<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Mark One
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
---------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission File Number: 000-26033
First Deposit Bancshares, Inc.
---------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Georgia 58-2443683
- ------------------------------------ -----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8458 Campbellton Street, Douglasville, Georgia 30134-1803
--------------------------------------------------------------
(Address of principal executive offices)
(770) 942-5108
--------------------------
(Issuer's telephone number
N/A
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes No X
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of November 10, 1999: 1,575,000; no par value.
Transitional Small Business Disclosure Format (Check One) Yes No X
--- ---
<PAGE>
FIRST DEPOSIT BANCSHARES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet - September 30, 1999............ 3
Consolidated Statements of Income and Comprehensive
Income - Three Months Ended September 30, 1999 and 1998
and Nine Months Ended September 30, 1999 and 1998....... 4
Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1999 and 1998................. 5
Notes to Consolidated Financial Statements................. 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 7
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K...................... 16
Signatures..................................................... 17
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST DEPOSIT BANCSHARES, INC.
AND SUBSIDIARY
BALANCE SHEET
SEPTEMBER 30, 1999
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Assets
- ------
<S> <C>
Cash and due from banks $ 4,709
Federal funds sold 50
Securities available-for-sale, at fair value 16,860
Securities held-to-maturity (fair value $2,366) 2,361
Loans 87,990
Less allowance for loan losses 1,041
--------
Loans, net 86,949
--------
Premises and equipment 1,834
Real estate held for development and sale 1,455
Other assets 1,272
--------
Total assets $115,490
========
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits
Demand $ 3,725
Interest-bearing demand 28,072
Savings 4,138
Time deposits 46,958
--------
Total deposits 82,893
Federal Home Loan Bank advances 7,000
Other liabilities 1,512
--------
Total liabilities 91,405
--------
Commitments and Contingent Liabilities
Preferred stock, no par, 10,000,000 authorized,
none issued 0
Common stock, no par, 10,000,000 authorized,
1,575,000 issued and outstanding 15,021
Retained earnings 10,435
Accumulated other comprehensive loss, net of tax (111)
Less unearned ESOP shares (1,260)
--------
Total stockholders' equity 24,085
--------
Total liabilities and stockholders' equity $115,490
========
</TABLE>
The accompanying notes are an integral part of these financial statments.
3
<PAGE>
FIRST DEPOSIT BANCSHARES, INC.
AND SUBSIDIARY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------- ----------------------------------------
1999 1998 1999 1998
------------------ ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Interest income
Loans $ 1,712 $ 1,676 $ 5,089 $ 4,857
Taxable securities 247 86 396 285
Federal funds sold 127 51 300 158
------------------ ------------------- ------------------- ------------------
Total interest income 2,086 1,813 5,785 5,300
------------------ ------------------- ------------------- ------------------
Interest expense
Deposits 948 994 2,876 2,905
Other borrowings 73 74 212 221
------------------ ------------------- ------------------- ------------------
Total interest expense 1,021 1,068 3,088 3,126
------------------ ------------------- ------------------- ------------------
Net interest income 1,065 745 2,697 2,174
Provision for loan losses 15 15 45 45
------------------ ------------------- ------------------- ------------------
Net interest income after
provision for loan losses 1,050 730 2,652 2,129
------------------ ------------------- ------------------- ------------------
Other income 195 108 529 344
------------------ ------------------- ------------------- ------------------
Other expenses
Salaries and employee benefits 327 289 961 855
Occupancy and equipment expenses 148 133 424 368
Other operating expenses 171 150 503 435
------------------ ------------------- ------------------- ------------------
Total other expenses 646 572 1,888 1,658
------------------ ------------------- ------------------- ------------------
Income before income taxes 599 266 1,293 815
Income tax expense 212 135 490 349
------------------ ------------------- ------------------- ------------------
Net income 387 131 803 466
Other comprehensive loss
Unrealized losses on securities
available-for-sale arising during
period, net of tax (60) (21) (60) (29)
------------------ ------------------- ------------------- ------------------
Comprehensive income $ 327 $ 110 $ 743 $ 437
================== =================== =================== ==================
Basic and diluted earnings
per common share $ 0.26 $ 0.09 $ 0.55 $ 0.32
Weighted average shares outstanding 1,449,000 1,449,000 1,449,000 1,449,000
Dividends declared per common share - - - -
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FIRST DEPOSIT BANCSHARES, INC.
AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 803 $ 466
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 263 234
Provision for loan losses 45 45
(Increase) decrease in real estate held
for development and sale 289 (217)
Other operating activities 755 232
-------------------- --------------------
Net cash provided by operating activities 2,155 760
-------------------- --------------------
INVESTING ACTIVITIES
Purchases of securities available-for-sale (14,880) (1,736)
Proceeds from maturities of securities available-for-sale 1,500 -
Purchases of securities held-to-maturity (1,500) -
Proceeds from maturities of securities held-to-maturity 181 3,562
Net (increase) decrease in Federal funds sold 665 (100)
Net increase in loans (3,617) (9,124)
Purchase of premises and equipment (320) (206)
-------------------- --------------------
Net cash used in investing activities (17,971) (7,604)
-------------------- --------------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits (2,793) 5,460
Net increase in other borrowings 2,000 76
Issuance of common stock 14,490 -
Stock offering expenses (729) -
-------------------- --------------------
Net cash provided by financing activities 12,968 5,536
-------------------- --------------------
Net decrease in cash and due from banks (2,848) (1,308)
Cash and due from banks, beginning of period 7,557 5,663
-------------------- --------------------
Cash and due from banks, end of period $ 4,709 $ 4,355
==================== ====================
NONCASH FINANCING ACTIVITIES
Common stock issued to ESOP 1,260 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
FIRST DEPOSIT BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial information included herein is unaudited;
however, such information reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the interim
periods.
The results of operations for the three and nine month periods
ended September 30, 1999 are not necessarily indicative of the results
to be expected for the full year.
NOTE 2. CURRENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities".
The effective date of this statement has been deferred by SFAS No. 137
until fiscal years beginning after June 15, 2000. 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, 2001. 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.
There are no other recent accounting pronouncements that have had, or
are expected to have, a material effect on the Company's financial
statements.
6
<PAGE>
FIRST DEPOSIT BANCSHARES, INC. AND SUBSIDIARY
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
First Deposit Bancshares, Inc. ("First Deposit") is a Georgia
corporation formed to serve as a holding company to acquire the capital
stock of Douglas Federal Bank (the "Bank") in connection with its
conversion from a mutual federal savings bank to a stock federal
savings bank. The conversion was approved by the Bank's depositors on
June 25, 1999 and the offering of 1,575,000 shares of the common stock
of First Deposit was closed on July 8, 1999. Until July 8, 1999, First
Deposit had no operations, had not issued any common stock, and did not
own the Bank. The following analysis discusses financial information
regarding the Company and Bank since the conversion and acquisition
compared to the operation of the Bank prior to the conversion.
The following selected financial and operating data presented below at
September 30, 1999 and for the three and nine month periods ended
September 30, 1999 and 1998 are derived from unaudited financial data,
but, in the opinion of management reflect all adjustments (consisting
of only recurring adjustments) which are necessary to present fairly
the results of such interim periods. The results of operations for the
three and nine months ended September 30, 1999 are not necessarily
indicative of the results of operations that may be expected for the
year ended December 31, 1999.
Cautionary Statement about Forward-Looking Statements
This quarterly report on Form 10-QSB contains "forward looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. When used in this report, the words "believes,"
"expects," "anticipates," "estimates," and similar words and
expressions are generally intended to identify forward-looking
statements. Statements that describe the Company's future strategic
plans, goals, or objectives are also forward-looking statements,
including those regarding the intent, belief, or current expectations
of management and are not guarantees of future performance, results, or
events and involve risks and uncertainties, and that actual results and
events may differ materially from those in the forward-looking
statements as a result of various factors including, but not limited
to, (i) general economic conditions in the markets in which the Bank
operates, (ii) competitive pressures in the markets in which the Bank
operates, (iii) the effect of future legislation or regulatory changes
on the Bank's operations, and (iv) other factors described from time to
time in the Company's filings with the Securities and Exchange
Commission. The forward-looking statements included in this report are
made only as of the date hereof. The Company undertakes no obligation
to update such forward-looking statements to reflect subsequent events
or circumstances.
7
<PAGE>
Liquidity and Capital Resources
As of September 30, 1999, the liquidity ratio of the Bank was 27.27%,
and, as determined under guidelines established by regulatory
authorities, was considered satisfactory and within management's target
ratio.
At September 30, 1999, the capital ratios of the Bank were adequate
based on regulatory minimum capital requirements. The minimum capital
requirements and the actual capital ratios for the Company and Bank are
as follows:
Actual
------------
First Deposit Douglas Regulatory
Bancshares, Inc. Federal Bank Requirement
---------------- ------------ -----------
Leverage capital ratios 21.16 % 14.00 % 4.00 %
Risk-based capital ratios:
Core capital 39.33 26.03 4.00
Total capital 40.59 27.29 8.00
8
<PAGE>
Financial Condition
Following is a summary of the Company's balance sheets for the periods
indicated:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998 Increase (Decrease)
----------------- ---------------- ---------------------------------
(Dollars in Thousands) Amount Percent
------------------------------------ -------------- -----------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 4,709 $ 7,557 $ (2,848) (37.69) %
Securities available-for-sale 16,860 3,707 13,153 354.82
Securities held-to-maturity 2,361 1,042 1,319 126.58
Federal funds sold 50 715 (665) (93.01)
Loans, net 86,949 83,377 3,572 4.28
Premises and equipment 1,834 1,777 57 3.21
Real estate held for development and sale 1,455 1,745 (290) (16.62)
Other assets 1,272 972 300 30.86
----------------- ---------------- --------------
$ 115,490 $ 100,892 $ 14,598 14.47
================= ================ ==============
Deposits $ 82,893 $ 85,686 $ (2,793) (3.26) %
Other borrowings 7,000 5,000 2,000 40.00
Other liabilities 1,512 544 968 177.94
Stockholders' equity 24,085 9,662 14,423 149.25
----------------- ---------------- --------------
$ 115,490 $ 100,892 $ 14,598 14.47
================= ================ ==============
</TABLE>
As indicated in the above table, the Company's total assets have increased by
14.47% during the first nine months of 1999. This increase is due to conversion
from a mutual savings bank to a stock organization which resulted in the sale of
1,575,000 shares of common stock.
In mid May the Bank began accepting subscriptions for the 1,575,000 shares being
offered in the conversion. In connection with this process, funds were deposited
into an escrow account at Douglas Federal Bank until the completion of the
offering. The offering was over subscribed and prior to closing the offering on
July 8, 1999, $20,963,000 including interest was refunded from the total funds
received totaling $36,749,000. These subscriptions were held in an escrow
savings account and held in an interest bearing account during the offering
period. Upon completion of the offering, the proceeds of $15,750,000, less
offering expenses of $729,000, were transferred to capital of the Company.
Approximately $7.5 million of the stock proceeds were injected into the
subsidiary bank as additional paid in capital.
The majority of the stock offering proceeds have been invested in securities
which have increased by $14.5 million since December 31, 1998. Total deposits
decreased during this same period by $2.8 million and was funded by a decrease
in cash and due from banks. The decrease in deposits was in time deposits which
carries the highest interest rates of all deposits.
9
<PAGE>
Results of Operations For The Three Months and For The Nine Months Ended
September 30, 1999 and 1998
Following is a summary of the Company's operations for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------------------
1999 1998 Increase (Decrease)
----------------- ----------------- -----------------------------------
(Dollars in Thousands) Amount Percent
-------------------------------------- --------------- ----------------
<S> <C> <C> <C> <C>
Interest income $ 2,086 $ 1,813 $ 273 15.06 %
Interest expense 1,021 1,068 (47) (4.40)
Net interest income 1,065 745 320 42.95
Provision for loan losses 15 15 - -
Other income 195 108 87 80.56
Other expense 646 572 74 12.94
Pretax income 599 266 333 125.19
Income taxes 212 135 77 57.04
Net income 387 131 256 195.42
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------
1999 1998 Increase (Decrease)
----------------- ----------------- -----------------------------------
(Dollars in Thousands) Amount Percent
-------------------------------------- --------------- ----------------
<S> <C> <C> <C> <C>
Interest income $ 5,785 $ 5,300 $ 485 9.15 %
Interest expense 3,088 3,126 (38) (1.22)
Net interest income 2,697 2,174 523 24.06
Provision for loan losses 45 45 - -
Other income 529 344 185 53.78
Other expense 1,888 1,658 230 13.87
Pretax income 1,293 815 478 58.65
Income taxes 490 349 141 40.40
Net income 803 466 337 72.32
</TABLE>
As indicated in the above tables, the Company's net interest income has
increased by $320,000 and $523,000 for the three and nine month periods in 1999,
respectively, as compared to the same periods in 1998. The Company's net
interest margin increased to 3.46% during the first nine months of 1999 as
compared to 3.39% for the previous year. The increase in the net interest margin
is due primarily to an increase in average interest-earning assets as the result
of the stock offering. The net interest margin is expected to gradually increase
as available funds are invested in loans versus securities and interest-bearing
deposits in banks.
10
<PAGE>
The provision for loan losses remained the same for both the three and nine
month periods in 1999 as compared to the same periods in 1998. The Company's
allowance for loan losses to total loans amounted to 1.18% of total loans at
September 30, 1999 and December 31, 1998. Nonaccrual loans and net charge-offs
have decreased by $595,000 and $24,000, respectively, as of September 30, 1999
compared to the same period in 1998. The allowance for loan losses is maintained
at a level that is deemed appropriate by management to adequately cover all
known and inherent risks in the loan portfolio. Management's evaluation of the
loan portfolio includes a continuing review of loan loss experience, current
economic conditions which may affect the borrower's ability to repay and the
underlying collateral value.
Information with respect to nonaccrual, past due, and restructured loans at
September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------------
1999 1998
--------------- ---------------
(Dollars in Thousands)
---------------------------------
<S> <C> <C>
Nonaccrual loans $ 301 $ 896
Loans contractually past due ninety days or more as to interest
or principal payments and still accruing - -
Restructured loans - -
Loans, now current about which there are serious doubts as to the
ability of the borrower to comply with loan repayment terms - -
and restructured loans under original terms
Interest income that was recorded on nonaccrual and restructured loans - -
</TABLE>
It is the policy of the Bank to discontinue the accrual of interest income when,
in the opinion of management, collection of such interest becomes doubtful. This
status is accorded such interest when (1) there is a significant deterioration
in the financial condition of the borrower and full repayment of principal and
interest is not expected and (2) the principal or interest is more than ninety
days past due, unless the loan is both well-secured and in the process of
collection.
Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention that have not been included in the table above do not represent
or result from trends or uncertainties which management reasonably expects will
materially impact future operating results, liquidity or capital resources.
These classified loans do not represent material credits about which management
is aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms.
11
<PAGE>
Information regarding certain loans and allowance for loan loss data through
September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1999 1998
--------------- ---------------
(Dollars in Thousands)
---------------------------------
<S> <C> <C>
Average amount of loans outstanding $ 85,900 $ 79,513
=============== ===============
Balance of allowance for loan losses at beginning of period $ 1,000 $ 866
=============== ===============
Loans charged off
Commercial and financial $ - $ -
Real estate mortgage (5) -
Instalment - -
--------------- ---------------
(5) -
--------------- ---------------
Loans recovered
Commercial and financial 2 21
Real estate mortgage - -
Instalment - -
--------------- ---------------
2
--------------- ---------------
Net (charge-offs) recoveries (3) 21
--------------- ---------------
Additions to allowance charged to operating expense during period 45 45
--------------- ---------------
Balance of allowance for loan losses at end of period $ 1,042 $ 932
=============== ===============
Ratio of net loans (charged off) recovered during the period to
average loans outstanding - % .03%
=============== ===============
</TABLE>
Other income increased by $87,000 and $185,000 for the three month and nine
month periods ended September 30, 1999, respectively, as compared to the same
periods in 1998. The single most significant increase was an increase of
$103,000 in gains on sale of real estate held for development and sale for the
nine month period ended September 30, 1999 as compared to 1998.
Other expenses increased for the three and nine month periods in 1999 as
compared to the same periods in 1998 by $74,000 and $230,000, respectively. For
the nine month period ended September 30, 1999, salaries and employee benefits
increased $106,000, occupancy and equipment expenses increased $56,000, and
other operating expenses increased $68,000, as compared to the same period in
1998. The increases for the three month period were $38,000, $15,000, and
$21,000, respectively. Approximately $70,000 of the increase in salaries and
employee benefits represents normal increases in officer and employee
compensation. The number of full-time equivalent employees was 38 at September
30, 1998 and September 30, 1999. The increase in occupancy and equipment
expenses is primarily due to increases in data processing expense of $25,000 and
maintenance expenses of $25,000 for the nine month period ending September 30,
1999 as compared to 1998. The increase in other operating expenses is partly
attributable to an increase of $35,000 in deposit account expenses as compared
to 1998.
12
<PAGE>
The Company's provision for income taxes increased by $77,000 and $141,000 for
the three and nine month periods in 1999, respectively, as compared to the same
periods in 1998 due to increased taxable income. The Company's effective tax
rate increased to 39% for the first nine months of 1999 as compared to 43% for
the first nine months of 1998.
Net income increased by $256,000 and $337,000, respectively, for the three and
nine months ended September 30, 1999. This increase is a combination of the
increase in net interest income and the gains on sale of real estate held for
development and sale.
Year 2000 Issues
- ----------------
Introduction. Similar to other financial institutions, the Bank's operations are
particularly sensitive to potential problems arising from the inability of many
existing computer hardware and software systems and associated 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. The Bank has implemented a detailed Year 2000 plan, as
required by its regulators, to evaluate Year 2000 compliance of its computer
systems and the equipment which supports its operations. Also included in this
Year 2000 plan is a detailed review of the readiness of the Bank's service
providers, vendors, major fund providers, major borrowers, and companies with
which the Bank has material investments. These reviews and updates have revealed
that these entities that the Year 2000 issue will not have a material adverse
impact on their relationship with the Bank. While these assurances do not rise
to the level of a certification of warranty, management is comfortable with the
assurances it has received. As of September 30, 1999, the Bank has met all
current target objectives of the Year 2000 plan, and management believes that
the Bank will continue to meet all future target objectives in accordance with
the terms of the plan.
Like many financial institutions, the Bank relies upon computers for the daily
conduct of its business and for data processing generally. As part of the Bank's
regular upgrading of computer systems, the Bank purchased and installed new
computers, servers, and software. The Bank also upgraded all of its ATMs. The
vendor of the Bank's core account processing system is executing its Year 2000
readiness plan in cooperation with the Bank and has certified that the system is
2000 compliant.
In addition to a core account processing system, the Bank has financial
accounting and mortgage loan origination systems that are computer-based, and
thus vulnerable to the Year 2000 issues. The Bank has installed new financial
accounting, mortgage loan origination, and mortgage loan servicing systems which
are Year 2000 compliant as part of its computer upgrade.
As a result of the Bank's core account processing system and the new financial
accounting, mortgage loan origination, and mortgage loan servicing systems,
management believes that it has resolved the Year 2000 issues with respect to
the most critical computer systems and applications. Management has completed
the testing phase with respect to the Bank's 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 September 30, 1999 have not
identified any non-compliance systems or equipment.
13
<PAGE>
Because of the substantial progress made towards its Year 2000 conversion, the
Bank does not anticipate that any additional significant changes will be
required or that the Year 2000 issue will pose significant operational problems
for the Bank. 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 the Bank to address and may have a material impact on its financial
condition and results of operations.
The Bank receives periodic updates from its 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 the Bank's interaction with major service providers, the Bank has
contacted in writing every vendor, major service providers, major borrowers, and
companies with which it has material investments, to evaluate their Year 2000
compliance plans and state of readiness and to determine the extent to which its
systems may be affected by the failure of others to remediate their own Year
2000 issues. To date, the Bank has received written responses from surveys
distributed from over 90% of such parties. While these written responses do not
rise to the level of 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 the
Bank's systems or operations. The Bank intends to re-contact those parties from
whom it has not received a response, either in writing or through personal
contact. The Bank has 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 the Bank's financial
condition and results of operations.
The Bank does not generally utilize Year 2000 compliance as a criteria in the
loan underwriting process because approximately 96% of its loan portfolio is
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.
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 the Bank competitive by ensuring that
its systems take advantage of recent advances in technology. The Bank's 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 the Bank. The Bank
has and intends to continue to fund such costs from its operations. However, as
the Bank progresses with its Year 2000 conversion and implement the necessary
changes to its systems, certain additional costs may be identified. Additional
costs could have a material adverse effect on the Bank's financial condition and
results of operations.
Risks of Year 2000 Issues. To date, the Bank has 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 the Bank
progresses with its Year 2000 conversion, the Bank 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 normal banking activities properly. Additionally, if
the Bank's commercial customers are not Year 2000 compliant and suffer adverse
effects on their operations, their ability to meet their obligations to the
14
<PAGE>
Bank could be adversely affected. The Bank's failure to identify systems which
require Year 2000 conversion that are critical to its operations or the Bank's
failure or that of others with which it does business to become Year 2000
compliant in a timely manner could have a material adverse impact on the Bank's
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, the management cannot
predict with any certainty that its 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 the Bank's systems.
The Bank has identified seven mission-critical vendors, of which all are Year
2000 compliant.
Contingency Plans. The Bank has 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 the Bank's 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.
The Company is not aware of any known trends, events, or uncertainties, other
than the effect of events as described above, that will have or that are
reasonably likely to have a material effect on its liquidity, capital resources,
or operations. The Company is also not aware of any current recommendations by
the regulatory authorities which, if they were implemented, would have such an
effect.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST DEPOSIT BANCSHARES, INC.
DATE: November 12, 1999 BY: /s/ J. David Higgins
-------------------- --------------------------------------
President, Chief Executive Officer and
Treasurer
DATE: November 12, 1999 BY: /s/ John L. King
-------------------- --------------------------------------
Senior Vice President and
Chief Financial Officer
17
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