and retain counsel acceptable to the
indemnified party, the indemnified party may retain additional counsel, but
shall bear the fees and expenses of such counsel unless (i) the
indemnifying party shall have specifically authorized the indemnified party
to retain such counsel or (ii) the parties to such suit include such
indemnifying party and the indemnified party, and such indemnified party
shall have been advised by counsel that one or more material legal defenses
may be available to the indemnified party which may not be available to the
indemnifying party, in which case the indemnifying party shall not be
entitled to assume the defense of such suit notwithstanding the
indemnifying party's obligation to bear the fees and expenses of such
counsel. An indemnifying party against whom indemnity may be sought shall
not be liable to indemnify an indemnified party under this Section 8 if any
settlement of any such action is effected without such indemnifying party's
consent. To the extent required by law, this Section 8 is subject to and
limited by the provisions of Section 23A.
9. Contribution. In order to provide for just and equitable contribution
------------
in circumstances in which the indemnity agreement provided for in Section 8
above is for any reason held to be unavailable to Trident, the Company and/or
the Bank other than in accordance with its terms, the Company or the Bank and
Trident shall contribute to the aggregate losses, liabilities, claims, damages,
and expenses of the nature contemplated by said indemnity agreement incurred by
the Company or the Bank and Trident (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Bank, on the one
hand, and Trident, on the other hand, from the offering of the Shares or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above, but also the relative fault of the Company or
the Bank, on the one hand, and Trident, on the other hand, in connection with
the statements or omissions which resulted in such losses, claims, damages,
liabilities or judgments, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Bank, on
the one hand, and Trident, on the other hand, shall be deemed to be in the same
proportion as the total net proceeds from the Conversion received by the Company
and the Bank bear to the total fees and expenses received by Trident under this
Agreement. The relative fault of the Company or the Bank, on the one hand, and
Trident, on the other hand, shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Bank or by Trident and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
<PAGE>
Trident Securities, Inc.
May , 1999
Page 27
The Company and the Bank and Trident agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by the indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 9, Trident shall not be required
to contribute any amount in excess of the amount by which fees owed Trident
pursuant to this Agreement exceeds the amount of any damages which Trident has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. To the extent required by law, this Section 9 is subject to
and limited by the provisions of Section 23A.
10. Survival of Agreements, Representations and Indemnities. The
--------------------------------------------------------
respective indemnities of the Company and the Bank and Trident and the
representations and warranties of the Company and the Bank and of Trident set
forth in or made pursuant to this Agreement shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of Trident or the Company or the Bank or any
controlling person or indemnified party referred to in Section 8 hereof, and
shall survive any termination or consummation of this Agreement and/or the
issuance of the Shares, and any legal representative of Trident, the Company,
the Bank and any such controlling persons shall be entitled to the benefit of
the respective agreements, indemnities, warranties and representations.
11. Termination. Trident may terminate this Agreement by giving the
-----------
notice indicated below in this Section at any time after this Agreement becomes
effective as follows:
(a) If any domestic or international event or act or occurrence has
materially disrupted the United States securities markets such as to make
it, in Trident's reasonable opinion, impracticable to proceed with the
offering of the Shares; or if trading on the New York Stock Exchange shall
have suspended; or if the United States shall have become involved in a war
or major hostilities; or if a general banking moratorium has been declared
by a state or federal authority which has material effect on the Bank or
the Conversion; or if a moratorium in foreign exchange trading by major
international banks or persons has been declared; or if there shall have
been a material change in the capitalization, financial condition or
business of the Company, or if the Bank shall have sustained a material or
substantial loss by fire, flood, accident, hurricane, earthquake, theft,
sabotage or other calamity or malicious act, whether or not said loss shall
have been insured; or if there shall have been a material change in the
condition, financial or otherwise, or prospects of the Company or the Bank.
<PAGE>
Trident Securities, Inc.
May , 1999
Page 28
(b) If Trident elects to terminate this Agreement as provided in this
Section, the Company and the Bank shall be notified promptly by Trident by
telephone or telegram, confirmed by letter.
(c) If this Agreement is terminated by Trident for any of the reasons
set forth in subsection (a) above, and to fulfill their obligations, if
any, pursuant to Sections 3, 6, 8(a) and 9 of this Agreement and upon
demand, the Company and the Bank shall pay Trident the full amount so owing
thereunder.
(d) The Bank may terminate the Conversion in accordance with the terms
of the Plan. Such termination shall be without liability to any party,
except that the Company and the Bank shall be required to fulfill their
obligations pursuant to Sections 3(b), 3(c), 6, 8(a) and 9 of this
Agreement.
12. Notices. All communications hereunder, except as herein otherwise
-------
specifically provided, shall be in writing and if sent to Trident shall be
mailed, delivered or faxed and confirmed to Trident Securities, Inc., 4601 Six
Forks Road, Suite 400, Raleigh, North Carolina 27609, Attention: Mr. R. Lee
Burrows, Jr. (with a copy to Muldoon, Murphy & Faucette LLP, 5101 Wisconsin
Avenue, N.W., Washington, DC 20016, Attention: Paul M. Aguggia, Esquire) and if
sent to the Company or the Bank, shall be mailed, delivered or telegraphed and
confirmed to Douglas Federal Bank, A Federal Savings Bank, 8458 Campbellton
Street, Douglasville, Georgia 30134-1803, Attention: J. David Higgins, President
of the Company and the Bank (with a copy to Womble Carlyle Sandridge & Rice,
PLLC, One Atlantic Center, 1201 West Peachtree Street, Atlanta, Georgia 30309,
Attention: Steven S. Dunlevie, Esquire).
13. Parties. This Agreement shall inure solely to the benefit of, and
-------
shall be binding upon, Trident, the Company, the Bank and the controlling and
other persons referred to in Section 8 hereof, and their respective successors,
legal representatives and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained.
The undersigned consent to the assignment of rights and obligations of Trident
Securities, Inc. hereunder to McDonald Investments Inc.
14. Construction. This Agreement shall be governed by and construed in
------------
accordance with the substantive laws of North Carolina regardless of the laws
that might otherwise govern under applicable principles of conflicts of law
thereof.
15. Counterparts and Definitions. This Agreement may be executed in
----------------------------
separate counterparts, each of which when so executed and delivered shall be an
original, but all of which together shall constitute but one and the same
instrument. Any initially capitalized terms not defined herein shall have the
meanings ascribed thereto in the Prospectus.
<PAGE>
Trident Securities, Inc.
May , 1999
Page 29
* * *
[Signature page follows]
<PAGE>
Trident Securities, Inc.
May , 1999
Page 30
Please acknowledge your agreement to the foregoing as of the date above
written by signing below and returning to the Company one copy of this letter.
FIRST DEPOSIT BANCSHARES, INC. DOUGLAS FEDERAL BANK,
A FEDERAL SAVINGS BANK
By: By:
-------------------------- ----------------------------
J. David Higgins J. David Higgins
President President
Agreed to and accepted:
TRIDENT SECURITIES, INC.
By:
--------------------------
R. Lee Burrows, Jr.
Managing Director
<PAGE>
Exhibit A
Trident Securities, Inc. is a registered selling agent in the jurisdictions
--
listed below:
Alabama Montana
Alaska Nebraska
Arizona Nevada
Arkansas New Hampshire
California New Jersey
Colorado New Mexico
Connecticut New York
Delaware North Carolina
District of Columbia North Dakota (Trident Securities, Inc.
only, no agents)
Florida Ohio
Georgia Oklahoma
Idaho Oregon
Illinois Pennsylvania
Indiana Rhode Island
Iowa South Carolina
Kansas Tennessee
Kentucky Texas
Louisiana Utah
Maine Vermont
Maryland Virginia
Massachusetts Washington
Michigan West Virginia
Minnesota Wisconsin
Mississippi Wyoming
Missouri
Trident Securities, Inc. is not a registered selling agent in the jurisdictions
---
listed below:
Hawaii
South Dakota
<PAGE>
EXHIBIT 4.1
FIRST DEPOSIT BANCSHARES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF GEORGIA
$10.00 PAR VALUE
COMMON STOCK
CUSIP 32090F 10 0
SEE REVERSE FOR
CERTAIN DEFINITIONS
This certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON CAPITAL STOCK OF
FIRST DEPOSIT BANCSHARES, INC.
transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
Secretary
Countersigned and Registered: REGISTRAR AND TRANSFER COMPANY
President
(CRANFORD, NEW JERSEY)
By
Transfer Agent
and Registrar
Authorized Signature
<PAGE>
EXHIBIT 8.2
May 5, 1999
Board of Directors
Douglas Federal Savings Bank, FSB
8458 Campbellton Street
Douglasville, Georgia 30134-1803
RE: Georgia corporate income tax and Georgia personal income tax opinion
related to the proposed Conversion of Douglas Federal Savings Bank, a
Federal Savings Bank, a federally-chartered mutual savings bank, to a
federally-chartered stock savings bank and the concurrent acquisition of
100% of the newly-issued stock of such bank by First Deposit Bancshares,
Inc., a newly-formed Georgia corporation.
Gentlemen:
Pursuant to your request, our opinion concerning certain Georgia corporate
income tax and Georgia personal income tax consequences of the proposed
Conversion of Douglas Federal Savings Bank, a Federal Savings Bank, a federally-
chartered mutual savings bank ("Mutual") to a federally-chartered stock savings
bank ("Stock Institution") and the concurrent acquisition of 100% of the newly-
issued stock of such bank by First Deposit Bancshares, Inc., a newly-formed
Georgia corporation operating exclusively within the State of Georgia ("Holding
Company"), is set forth below.
STATEMENT OF FACTS
The facts and circumstances surrounding the proposed reorganization are quite
detailed and are described at length in the Plan of Conversion dated February 9,
1999. A summary of the proposed Conversion and the related assumptions regarding
such Conversion are documented in the federal tax opinion letter provided by
Womble, Carlyle, Sandridge & Rice, LLC.
<PAGE>
Our opinion is based solely upon our understanding that, pursuant to the Plan of
Conversion, Mutual will, through a series of transactions, convert from a
federally-chartered mutual savings bank to a federally-chartered stock savings
bank and issue 100% of its newly-issued stock to Holding Company.
In addition, we have assumed, based solely on the opinion of Womble, Carlyle,
Sandridge & Rice, LLC, as presented in their federal tax opinion letter for
purposes of this opinion, that the following federal tax consequences will
result:
1. The Conversion of Mutual to Stock Institution will constitute a tax-free
reorganization under the Internal Revenue Code of 1986 as amended.
2. No gain or loss will be recognized for federal income tax purposes by
Mutual, Stock Institution, or Holding Company as a result of the
Conversion.
3. No federal gain or loss will be recognized by the Eligible Account Holders
or Supplemental Eligible Account Holders on the receipt of an interest in
the liquidation account and/or nontransferable subscription rights to
purchase shares of stock in Holding Company to the extent the interest in
the liquidation account and the nontransferable subscription rights
received have no fair market value.
4. Eligible Account Holders or Supplemental Eligible Account Holders will not
realize any taxable income as a result of the exercise by them of the
nontransferable subscription rights.
OPINION
Based upon our analysis of applicable Georgia tax law and administrative
rulings, we have made the following determinations:
A. The income tax liability of a corporation, including a bank or thrift,
conducting business and owning property within Georgia, is calculated by
reference to the separate federal taxable income of that corporation, with
certain modifications (Section 48-7-21 of the Official Code of Georgia
Annotated).
B. The income tax liability of an individual subject to the Georgia income tax
on personal income is calculated by reference to the federal Adjusted Gross
Income of that individual, with certain modifications (Section 48-7-27 of
the Official Code of Georgia Annotated).
Based upon the above facts and the opinions provided in the federal tax
opinion letter as provided by Womble, Carlyle, Sandridge & Rice, LLC, we are of
the opinion that, if the Conversion is effected in accordance with the Plan of
Conversion, for Georgia tax purposes:
<PAGE>
1. No gain or loss will be recognized by Mutual upon its Conversion from a
federally-chartered mutual savings bank to a federally-chartered stock
savings bank because such conversion will have no effect on the federal
taxable income of Mutual.
2. No gain or loss will be recognized by Holding Company or Stock Institution
upon the acquisition of the stock of Stock Institution by Holding Company
because such acquisition will have no effect on the federal taxable income
of either corporation.
3. No gain or loss will be recognized by Holding Company upon the receipt of
property in exchange for its newly issued shares of stock because such
receipt will have no effect on the federal taxable income of Holding
Company.
4. Taxable gain will be recognized by depositors and other recipients of
subscription rights only to the extent that such gain is recognized in the
depositors' and other recipients' federal Adjusted Gross Income.
5. No gain or loss will be recognized by Eligible Account Holders or
Supplemental Eligible Account Holders as a result of the exercise by them
of the nontransferable subscription rights because such exercise will have
no effect on the federal taxable income of Eligible Account Holders or
Supplemental Eligible Account Holders.
Our opinion is based upon legal authorities currently in effect, which
authorities are subject to modification or challenge at any time and perhaps
with retroactive effect. Further, no opinion is expressed as to the tax
treatment of the transaction under the provisions of any of the other sections
of the Official Code of Georgia Annotated which may also be applicable thereto,
or as to the tax treatments of any conditions existing at the time of, or
effects resulting from, the transaction which are not specifically covered by
the opinions set forth above.
Sincerely,
MAULDIN & JENKINS, LLC
/s/ Kenneth W. Henry
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report, dated February 12, 1999,
relating to the consolidated financial statements of Douglas Federal Bank, FSB
and subsidiary for the two years ended December 31, 1998, included in this
Amendment No. 2 to the Registration Statement on Form SB-2. We also consent to
the reference to our Firm under the caption "Experts" in the Prospectus.
/s/ Mauldin & Jenkins, LLC
Atlanta, Georgia
May 11, 1999
