<PAGE>
As filed with the Securities and Exchange Commission on December 22, 1997
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GASTON FEDERAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Federal 6712 (To be applied for)
(State or other (Primary standard (I.R.S. Employer
jurisdiction of industrial classification) identification number)
incorporation or
organization)
245 West Main Avenue, P.O. Box 2249
Gastonia, North Carolina 28053-2249
(704) 868-5200
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Kim S. Price
President and Chief Executive Officer
Gaston Federal Bancorp, Inc.
245 West Main Avenue, P.O. Box 2249
Gastonia, North Carolina 28053-2249
(704) 868-5200
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
John J. Gorman, Esq.
Kenneth R. Lehman, Esq.
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
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 of 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, 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 this form is a post-effective amendment filed pursuant to Rule 462(d) 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, check
the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================================================================
Proposed Proposed maximum
Title of each class of Amount to be maximum offering aggregate Amount of
securities to be registered registered price per share offering price (1) registration fee
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par value per share 2,026,100 shares $10.00 $20,261,000 $5,977
==============================================================================================================================
</TABLE>
- --------------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
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 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 Supplement
GASTON FEDERAL BANCORP, INC.
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN
(Participation Interests)
This Prospectus Supplement relates to the offer and sale to members (the
"Members") in the Gaston Federal Savings and Loan Association Employees' Savings
& Profit Sharing Plan (the "Plan") of up to 185,000 shares of common stock, par
value $1.00 per share (the "Common Stock") of Gaston Federal Bancorp, Inc. (the
"Company") and related participation interests in the Plan, in connection with
the proposed conversion ("Conversion") of Gaston Federal Savings and Loan
Association (the "Bank") from a federal mutual savings association to a federal
stock savings association, and the issuance of the Bank's capital stock to the
Company pursuant to the Bank's Plan of Conversion and Reorganization (the "Plan
of Conversion") and the related Subscription Offering and Community Offering
(collectively, the "Offering").
The Plan permits Members to direct the trustee of the Plan (the "Trustee")
to invest in Common Stock with amounts in the Plan attributable to such Members.
Such investments in Common Stock would be by means of the Gaston Federal
Bancorp, Inc. Stock Fund ("Employer Stock Fund"). This Prospectus Supplement
relates to the initial election of Members to direct that all or a portion of
their accounts be invested in the Employer Stock Fund in connection with the
Conversion and Offering and also to elections by Members to direct that all or a
portion of their accounts be invested in the Employer Stock Fund after the
Conversion. A Member will be able to provide alternative investment
instructions to the Trustee in the event that the Offering is oversubscribed and
the total amount allocated by a Member cannot be used by the Trustee to purchase
Common Stock.
The Prospectus of the Company dated February __, 1998 (the "Prospectus")
which is attached to this Prospectus Supplement includes detailed information
with respect to the Conversion, the Common Stock and the financial condition,
results of operations and business of the Bank. This Prospectus Supplement,
which provides detailed information with respect to the Plan, should be read
only in conjunction with the Prospectus.
THESE PARTICIPATION INTERESTS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE SECURITIES AND EXCHANGE COMMISSION,
THE OFFICE OF THRIFT SUPERVISION, OR BY ANY OTHER FEDERAL AGENCY, OR BY ANY
STATE SECURITIES BUREAU OR OTHER STATE AGENCY, NOR HAS ANY SUCH OFFICE,
CORPORATION, COMMISSION, BUREAU OR OTHER AGENCY PASSED UPON THE
<PAGE>
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Bank or the Plan. This
Prospectus Supplement does not constitute an offer to sell or solicitation of an
offer to buy any securities in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Prospectus Supplement and the Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Bank or the Plan since the date hereof, or
that the information herein contained or incorporated by reference is correct as
of any time subsequent to the date hereof. This Prospectus Supplement should be
read only in conjunction with the Prospectus that is attached hereto and should
be retained for future reference.
The date of this Prospectus Supplement is February __, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE OFFERING........................................................... 1
Securities Offered................................................ 1
Election to Purchase Common Stock in the Offering; Priorities..... 1
Value of Participation Interests.................................. 2
Method of Director Transfer....................................... 2
Time for Directing Transfer....................................... 2
Irrevocability of Transfer Direction.............................. 2
Direction to Purchase Common Stock After the Offering............. 2
Purchase Price of Common Stock.................................... 3
Nature of a Members Interest in Common Stock...................... 3
Voting Rights of Common Stock..................................... 3
DESCRIPTION OF THE PLAN................................................ 3
Introduction...................................................... 3
Eligibility and Participation..................................... 4
Contributions Under the Plan...................................... 4
Limitations on Contributions...................................... 5
Investment of Contributions and Account Balances.................. 7
Benefits Under the Plan........................................... 9
Withdrawals and Distributions From the Plan.......................10
Trustee...........................................................10
Plan Administrator................................................11
Reports to Plan Members...........................................11
Amendment and Termination.........................................11
Merger, Consolidation or Transfer.................................11
Federal Income Tax Consequences...................................12
ERISA and Other Qualifications....................................15
SEC Reporting and Short-Swing Profit Liability....................15
Financial Information Regarding Plan Assets.......................15
LEGAL OPINION..........................................................16
</TABLE>
<PAGE>
THE OFFERING
Securities Offered
The securities offered hereby are participation interests in the Plan. Up
to 185,000 shares (assuming a purchase price of $10.00 per share) of Common
Stock may be acquired by the Plan to be held in the Employer Stock Fund. The
Company is the issuer of the Common Stock. Only employees of the Bank may become
Members in the Plan. The Common Stock to be issued hereby is conditioned on the
consummation of the Conversion. A Member's investment in the Employer Stock Fund
in the Conversion is subject to the priority set forth in the Plan of
Conversion. Information with regard to the Plan is contained in this Prospectus
Supplement and information with regard to the Conversion and the financial
condition, results of operation and business of the Bank is contained in the
attached Prospectus. The address of the principal executive office of the Bank
is 245 West Main Avenue, P.O. Box 2249, Gastonia, North Carolina 28053-2249. The
Bank's telephone number is (704) 868-5200.
Election to Purchase Common Stock in the Offering; Priorities
The Plan permits each Member to direct that all or part of the funds which
represent his or her beneficial interest in the assets of the Plan may be
transferred to the Employer Stock Fund, an investment fund in the Plan, that
will invest in Common Stock and will be used to purchase Common Stock issued in
connection with the Offering. The Trustee of the Plan will purchase Common Stock
offered for sale in connection with the Offering in accordance with each
Member's directions. Members will be provided the opportunity to elect
alternative investments from among the nine other funds offered. In the event
the Offering is oversubscribed and the Trustee is unable to use the full amount
allocated by a Member to purchase Common Stock in the Offering, Members may
either (i) elect alternative investments from among the nine other funds
offered, or (ii) direct the Trustee to hold the funds transferred to the
Employer Stock Fund and purchase Common Stock in the open market after the
Offering. If a Member fails to direct the investment of his or her account
balance, the Member's account balance will be invested in the Money Market Fund.
The shares of Common Stock to be sold in the Offering are being offered in
accordance with the following priorities: (i) holders of deposit accounts of the
Bank totaling $50 or more as of March 31, 1996 ("Eligible Account Holders");
(ii) the Employee Stock Ownership Plan ("ESOP"); (iii) holders of deposit
accounts of the Bank totaling $50 or more as of December 31, 1997 ("Supplemental
Eligible Account Holders"); (iv) holders of deposit accounts of the Bank
totaling $50 or more in February __, 1998; (v) certain members of the general
public with preference given to matured persons residing in Gaston County, North
Carolina. To the extent that Members fall into one of these categories, they are
being permitted to use funds in their Plan account to subscribe or pay for the
Common Stock being acquired. Common Stock so purchased will be placed in the
Member's Employer Stock Fund within his Plan account.
1
<PAGE>
Value of Participation Interests
The aggregate market value of the Members' accounts in the Financial
Institutions Thrift Plan as adopted by Gaston Federal Savings and Loan
Association ("Financial Institutions Thrift Plan") were valued at approximately
$1.8 million as of December 18, 1997. Each Member was informed of the value of
his or her beneficial interest in the Financial Institutions Thrift Plan as of
September 30, 1997.
Method of Directing Transfer
Each Member shall receive a form which provides for a Member to direct that
all or a portion of his or her beneficial interest in the Plan be transferred to
the Employer Stock Fund (the "Enrollment Application Form") or to the other
investment options established under the Plan. The Member's investment in the
other investment options set forth in the Plan may be in any combination of
multiples of 5%. If a Member wishes to invest all or part of his or her
beneficial interest in the assets of the Plan to the purchase of Common Stock
issued in connection with the Offering, he or she should indicate that decision
on the Enrollment Application Form.
Time for Directing Transfer
Directions to transfer amounts to the Employer Stock Fund in order to
purchase Common Stock issued in connection with the Offering must be returned to
the Stock Information Center at 245 West Main Avenue, P.O. Box 2249, Gastonia,
North Carolina 28053-2249 no later than __:00 p.m. on ______________, 1998.
Irrevocability of Transfer Direction
A Member's direction to transfer amounts credited to such Member's account
in the Plan to the Employer Stock Fund in order to purchase shares of Common
Stock in connection with the Offering is irrevocable. Members, however, will be
able to direct the investment of their accounts under the Plan as explained
below.
Direction to Purchase Common Stock After the Offering
After the Offering, a Member will continue to be able to direct that a
certain percentage of his or her interest in the Plan be transferred to the
Employer Stock Fund and invested in Common Stock, or to the other investment
funds available under the Plan (amounts invested in the investment funds may be
invested in any combination of multiples of 5%). The allocation of a Member's
interest in a Plan Fund may be changed on a monthly basis. Special restrictions
may apply to transfers directed to and from the Employer Stock Fund by those
Members who are officers, directors and principal shareholders of the Company
who are subject to the provisions of Section 16(b) of the Securities and
Exchange Act of 1934 (the "Exchange Act"), as amended.
2
<PAGE>
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Offering will be used by the Trustee to purchase
shares of Common Stock, except in the event of an oversubscription, as discussed
above. The price paid for such shares of Common Stock will be the same price as
is paid by all other persons who purchase shares of Common Stock in the
Offering.
Subsequent to the Offering, Common Stock purchased by the Trustee will be
acquired in open market transactions. The prices paid by the Trustee for shares
of Common Stock will not exceed "adequate consideration" as defined in Section
3(18) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
Nature of a Member's Interest in the Common Stock
The Common Stock will be held in the name of the Trustee for the Plan, as
Trustee. Shares of Common Stock acquired at the direction of a Member will be
allocated to the Member's account under the Plan. Therefore, earnings with
respect to a Member's account should not be affected by the investment
designations (including investments in Common Stock) of other Members. The
Trustee as record holder will vote such allocated shares, if any, as directed by
Members.
Voting Rights of Common Stock
The Trustee generally will exercise voting rights attributable to all
Common Stock held by the Employer Stock Fund as directed by Members with
interests in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have a right to vote, each Member will be allocated
voting instruction rights reflecting such Member's proportionate interest in the
Employer Stock Fund. The number of shares of Common Stock held in the Employer
Stock Fund that are voted in the affirmative and negative on each matter shall
be proportionate to the number of voting instruction rights exercised by Members
in the affirmative and negative respectively.
DESCRIPTION OF THE PLAN
Introduction
The Bank adopted a multiple-employer defined contribution plan (the
"Financial Institutions Thrift Plan") effective January 1, 1993. The Bank
withdrew from the Financial Institutions Thrift Plan and adopted a single-
employer plan effective January 1, 1998 in order to permit the investment of
Plan assets in Common Stock. The Plan is a tax-qualified plan with a cash or
deferred compensation feature established in accordance with the requirements
under Section 401(a) and Section 401(k) or the Internal revenue Code of 1986, as
amended (the "Code"). The Plan has applied for a ruling from the Internal
Revenue Service that the Plan is qualified under Section 401(a) of the
3
<PAGE>
Code, and its related trust is qualified under Section 501(a) of the Code.
The Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Bank will
adopt any amendments to the Plan that may be necessary to ensure the qualified
status of the Plan under the Code and applicable Treasury Regulations.
Employee Retirement Income Security Act. The Plan is an "individual
----------------------------------------
account plan" other than a "money purchase pension plan" within the meaning of
ERISA. As such, the Plan is subject to all of the provisions of Title I
(Protection of Employee Benefit Rights) and Title II (Amendments to the Internal
Revenue Code Relating to Retirement Plans) of ERISA, except the funding
requirements contained in Part 3 of Title I of ERISA which by their terms do not
apply to an individual account plan (other than a money purchase plan). The Plan
is not subject to Title IV (Plan Termination Insurance) of ERISA. The funding
requirements contained in Title IV of ERISA are not applicable to Members (as
defined below) or beneficiaries under the Plan.
Reference to full Text of Plan. The following statements are summaries of
------------------------------
certain provisions of the Plan. They are not complete and are qualified in their
entirety by the full text of the Plan. Words capitalized but not defined in the
following discussion have the same meaning as set forth in the Plan. Copies of
the Plan are available to all employees by filing a request with the Plan
Administrator, c/o _____________________________________________________________
Each employee is urged to read carefully the full text of the Plan.
Eligibility and Participation
Any employee of the Employer is eligible to become a member in the Plan on
the first day of the month following completion of three (3) months of
employment during which an employee completes at least 250 hours of service with
the Bank. The plan year is January 1 to December 31 (the "Plan Year").
As of _______________, 1998, there were approximately __ employees eligible
to participate in the Plan, and __ employees participating by making elective
deferral contributions.
Contributions Under the Plan
401(k) Plan Contributions. Each Member of the Plan is permitted to elect to
-------------------------
defer such Member's Salary (as defined below) on a pre-tax basis up to 15% of
annual Salary (expressed in terms of whole percentages) and subject to certain
other restrictions imposed by the Code, and to have that amount contributed to
the Plan on such Member's behalf. For purposes of the Plan, "Salary" means,
generally, a Member's regular, basic salary. In 1998, the annual Salary of each
Member taken into account under the Plan was and is limited to $160,000. (Limits
established by the IRS are subject to increase pursuant to an annual cost of
living adjustment, as permitted by the Code). A Member may elect to modify the
amount contributed to the Plan by filing a new elective
4
<PAGE>
deferral agreement with the Plan Administrator on a monthly basis.
Employer Contributions. The Bank makes matching contributions to the Plan
----------------------
equal to 25% of the elective deferral contributions, up to a maximum of 15% of
the Member's Salary for the Plan Year.
Limitations on Contributions
Limitation on Employee Salary Deferrals. The annual amount of deferred
---------------------------------------
Salary of a Member (when aggregated with any elective deferrals of the Member
under a simplified employee pension plan or a tax-deferred annuity) may not
exceed the limitation contained in Section 402(g) of the Code, adjusted for
increases in the cost of living as permitted by the Code (the limitation for
1998 is $10,000). Contributions in excess of this limitation ("excess
deferrals") will be included in the Member's gross income for federal income tax
purposes in the year they are made. In addition, any such excess deferral will
again be subject to federal income tax when distributed by the Plan to the
Member, unless the excess deferral (together with any income allocable thereto)
is distributed to the Member not later than the first April 15th following the
close of the taxable year in which the excess deferral is made. Any income on
the excess deferral that is distributed not later than such date shall be
treated, for federal income tax purposes, as earned and received by the Member
in the taxable year in which the distribution is made.
Limitations on Annual Additions and Benefits. Pursuant to the requirements
--------------------------------------------
of the Code, the Plan provides that the amount of contributions and forfeitures
allocated to each Member's account during any Plan Year may not exceed the
lesser of $30,000 or 25% of the Member's Compensation (as defined) for the Plan
Year. In addition, annual additions are limited to the extent necessary to
prevent contributions on behalf of any employee from exceeding the employee's
combined plan limit, i.e., a limit that takes into account the contributions and
benefits made on behalf of an employee to all plans of the Bank. To the extent
that these limitations have been exceeded with respect to a Member, the Plan
Administrator shall:
(i) return any elective deferral contributions to the extent that the
return would reduce the excess amount in the Member's accounts;
(ii) reduce Employer contributions made with respect to those returned
elective deferral contributions.
If, in addition to this Plan, the Member is covered under other defined
contribution plans and welfare benefit funds maintained by the Bank and annual
additions exceed the maximum permissible amount, the amount contributed or
allocated under the other defined contribution plans, will be reduced so that
the annual additions under all such plans and funds equal the maximum
permissible amount.
Limitation on Plan Contributions for Highly Compensated Employees.
-----------------------------------------------------------------
Sections 401(k) and
5
<PAGE>
401(m) of the Code limits the amount of elective deferral contributions and
matching contributions that may be made to the Plan in any Plan Year on behalf
of Highly Compensated Employees (defined below) in relation to the amount of
elective deferral contributions made by or on behalf of all other employees
eligible to participate in the Plan. Specifically, the "actual deferral
percentage" ("ADP") (i.e., the average of the actual deferral ratios, expressed
as a percentage, of each eligible employee's elective deferral contribution if
any, for the Plan Year over the employee's Salary), of the Highly Compensated
Employees must meet either of the following tests: (i) the ADP of the eligible
Highly Compensated Employees is not more than 125% of the ADP of all other
eligible employees, or (ii) the ADP of the eligible Highly Compensated Employees
is not more than 200% of the ADP of all other eligible employees, and the excess
of the ADP for the eligible Highly Compensated Employees over the ADP of all
other eligible employees is not more than two percentage points. Similarly, the
actual contribution percentage ("ACP") (i.e., the average of the actual
contribution ratios, expressed as a percentage, of each eligible employee's
matching contributions, if any, for the Plan Year over the employee's Salary) of
the Highly Compensated Employees must meet either of the following tests: (i)
the ACP of the eligible Highly Compensated Employees is not more than 125% of
the ACP of all other eligible employees, or (ii) the ACP of the eligible Highly
Compensated Employees is not more than 200% of the ACP of all other eligible
employees, and the excess of the ACP for the eligible Highly Compensated
Employees over the ACP of all other employees is not more than two percentage
points.
In general, for Plan Years beginning in 1998, a Highly Compensated Employee
includes any employee, who, (1) during the Plan Year or the preceding Plan Year,
was at any time a 5% owner (i.e., owns directly or indirectly more than 5% of
the stock of an employer, or stock possessing more than 5% of the total combined
voting power of all stock of an employer), or (2) for the preceding Plan Year,
received Pay from an employer in excess of $80,000 (in 1998), and (if the
employer elects for a Plan Year) was in the group consisting of the top 20% of
employees when ranked on the basis of Pay paid during the Plan Year. The dollar
amounts set forth above are adjusted annually to reflect increases in the cost
of living.
In order to prevent the disqualification of the Plan, any amount
contributed by Highly Compensated Employees that exceed the ADP limitation in
any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed first to Highly Compensated Employees with the
greatest dollar amount deferrals, and so on, until the Plan satisfies the ADP
test, before the close of the following Plan Year. Moreover, the Bank will be
subject to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are re-
characterized or are distributed before the close of the first 2-1/2 months
following the Plan Year to which such excess contributions relate. In addition,
in order to avoid disqualification of the Plan, any contributions by Highly
Compensated Employees that exceed the average contribution limitation in any
Plan Year ("excess aggregate contributions") together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the 10% excise tax will be imposed on
the Bank with respect to any excess aggregate contributions, unless such
amounts, plus any income allocable thereto, are distributed within 2-1/2 months
following the close of the Plan Year in which they arose.
6
<PAGE>
Investment of Contributions and Account Balances
All amounts credited to Members' accounts under the Plan are held in the
Plan Trust (the "Trust") which is administered by the Trustee appointed by the
Bank's Board of Directors.
Prior to the effective date of the Offering, Members have been provided the
opportunity to direct the investment of their accounts into one of the following
funds (the "Funds"):
A. S&P 500 Stock Fund
B. Stable Value Fund
C. S&P MidCap Stock Fund
D. Money Market Fund
E. Bond Market Fund (Effective June 1997, this became the Long-Term Government
Bond Fund)
F. Income Plus Fund
G. Growth & Income Fund
H. Growth Fund
I. International Stock Fund
The Plan now provides that in addition to the Funds specified above, a
Member may direct the Trustee to invest all or a portion of his account in the
Employer Stock Fund.
A Member may elect to have both past contributions (and earnings), as well
as future contributions to the Member's account invested either in the Employer
Stock Fund or among the Funds listed above. Transfers of past contributions (and
the earnings thereon) do not affect the investment mix of future contributions.
These elections will be effective on the Valuation Date (generally the last
business day of the month) coinciding with or next following the date the notice
was received by the Plan Administrator. Until an effective direction is made by
a Member, a Member's account will be invested in the Money Market Fund.
A. Previous Funds.
Prior to the effective date of the Offering, contributions under the Plan
have been invested in the nine funds specified above. The Income Plus, Growth &
Income, Growth and International Stock Funds were added July 2, 1997. The
following table provides performance data with respect to the investment funds
available under the Plan, based on information provided to the Company by The
Pentegra Group ("Pentegra"):
7
<PAGE>
Net Investment Performance
--------------------------
<TABLE>
<CAPTION>
November 30, 1997
as of 11-30-97 Annualized 5 Years
-------- ------------------
<S> <C> <C>
A. S&P 500 Stock Fund 30.5% 14.7%
B. Stable Value Fund 5.7 7.1
C. S&P MidCap Stock Fund 26.1 12.2
D. Money Market Fund 4.9 4.3
E. Bond Market Fund 13.7 6.4
F. Income Plus Fund 8.2 8.1
G. Growth & Income Fund 12.4 10.6
H. Growth Fund 17.2 13.2
I. International Stock Fund 2.8 10.5
</TABLE>
The following is a description of each of the Plan's nine investment funds:
S&P 500 Stock Fund A fund designed to simulate the performance of the
------------------
Standard & Poor's Composite Index of 500 stocks.
Stable Value Fund An income portfolio with the objective of maximizing
-----------------
income at minimum risk of capital with contributions invested in fixed income
instruments, including, but not limited to: (i) group annuity contracts
including fixed and variable rate contracts with insurance companies or other
financial institutions, (ii) bank time deposits or deposit agreements, (iii)
short term investment funds, (iv) U.S. Treasury Bills and (v) third party
agreements providing book value liquidity for investments in U. S. Government or
Agency securities or collateralized mortgage obligations backed by Agency
collateral.
S&P MidCap Stock Fund A diversified equity portfolio with the objective of
---------------------
simulation the performance of the Standard & Poor's MidCap Index of 400 stocks.
Money Market Fund A government instrument fund with the objective of
-----------------
maximizing income at minimum risk of capital with underlying investments in
obligations issued or guaranteed by the United States government or agencies or
instrumentalities thereof.
Long Term Government Bond Fund A fund designed to maximize income at
------------------------------
minimum risk with underlying investments in U.S. Treasury bonds with a maturity
of 20 years or more.
Income Plus Fund A fund designed to invest in stable value securities to
----------------
reduce short-term risk and to offer some potential for growth.
Growth & Income Fund A fund that invests in U.S. and international stocks,
--------------------
U. S. bonds and other stable value investments to pursue long-term appreciation
and short-term stability and has a small flexible component to take advantage of
market opportunities.
Growth Fund A fund that invests in a broad range of domestic and
-----------
international stocks with
8
<PAGE>
a large flexible component to take advantage of market opportunities.
International Fund A fund designed to approximate the performance of the
------------------
Morgan Stanley Capital International Eastern, Australia, Far East Index (with a
25% investment limit in Japanese stocks).
B. The Employer Stock Fund.
The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Offering. After the Offering, the Trustee
will, to the extent practicable, use all amounts held by it in the Employer
Stock Fund, including cash dividends paid on Common Stock held in the Employer
Stock Fund, to purchase shares of Common Stock of the Company. It is expected
that all purchases will be made at prevailing market prices. Under certain
circumstances, the Trustee may be required to limit the daily volume of shares
purchased. Pending investment in Common Stock, assets held in the Employer Stock
Fund will be placed in a short-term interest fund.
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market for
the Common Stock. Accordingly, there is no record of the historical performance
of the Employer Stock Fund. Performance will be dependent upon a number of
factors, including the financial condition and profitability of the Company and
the Bank and market conditions for the Common Stock generally.
INVESTMENT IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN RISKS IN
INVESTMENT IN COMMON STOCK OF THE COMPANY. FOR A DISCUSSION OF THESE RISK
FACTORS, SEE THE PROSPECTUS.
Benefits Under the Plan
Vesting. A Member, at all times, has a fully vested, nonforfeitable
--------
interest in his or her salary deferral contribution and the earnings thereon
under the Plan. A member is vested in any employer contributions in accordance
with the following schedule:
<TABLE>
<CAPTION>
Years of Service Vesting Percentage
---------------- ------------------
<S> <C>
0 - 4 0%
5 or more 100%
</TABLE>
A member will also be 100% vested in employer contributions regardless of
his or her years of vesting service, upon attainment of normal retirement age
under the Plan, death or disability. Any non-vested contributions which are
forfeited shall be used at the option of the Bank to (i) reduce administrative
expenses or (ii) offset any contribution to be made for the Plan Year.
9
<PAGE>
Withdrawals and Distributions From the Plan
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN MEMBER TO WITHDRAW AMOUNTS HELD FOR HIS OR HER BENEFIT
UNDER THE PLAN PRIOR TO THE MEMBER'S TERMINATION OF EMPLOYMENT WITH THE BANK. A
SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS MADE PRIOR TO
THE MEMBER'S ATTAINMENT OF AGE 59-1/2, REGARDLESS OF WHETHER SUCH A WITHDRAWAL
OCCURS DURING HIS OR HER EMPLOYMENT WITH THE BANK OR AFTER TERMINATION OF
EMPLOYMENT.
Withdrawals Prior to Termination of Employment. A Member may make a
-----------------------------------------------
withdrawal from his or her elective deferral contributions (and earnings
thereon) prior to termination of employment only in the event of financial
hardship, subject to the hardship distribution rules under the Plan. These
requirements insure that Members have a true financial need before a withdrawal
may be made. A Member may make a withdrawal of employer contributions credited
to his Regular Account if the Member has completed 60 months of participation in
the Plan, the employer contributions have been invested in the Plan for at least
24 months, or the attainment of age 59 1/2.
Distribution Upon Termination of Employment or Disability. Payment of
----------------------------------------------------------
benefits to a Member who retires, incurs a disability, or otherwise terminates
employment shall be made in a lump sum payment or in installments, over a period
of up to 20 years. Such period must not extend beyond the life expectancy of the
Member. Benefit payments generally may be deferred until April 1 following the
calendar year in which the Member attains age 70-1/2.
Distribution Upon Death. A Member who dies prior to the benefit
------------------------
commencement date for retirement, disability or termination of employment shall
have his or her benefits paid to the surviving spouse or beneficiary in a lump
sum, unless the payment would exceed $500, and the member elected prior to death
that the payment be made in annual installments over a period not to exceed 5
years (10 years if the spouse is the beneficiary). If no election is in effect
at the time of the Member's death, the beneficiary may elect to receive the
benefit in the form of annual installments over a period not to exceed 5 years
(10 years if the spouse is the beneficiary).
Nonalienation of Benefits. Except with respect to federal income tax
-------------------------
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
Trustee
The Trustee is appointed by the Board of Directors of the Bank to serve at
its pleasure. The Bank of New York has been appointed as trustee of the Plan.
Until the Offering is concluded,
10
<PAGE>
______________________ will serve as trustee of the Employer Stock Fund.
The Trustee receives, holds and invests the contributions to the Plan in
trust and distributes them to Members and beneficiaries in accordance with the
terms of the Plan and the directions of the Plan Administrator. The Trustee is
responsible for investment of the assets of the Trust.
Plan Administrator
Pursuant to the terms of the Plan, the Plan is administered by the plan
administrator (the "Plan Administrator"). _________________________ is the Plan
Administrator. The address of the Plan Administrator is
___________________________________________________, Telephone number
_____________. The Plan Administrator is responsible for the administration of
the Plan, interpretation of the provisions of the Plan, prescribing procedures
for filing applications for benefits, preparation and distribution of
information explaining the Plan, maintenance of plan records, books of account
and all other data necessary for the proper administration of the Plan, and
preparation and filing of all returns and reports relating to the Plan which are
required to be filed with the U.S. Department of Labor and the IRS, and for all
disclosures required to be made to Members, beneficiaries, and others under
Sections 104 and 105 of ERISA.
Reports to Plan Members
The Plan Administrator will furnish to each Member a statement at least
annually showing (i) the balance in the Member's account as of the end of that
period, (ii) the amount of contributions allocated to such Member's account for
that period, and (iii) the adjustments to such Member's account to reflect
earnings or losses (if any).
Amendment and Termination
It is the intention of the Bank to continue the Plan indefinitely.
Nevertheless, the Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the Plan,
each employee affected by such termination shall have a fully vested interest in
his or her accounts. The Bank reserves the right to make, from time to time, any
amendment or amendments to the Plan which do not cause any part of the Trust to
be used for, or diverted to, any purpose other than the exclusive benefit of
Members or their beneficiaries; provided, however, that the Bank may make any
amendment it determines necessary or desirable, with or without retroactive
effect, to comply with ERISA.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust assets to another plan, the Plan requires that each
Member would (if either the Plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he or she would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
11
<PAGE>
Federal Income Tax Consequences
The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. Members are urged to
consult their tax advisors with respect to any distribution from the Plan and
transactions involving the Plan.
The Plan is qualified under Section 401(a) and 401(k) of the Code and the
related Trust is exempt from tax under Section 501(a) of the Code. A plan that
is qualified under these sections of the Code is afforded special tax treatment
which include the following: (1) the Bank is allowed an immediate tax deduction
for the amount contributed to the Plan each year; (2) Members pay no current
income tax on amounts contributed by the Bank on their behalf; and (3) Earnings
of the Plan are tax-exempt thereby permitting the tax-free accumulation of
income and gains on investments. The Plan will be administered to comply in
operation with the requirements of the Code as of the applicable effective date
of any change in the law. The Bank expects to timely adopt any amendments to the
Plan that may be necessary to maintain the qualified status of the Plan under
the Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code, participation in the Plan under existing federal income tax laws
will have the following effects:
(a) Amounts contributed to a Member's account and the investment earnings
on the account are not includable in a Member's federal taxable income until
such contributions or earnings are actually distributed or withdrawn from the
Plan. Special tax treatment may apply to the taxable portion of any distribution
that includes Common Stock or qualifies as a Lump Sum Distribution (as described
below).
(b) Income earned on assets held by the Trust will not be taxable to the
Trust.
Lump Sum Distribution. A distribution from the Plan to a Member or the
---------------------
beneficiary of a Member will qualify as a lump sum distribution ("Lump Sum
Distribution") if it is made: (i) within one taxable year of the Member or
beneficiary; (ii) on account of the Member's death, disability or separation
from service, or after the Member attains age 59-1/2; and (ii) consists of the
balance to the credit of the Member under this Plan and all other profit sharing
plans, if any, maintained by the Bank. The portion of any Lump Sum Distribution
that is required to be included in the Member's or beneficiary's taxable income
for federal income tax purposes (the"total taxable amount") consists of the
entire amount of such Lump Sum Distribution less the amount of after-tax
contributions, if any, made by the Member to any other profit sharing plan
maintained by the Bank which is included in such distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
----------------
Distribution that
12
<PAGE>
is attributable to participation after 1973 in the Plan or in any other profit-
sharing plan maintained by the Bank (the "ordinary income portion") will be
taxable generally as ordinary income for federal income tax purposes. However, a
Member who has completed at least five years of participation in the Plan before
the taxable year in which the distribution is made, or a beneficiary who
receives a Lump Sum Distribution on account of the Member's death (regardless of
the period of the Member's participation in the Plan or any other profit-sharing
plan maintained by the Bank), may elect to have the ordinary income portion of
such Lump Sum Distribution taxed according to a special averaging rule ("five-
year averaging"). The election of the special averaging rules may apply only to
one Lump Sum Distribution received by the Member or beneficiary, provided such
amount is received on or after the Member turns 59-1/2 and the recipient elects
to have any other Lump Sum Distribution from a qualified plan received in the
same taxable year taxed under the special averaging rule. Under a special
grandfather rule, individuals who turned 50 by 1985 may elect to have their Lump
Sum Distribution taxed under either the five-year averaging rule or under the
prior law ten-year averaging rule. Such individuals also may elect to have that
portion of the Lump Sum Distribution attributable to the Member's pre-1974
participation in the Plan taxed at a flat 20% rate as gain from the sale of a
capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum Distribution
-----------------------------------------------
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
distribution over the cost or other basis to the Trust. The tax basis of such
Common Stock to the Member or beneficiary for purposes of computing gain or loss
on its subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered short-term, mid-term or long-term capital
gain depending upon the length of the holding period of the Common Stock. The
recipient of a distribution may elect to include the amount of any net
unrealized appreciation in the total taxable amount of such distribution to the
extent allowed by the regulations to be issued by the IRS.
Contribution to Another Qualified Plan or to an IRA. A Member may defer
----------------------------------------------------
federal income taxation of all or any portion of the total taxable amount of a
Lump Sum Distribution (including the proceeds from the sale of any Common Stock
included in the Lump Sum Distribution) to the extent that such amount, or a
portion thereof, is contributed, within 60 days after the date of its receipt by
the Member, to another qualified plan or to an individual retirement account
("IRA"). If less than the total taxable amount of a Lump Sum Distribution is
contributed to another qualified plan or to an IRA within the applicable 60-day
period, the amount not so contributed must be included in the Member's income
for federal income tax purposes and will not be eligible for the special
averaging rules or for capital gains treatment. Additionally, a Member may defer
the federal income taxation of any portion of an amount distributed from the
Plan on account of the Member's disability or separation from service,
generally, if the amount is distributed within one taxable year of the Member,
and such amount is contributed, within 60 days after the date of its receipt by
the Member, to an IRA. Prior to 1993, following the partial distribution of a
Member's account, any remaining
13
<PAGE>
balance under the Plan (and the balance to the credit of the Member under any
other profit sharing plan sponsored by the Bank) would not be eligible for the
special averaging rules or for capital gains treatment. For these purposes, a
"partial distribution" is a distribution within one taxable year of the Member
equal to at least 50% of the balance of a Member's account ("Partial
Distribution").
Pursuant to a change in the law, effective January 1, 1993, virtually all
distributions from the Plan may be rolled over to another qualified Plan or to
an IRA without regard to whether the distribution is a Lump Sum Distribution or
a Partial Distribution. Effective January 1, 1993, Members have the right to
elect to have the Trustee transfer all or any portion of an "eligible rollover
distribution" directly to another plan qualified under Section 401(a) of the
Code or to an IRA. If the Member does not elect to have an "eligible rollover
distribution" transferred directly to another qualified plan or to an IRA, the
distribution will be subject to a mandatory federal withholding tax equal to 20%
of the taxable distribution. An "eligible rollover distribution" means any
amount distributed from the Plan except: (1) a distribution that is (a) one of a
series of substantially equal periodic payments made (not less frequently than
annually ) over the Member's life or the joint life of the Member and the
Member's designated beneficiary, or (b) for a specified period of ten years or
more; (2) any amount that is required to be distributed under the minimum
distribution rules; and (3) any other distributions excepted under applicable
federal law.
The beneficiary of a Member who is the Member's surviving spouse also may
defer federal income taxation of all or any portion of a distribution from the
Plan to the extent that such amount, or a portion thereof, is contributed within
60 days after the date of its receipt by the surviving spouse, to an IRA. If all
or any portion of the total taxable amount of a Lump Sum Distribution is
contributed by the surviving spouse of a Member to an IRA within the applicable
60-day period, any subsequent distribution from the IRA will not be eligible for
the special averaging rules or for capital gains treatment. Any amount received
by the Member's surviving spouse that is not contributed to another qualified
plan or to an IRA within the applicable 60-day period, and any amount received
by a nonspouse beneficiary will be included in such beneficiary's income for
federal tax purposes in the year in which it is received.
Additional Tax on Early Distributions. A Member who receives a
--------------------------------------
distribution from the Plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate or a Member) on or
after the death of the Member, (ii) attributable to the Member's being disabled
within the meaning of Section 72(m)(7) of the Code, (iii) part of a series of
substantially equal periodic payments (not less frequently than annually) made
for the life (or life expectancy) of the Member or the joint lives (or joint
life expectancies) of the Member and his beneficiary, (iv) made to the Member
after separation from service on account of early retirement under the Plan
after attainment of age 55, (v) made to pay medical expenses to the extent
deductible for federal income tax purposes, (vi) payments made to an alternate
payee pursuant to a qualified domestic relations order, or (vii) made to effect
the distribution of excess contributions or excess deferrals.
14
<PAGE>
ERISA and Other Qualifications
As noted above, the Plan is subject to certain provisions of the ERISA and
has applied for a favorable determination that it is qualified under Section
401(a) of the Code.
The foregoing is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan.
Accordingly, each Member is urged to consult a tax advisor concerning the
federal, state and local tax consequences of participating in and receiving
distributions from the Plan.
SEC Reporting and Short-Swing Profit Liability
Section 16 of the Exchange Act imposes reporting and liability requirements
on officers, directors, and persons beneficially owning more than 10% of public
companies such as the Company. Section 16(a) of the Exchange Act requires the
filing of reports of beneficial ownership. Within 10 days of becoming a person
subject to the reporting requirements of Section 16(a), a Form 3 reporting
initial beneficial ownership must be filed with the Securities and Exchange
Commission ("SEC") . Certain changes in beneficial ownership, such as purchases,
sales and gifts must be reported periodically, either on a Form 4 within 10 days
after the end of the month in which a change occurs, or annually on a Form 5
within 45 days after the close of the Company's fiscal year. Certain
discretionary transactions in and beneficial ownership of the Common Stock
through the Employer Stock Fund of the Plan by officers, directors and persons
beneficially owning more than 10% of the Common Stock of the Company must be
reported to the SEC by such individuals.
In addition to the reporting requirements described above, Section 16(b) of
the Exchange Act as provides for the recovery by the Company of profits realized
by an officer, director or any person beneficially owning more than 10% of the
Company's Common Stock ("Section 16(b) Persons") resulting from non-exempt
purchases and sales of the Company's Common Stock within any six-month period.
The SEC has adopted rules that provide exemption from the profit recovery
provisions of Section 16(b) for all transactions in employer securities within
an employee benefit plan, such as the Plan, provided certain requirements are
met. These requirements generally involve restrictions upon the timing of
elections to acquire or dispose of employer securities for the accounts of
Section 16(b) Persons.
Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, Section 16(b) Persons are required to hold shares of Common Stock
distributed from the Plan for six months following such distribution and are
prohibited from directing additional purchases of units within the Employer
Stock Fund for six months after receiving such a distribution.
Financial Information Regarding Plan Assets
Financial statements for the Financial Institutions Thrift Plan, for the
year ending December 31, 1996 are attached to the Prospectus. The financial
statements were prepared by Pentegra.
15
<PAGE>
LEGAL OPINION
The validity of the issuance of the Common Stock will be passed upon by
Luse Lehman Gorman Pomerenk & Schick, A Professional Corporation, Washington,
D.C., which firm acted as special counsel to the Bank in connection with the
Company's Conversion from a mutual savings bank to a stock based organization
and the concurrent formation of the Company.
16
<PAGE>
PROSPECTUS
Up to 2,113,355 Shares of Common Stock
GASTON FEDERAL BANCORP, INC.
245 West Main Avenue
P.O. Box 2249
Gastonia, North Carolina 28053-2249
(704) 868-5200
================================================================================
Gaston Federal Savings and Loan Association, Gastonia, North Carolina is
reorganizing from the mutual form of organization to the mutual holding company
form of organization. As part of the Reorganization, Gaston Federal Savings and
Loan Association will change its name to Gaston Federal Bank and will become a
wholly-owned subsidiary of Gaston Federal Bancorp, Inc., a Federal corporation,
and Gaston Federal Bancorp, Inc. will issue a majority of its common stock to
Gaston Federal Holdings, MHC, a Federal mutual holding company, and sell a
minority of its common stock to the public pursuant to this Prospectus. The
shares of common stock of Gaston Federal Bancorp, Inc. are being offered to the
public under the terms of a Plan of Reorganization which must be approved by
members of Gaston Federal Savings and Loan Association and by the Office of
Thrift Supervision. The Reorganization will not go forward if Gaston Federal
Savings and Loan Association does not receive these approvals, or if Gaston
Federal Bancorp, Inc. does not sell at least a minimum number of shares of its
common stock. Because the names of Gaston Federal Savings and Loan Association,
Gaston Federal Bank, Gaston Federal Bancorp, Inc. and Gaston Federal Holdings,
MHC are so similar, we will refer to Gaston Federal Savings and Loan Association
and Gaston Federal Bank as the "Bank," we will refer to Gaston Federal Bancorp,
Inc. as the "Company," and we will refer to Gaston Federal Holdings, MHC as the
"Mutual Holding Company."
================================================================================
TERMS OF OFFERING
An independent appraiser has estimated that as of December 11, 1997, the
pro forma market value of the common stock of the Company ranged from
$28,900,000 to $39,100,000. Based on the valuation, the Company will issue
between 2,890,000 and 3,910,000 shares of common stock in the Reorganization.
The Company intends to sell 47% of such shares, or between 1,358,300 and
1,837,700 shares, to the public pursuant to this Prospectus, and issue 53% of
such shares, or between 1,531,700 and 2,072,300 shares, to the Mutual Holding
Company. Subject to approval of the Office of Thrift Supervision, an additional
15% above the maximum number of shares, or up to 4,496,500 shares may be issued
in the Reorganization and up to 2,113,355 of such shares may be sold in the
Offering in the event of an increase in the estimated pro forma market value of
the common stock of the Company. Based on these estimates, we are making the
following offering of shares of common stock pursuant to this Prospectus.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
. Price Per Share: $10
. Number of Shares
Minimum/Maximum/Adjusted Maximum: 1,358,300 1,837,700 2,113,355
. Reorganization Expenses
Minimum/Maximum/Adjusted Maximum: $722,000 $770,000 $873,000
. Net Proceeds to Gaston Federal Bancorp, Inc.
Minimum/Maximum/Adjusted Maximum: 12,861,000 $13,354,000 $20,261,000
. Net Proceeds per share to Gaston Federal Bancorp, Inc.
Minimum/Maximum/Adjusted Maximum: $9.47 $9.58 $9.58
</TABLE>
Please refer to Risk Factors beginning on page _____ of this document.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
<PAGE>
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation, nor any state securities
regulator has approved or disapproved these securities or determined if this
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Trident Securities, Inc. will use its best efforts to assist the Company in
selling at least the minimum number of shares but does not guarantee that this
number will be sold. All funds received from subscribers will be held in an
interest bearing savings account at Gaston Federal until the completion or
termination of the Reorganization.
For information on how to subscribe, call the Stock Information Center at (704)
___________.
TRIDENT SECURITIES, INC.
Prospectus dated February __, 1998
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING............................. 1
SUMMARY.................................................................... 4
SELECTED FINANCIAL AND OTHER DATA.......................................... 8
RISK FACTORS............................................................... 9
GASTON FEDERAL HOLDINGS, MHC............................................... 13
GASTON FEDERAL BANCORP, INC................................................ 14
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION................................ 14
REGULATORY CAPITAL COMPLIANCE.............................................. 15
USE OF PROCEEDS............................................................ 15
DIVIDEND POLICY............................................................ 16
MARKET FOR COMMON STOCK.................................................... 17
CAPITALIZATION............................................................. 18
PRO FORMA DATA............................................................. 19
PARTICIPATION BY MANAGEMENT................................................ 22
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME........................................ 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................... 24
BUSINESS OF THE COMPANY.................................................... 31
BUSINESS OF THE BANK....................................................... 31
FEDERAL AND STATE TAXATION................................................. 50
REGULATION................................................................. 51
MANAGEMENT OF THE COMPANY.................................................. 58
MANAGEMENT OF THE BANK..................................................... 59
THE REORGANIZATION AND OFFERING............................................ 66
RESTRICTIONS ON ACQUISITION OF THE COMPANY................................. 79
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY................................ 81
TRANSFER AGENT AND REGISTRAR............................................... 82
LEGAL AND TAX MATTERS...................................................... 82
EXPERTS.................................................................... 82
ADDITIONAL INFORMATION..................................................... 82
</TABLE>
This document contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" beginning on page __ of this Prospectus.
Please see the Glossary beginning on page G-l for the meaning of capitalized
terms that are used in this Prospectus.
(i)
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: What is the purpose of the Offering?
A: The Offering is being made in connection with the Reorganization of Gaston
Federal from a Federal mutual savings association into the mutual holding
company form of ownership. As part of the Reorganization, you will have the
opportunity to become a shareholder of the Company, a Federal corporation,
which will allow you to share in the future of our bank. By converting to
the stock form of ownership, the Bank will be structured in the form used
by virtually all commercial banks and a large number of savings banks. The
Offering will increase our capital for lending and investment activities.
This will better enable us to continue the expansion of our retail banking
franchise and to diversify operations. Further, as a stock bank operating
through a holding company structure, we will improve our future access to
the capital markets.
Q: How do I order the stock?
A: You must complete and return the stock order form and certification to us
together with your payment, on or before March _____, 1998.
Q: How much stock may I order?
A: The minimum order is 25 shares (or $250). The maximum order is 25,000
shares for a purchase price of $250,000. For purposes of these limitations,
joint account holders may not collectively exceed the 25,000 share limit.
In certain instances, your order may be grouped together with orders by
other persons who are associated with you (such as your spouse, child or
relative living in your home), or with whom you are acting in concert, and,
in that event, the aggregate order may not exceed 25,000 shares. We may
decrease or increase the maximum purchase limitation without notifying you.
However, if we increase the maximum purchase limitation, and you previously
subscribed for the maximum number of shares, you will be given the
opportunity to subscribe for additional shares.
Q: What happens if there are not enough shares to fill all orders?
A: If the Offering is oversubscribed, shares will be allocated based upon a
formula set forth in the Plan of Reorganization and in accordance with
regulations of the Office of Thrift Supervision.
Q: Who will receive subscription rights?
A: The stock will be offered on a priority basis to the following persons:
. Persons who had deposit accounts of at least $50 with us on March 31,
1996. Any remaining shares will be offered to:
. The Company's employee stock ownership plan. Any remaining shares will
be offered to:
. Persons who had deposit accounts of at least $50 with us on December
31, 1997. Any remaining shares will be offered to:
. Persons who had deposit accounts of at least $50 with us on February
__, 1998.
If the above persons do not subscribe for all of the shares, the remaining
shares will be offered to certain members of the general public, with
preference given to natural persons residing in Gaston County, North
Carolina.
<PAGE>
Q: What particular factors should I consider when deciding whether or not to
buy the stock?
A: Before you decide to purchase stock, you should read the entire Prospectus,
including the Risk Factors section on pages _____.
Q: As a depositor of Gaston Federal, what will happen if I do not order any
stock?
A: You are not required to purchase common stock. Your deposit accounts,
certificate accounts and any loans you may have with us will not be
affected by the Reorganization.
Q: What is a Mutual Holding Company Reorganization?
A: Gaston Federal will convert from the mutual form of organization to the
capital stock form of organization, and establish the Company. The Company
will issue between 2,890,000 and 4,496,500 shares of common stock in the
Reorganization; 53% of the shares will be issued to the Mutual Holding
Company, and 47% will be sold to depositors and the public pursuant to this
Prospectus. The Mutual Holding Company is a Federal mutual holding company
without shares of capital stock, which will be regulated by the Office of
Thrift Supervision. As part of the Reorganization, membership interests
that depositors had in Gaston Federal will become membership interests in
the Mutual Holding Company. Based upon the Independent Valuation, 53% of
the shares of common stock to be issued in the Reorganization will range
from a minimum of 2,890,000 shares to an adjusted maximum of 4,496,500
shares, and 47% of the shares of common stock to be sold pursuant to this
Prospectus will range from a minimum of 1,350,300 shares to an adjusted
maximum of 2,113,355 shares.
Q: Is a Mutual Holding Company Reorganization Different from Other Mutual to
Stock Holding Company Conversions?
A: The mutual holding company structure differs in significant respects from
an ordinary savings and loan or bank holding company. The Mutual Holding
Company is a mutual corporation without shares of capital stock.
Furthermore, the Mutual Holding Company's Board of Directors, in making
certain business decisions, considers the impact of its action on a variety
of constituencies, including the depositors of the Bank, the employees of
the Bank, and the communities in which the Bank operates. As the majority
stockholder of the Company, the Mutual Holding Company is also interested
in the continued success and profitability of Gaston Federal and the
Company. Consequently, the Mutual Holding Company will act in a manner
which furthers the general interest of all of its constituencies,
including, but not limited to, the interest of the stockholders of the
Company. The Mutual Holding Company believes that the interests of the
stockholders of the Company, and those of the Mutual Holding Company's
other constituencies, are in many circumstances the same, such as the
increased profitability of the Company and Gaston Federal and continued
service to the communities in which the Bank operates.
Q: Can the Mutual Holding Company Convert to Stock Form?
A: Office of Thrift Supervision regulations and the Plan of Reorganization
permit the Mutual Holding Company to convert from the mutual to the capital
stock form of organization. There can be no assurance that such a
transaction will ever occur, and the Board of Directors has no current
intention or plan to undertake such a transaction. If the Mutual Holding
Company were to convert to the capital stock form of organization, certain
depositors would receive the right to subscribe for additional shares of
the new stock holding company that would be formed in the transaction. In
such a transaction, each share of common stock outstanding and held by
persons other than the Mutual Holding Company would be automatically
converted into shares of common stock of the new stock holding company. The
number of shares that each stockholder would receive would be determined
pursuant an exchange ratio that ensures that after the transaction, subject
to an
2
<PAGE>
adjustment to reflect any dividends that the Mutual Holding Company may
have waived and any assets that the Mutual Holding Company may have other
than common stock of the Company, the percentage of the to-be outstanding
shares of the new stock holding company issued to such stockholders in
exchange for their common stock would be equal to the percentage of the
outstanding shares of common stock held by such stockholders immediately
prior to the transaction.
Q: How do I decide whether to buy stock in the Offering?
A: In order to make an informed investment decision, you should read this
entire Prospectus. This section highlights selected information and may not
contain all of the information that is important to you. If you have
questions about the Offering, you may contact:
Stock Information Center
Gaston Federal
245 West Main Avenue
P.O. Box 2249
Gastonia, North Carolina 28053-2249
(704) __________
3
<PAGE>
SUMMARY AND OVERVIEW
Generally. This summary highlights selected information from this document
and does not contain all the information that you need to know before making an
informed investment decision. To understand the Offering fully, you should read
carefully this entire Prospectus, including the consolidated financial
statements and the notes to the consolidated financial statements of Gaston
Federal Savings and Loan Association. References in this document to the "Bank,"
"we," "us," or "our" refer to Gaston Federal Savings and Loan Association and/or
Gaston Federal Bank. In certain instances where appropriate, "us" or "our"
refers collectively to Gaston Federal Bancorp, Inc. and the Bank. References in
this document to the "Company" refer to Gaston Federal Bancorp, Inc. References
to the "Mutual Holding Company" refer to Gaston Federal Holdings, MHC.
Use of Defined Terms. You should note as you read this Prospectus that at
times we use capitalized terms. These capitalized terms are generally defined in
the Glossary that appears at the back of this Prospectus. We use these defined
terms so that we can clearly differentiate between various components of the
transaction, and so that we don't have to describe exactly what we mean each
time we use a term. For example, to avoid confusion, we refer to all of the
steps that are part of this transaction as the "Reorganization," and we refer to
the issuance of 47% of the Company's common stock pursuant to this Prospectus as
the "Offering." The term "Reorganization" includes the Offering, but the term
"Offering" does not include the Reorganization. To further assist you, in
addition to including a Glossary of all defined terms, we usually will define
each term the first time that it is used in the Prospectus.
The Companies
Gaston Federal Bancorp, Inc.
245 West Main Avenue
P.O. Box 2249
Gastonia, North Carolina 28053-2249
(704) 868-5200
Upon completion of the reorganization of the Bank into the mutual holding
company structure and the sale of stock to depositors and the public (the
"Reorganization"), the Company will own all of Gaston Federal's common stock,
the public (including depositors) will own a minority of the shares of common
stock of the Company, and the Mutual Holding Company will be the Company's
majority stockholder. The holding company structure will provide us greater
flexibility in terms of operations, expansion and diversification. The Company
has not yet been formed. See page _____.
Gaston Federal Bank
245 West Main Avenue
P.O. Box 2249
Gastonia, North Carolina 28053-2249
(704) 868-5200
We are a community- and customer-oriented Federal mutual savings
association. We provide financial services to individuals, families and small
businesses primarily in Gaston County and its four contiguous counties in North
and South Carolina. We are engaged primarily in the business of attracting
retail deposits through our four branch offices and investing those deposits,
together with funds generated from operations and borrowings, in one-to four-
family residential, multi-family residential and commercial real estate loans,
construction loans, commercial business loans, consumer loans, and investment
and mortgage-backed securities. At September 30, 1997, we had total assets of
$173.5 million, total deposits of $145.4 million and total equity of $20.9
million. See pages _____ to _____.
4
<PAGE>
The Stock Offering
The Company is offering for sale between 1,350,300 and 1,837,700 shares of
its common stock, for a price per share of $10.00. This Offering may be
increased to 2,113,355 shares without further notice to you if market or
financial conditions change prior to the completion of this Offering.
Stock Purchase Priorities
The Company will offer shares of its common stock to the Bank's depositors
who held deposit accounts as of certain dates and to the Bank's employee stock
ownership plan (the "ESOP") (the "Subscription Offering"). Any shares not
subscribed for may be offered to certain members of the general public in a
community offering, with preference given to natural persons residing in Gaston
County, North Carolina (the "Community Offering"). See pages _____ to _____. We
have engaged Trident Securities, Inc. to assist us on a best efforts basis in
selling the common stock in the Offering.
Prohibition on Transfer of Subscription Rights
Selling or assigning your subscription rights is illegal. All persons
exercising their subscription rights will be required to certify that they are
purchasing shares solely for their own account and that they have no agreement
or understanding regarding the sale or transfer of such shares. We intend to
pursue any and all legal and equitable remedies in the event we become aware of
the transfer of subscription rights and we will not honor orders known by us to
involve the transfer of such rights. In addition, persons who violate the
purchase limitations may be subject to sanctions and penalties imposed by the
Office of Thrift Supervision.
Stock Pricing and Number of Shares to be Issued
The Plan of Conversion and Office of Thrift Supervision ("OTS") regulations
require that the aggregate purchase price of the common stock issued in the
Offering must be based on the appraised pro forma market value of the Company's
common stock, as determined by an independent valuation. The Bank has retained
Feldman Financial Advisors, Inc., Washington, D.C. to make such valuation. The
independent valuation prepared by Feldman Financial (the "Independent
Valuation") states that as of December 11, 1997, the estimated pro forma market
value of the Company's common stock to be issued in the Reorganization ranged
from a minimum of $28,900,000 to a maximum of $39,100,000 with a midpoint of
$34,000,000. To avoid confusion, we will refer to this range of estimated values
as the "Estimated Valuation Range." Based on the Estimated Valuation Range and
the $10 per share subscription price (the "Subscription Price"), the number of
shares of common stock that the Company will issue will range from between
2,890,000 shares to 3,910,000 shares, with a midpoint of 3,400,000 shares. The
Bank's Board of Directors determined to offer 47% of such shares, or between
1,350,300 shares and 1,837,700 shares with a midpoint of 1,598,000 shares (the
"Offering Range"), to depositors and the public pursuant to this Prospectus. The
53% of the shares of Company's common stock that are not sold in the Offering
will be issued to the Mutual Holding Company.
Following commencement of the Offering, the maximum of the Estimated
Valuation Range may be increased by up to 15% to up to $44,965,000, which will
result in a corresponding increase in the maximum of the Offering Range to up to
2,113,355 shares to reflect changes in the market and financial conditions and
demand for the common stock following commencement of the Offering, without the
resolicitation of subscribers. The minimum of the Estimated Valuation Range and
the minimum of the Offering Range may not be decreased without a resolicitation
of subscribers. The Independent Valuation, however, is not intended, and must
not be construed, as a recommendation of any kind as to the advisability of
purchasing shares. Because such valuation is necessarily based upon estimates
and projections of a number of matters, all of which are subject to change from
time to time, no assurance can be given that persons purchasing such shares in
the Offering will thereafter be able to sell such shares at prices at or above
the Subscription Price.
5
<PAGE>
Termination of the Offering
The Subscription Offering will terminate at 12:00 noon, local time, on
March __, 1998. If a Community Offering is held, it is expected to begin
immediately after the termination of the Subscription Offering, but may begin
during the Subscription Offering. The Community Offering may terminate on or
after March ___, 1998 but in any event, no later than May ___, 1998 unless an
extension is granted by the OTS.
Benefits to Management from the Offering
Our full-time employees will participate in our ESOP, which is a form of
retirement plan that will purchase shares of common stock in the Offering on
behalf of our employees. We also intend to implement a recognition and retention
plan and a stock option plan following completion of the Reorganization, which
will benefit our officers and directors. If we adopt the recognition and
retention plan, certain officers and directors will be awarded shares of common
stock without paying for the shares. However, the recognition and retention plan
and stock option plan may not be adopted until at least six months after
completion of the Reorganization and are subject to shareholder approval. See
pages _____ to _____.
Use of the Proceeds Raised from the Sale of Common Stock
The Company will use the net proceeds from the Offering as follows. The
percentages we use are examples:
. 50% will be used to buy all the capital stock of Gaston Federal.
. 8% will be loaned to the ESOP to fund its purchase of common stock.
. 42% will be retained as a possible source of funds for the payment of
dividends to shareholders, the repurchase of stock, and for other
general corporate purposes.
The proceeds to be received by the Bank will be available for continued
expansion of the retail banking franchise, through de novo branching or deposit
or bank acquisitions, continued growth in the loan portfolio, and the purchase
of investment and mortgage-backed securities, in addition to general corporate
purposes.
See pages _____ to _____.
Procedure for Purchasing Common Stock
To ensure that eligible account holders, supplemental eligible account
holders, and other members are properly identified as to their stock purchase
priorities, such parties must list all deposit accounts on the order form,
giving all names on each deposit account and the account numbers at the
applicable date. The failure to provide accurate and complete account
information on the order form may result in a reduction or elimination of your
order.
Full payment by check, cash (except by mail), money order, bank draft or
withdrawal authorization (payment by wire transfer will not be accepted) must
accompany an original order form. The Company is not obligated to accept an
order submitted on photocopied or telecopied order forms. We will not accept
order forms if the certification appearing on the reverse side of the order form
is not executed.
Dividends
The Company intends to pay an annual cash dividend of $.20 payable
quarterly at $.05 per share. The payment of dividends is expected to commence
following the first full quarter after completion of the Reorganization.
6
<PAGE>
Market for the Common Stock
The Company is a newly organized company which has never issued capital
stock. Consequently, there is no current market for its common stock. The
Company has received conditional approval to have its common stock quoted on the
Nasdaq National Market System under the symbol "______." If the Company is
unable, for any reason, to list the Common Stock on the Nasdaq National Market,
or to continue to be eligible for such listing, then the Holding Company intends
to list the Common Stock on the Nasdaq SmallCap Market under the same symbol, or
on the American Stock Exchange under the symbol "_________," subject to the
applicable listing criteria for such markets. There can be no assurance that an
active and liquid trading market will develop. Trident Securities, Inc. has
indicated its intention to make a market in the common stock subject to
compliance with applicable provisions of federal and securities laws and other
regulatory requirements, and we anticipate that it will be able to secure at
least two additional market makers for the common stock. If you purchase shares,
you may not be able to sell them when you want to at a price that is equal to or
more than the price you paid. See page ______.
Important Risks in Purchasing and Owning the Company's Common Stock
Before you decide to purchase stock in the Offering, you should read the
Risk Factors section on pages _____ of this Prospectus, in addition to the other
sections of this Prospectus.
7
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
We are providing the following summary financial information about us for
your benefit. This information is derived from our audited financial statements
for each of the fiscal years shown below. The following information is only a
summary and you should read it in conjunction with our consolidated (including
consolidated data from operations of our subsidiary) financial statements and
notes beginning on page F-1.
<TABLE>
<CAPTION>
Selected Financial Data
For the Years Ended
September 30,
---------------------
1997 1996
---- ----
(Dollars in Thousands)
<S> <C> <C>
Total assets....................................................... $173,470 $171,953
Loans receivable, net.............................................. 134,491 130,862
Mortgage-backed securities......................................... 10,087 12,918
United States government and agency securities held to maturity.... 10,407 14,751
United States government and agency securities available for sale.. 2,009 --
Other investments available for sale............................... 6,239 5,515
Deposits........................................................... 145,444 145,975
Borrowed funds..................................................... 3,500 3,750
Total equity....................................................... 20,868 19,084
</TABLE>
<TABLE>
<CAPTION>
Summary of Operations
Years Ended September 30,
------------------------
1997 1996
---- ----
<S> <C> <C>
(Dollars in Thousands)
Interest income.................................................... $ 12,936 $ 12,518
Interest expense................................................... 6,952 7,381
-------- --------
Net interest income................................................ 5,984 5,137
Provision for loan losses.......................................... 293 47
-------- --------
Net interest income after provision for loan losses................ 5,691 5,090
Non-interest income................................................ 516 417
Non-interest expense (1)........................................... 3,956 4,646(1)
-------- --------
Income before income taxes......................................... 2,251 861
Income tax expense................................................. 819 351
-------- --------
Net income......................................................... $ 1,432 $ 510
======== ========
</TABLE>
- -------------------------
(1) Includes a non-recurring expense of $867 for the year ended September 31,
1996 for a one-time premium to recapitalize the Savings Association
Insurance Fund.
8
<PAGE>
Key Operating Ratios and Other Data
<TABLE>
<CAPTION>
At and For the Years
Ended September 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Performance Ratios:
Return on average assets (net income divided by average total assets)................ 0.84% 0.30%
Return on average equity (net income divided by average equity)...................... 7.38% 2.76%
Net interest rate spread............................................................. 3.04% 2.68%
Net interest margin.................................................................. 3.45% 2.99%
Average interest-earning assets to average interest-bearing liabilities.............. 109.92% 108.29%
Non interest expenses to total assets................................................ 2.28% 2.70%
Non-interest expenses to average total assets........................................ 2.31% 2.74%
Asset Quality Ratios:
Nonperforming assets to total assets................................................. 0.75% 0.84%
Nonperforming loans to total loans................................................... 0.76% 0.88%
Nonperforming loans to total assets.................................................. 0.61% 0.69%
Allowance for loan losses to total loans at the end of period........................ 0.80% 0.61%
Allowance for loan losses to nonperforming loans..................................... 104.82% 69.51%
Net interest income after provision for loan losses, to total non-interest expenses.. 143.82% 109.58%
Capital Ratios:
Ratio of average equity to average total assets...................................... 11.34% 10.92%
Equity to assets at period end....................................................... 12.03% 11.10%
Other Data:
Number of real estate loans outstanding.............................................. 1,999 2,060
Number of deposit accounts........................................................... 14,368 14,315
Number of full service offices....................................................... 4 4
</TABLE>
RISK FACTORS
In addition to the other information in this Prospectus, you should
consider carefully the following risk factors in evaluating an investment in the
common stock.
Decreased Return on Average Equity Immediately After Reorganization
At September 30, 1997, Gaston Federal's ratio of net worth to assets was
12.03%. Our equity position will significantly increase as a result of the net
proceeds that we receive in the Offering. On a pro forma basis as of September
30, 1997, the Company's consolidated ratio of equity to assets would be 18.2% at
the adjusted maximum of the Offering Range. We currently anticipate that it will
take time to prudently deploy such capital. As a result, our return on average
equity (net income divided by average equity) is expected initially to be below
the industry average after the Reorganization.
Potential Effects of Changes in Interest Rates and the Current Interest Rate
Environment
Our results of operations and financial condition are significantly
affected by changes in interest rates. Our results of operations are
substantially dependent on our net interest income, which is the difference
between the interest income earned on our interest-earning assets and the
interest expense paid on our interest-bearing liabilities. Because as a general
matter our interest-bearing liabilities reprice or mature more quickly than our
interest-earning
9
<PAGE>
assets, an increase in interest rates generally would result in a decrease in
our average interest rate spread and net interest income. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Management of Interest Rate Risk."
Changes in interest rates also affect the value of our interest-earning
assets, and in particular our investment securities portfolio. Generally, the
value of investment securities fluctuates inversely with changes in interest
rates. At September 30, 1997, our securities portfolio totaled $8.2 million,
including $18.3 million of securities available for sale. Unrealized gains and
losses on securities available for sale are reported on a quarterly basis as a
separate component of equity. Decreases in the fair value of securities
available for sale therefore could have an adverse affect on stockholders'
equity. See "Business of the Bank--Investment Activities."
We are also subject to reinvestment risk relating to interest rate
movements. Changes in interest rates can affect the average life of loans and
mortgage-backed securities. Decreases in interest rates can result in increased
prepayments of loans and mortgage-backed securities, as borrowers refinance to
reduce borrowing costs. Under these circumstances, we are subject to
reinvestment risk to the extent that we are not able to reinvest such
prepayments at rates that are comparable to the rates on the maturing loans or
securities.
Lending Risks Associated With Commercial and Multi-Family Real Estate,
Commercial Business and Consumer Lending
At September 30, 1997, our portfolio of commercial real estate loans
totaled $7.3 million, or 5.3% of total loans, our portfolio of commercial
business loans totaled $5.6 million, or 4.0% of total loans, our portfolio of
multi-family loans totaled $6.5 million, or 4.7% of total loans, and our
portfolio of consumer and other loans totaled $7.4 million, or 5.3% of total
loans. Most industry experts believe that commercial real estate, commercial
business, multi-family and consumer loans expose a lender to a greater risk of
loss than one-to-four-family residential loans. See "Business of the Bank--
Lending Activities" and "Business of the Bank--Lending Activities--Nonperforming
Assets and Delinquencies."
Minority Public Ownership and Certain Anti-Takeover Provisions
Voting Control of the Mutual Holding Company. Under OTS regulations, the
Plan of Reorganization, and our governing corporate instruments, a majority of
the Company's voting shares must be owned by the Mutual Holding Company. The
Mutual Holding Company will be controlled by its Board of Directors, who
initially will consist of persons who are members of the Board of Directors of
the Company. The Mutual Holding Company will elect all members of the Board of
Directors of the Company, and as a general matter, will control the outcome of
all matters presented to the stockholders of the Company for resolution by vote,
except for matters that require a vote greater than a majority. The Mutual
Holding Company, acting through its Board of Directors, will be able to control
the business and operations of the Company and the Bank and will be able to
prevent any challenge to the ownership or control of the Company by stockholders
other than the Mutual Holding Company ("Minority Stockholders"). Although OTS
regulations and the Plan of Reorganization permit the Mutual Holding Company to
convert from the mutual to the capital stock form of organization, there can be
no assurance when, if ever, a conversion of the Mutual Holding Company will
occur.
Provisions in the Company's and the Bank's Governing Instruments. In
addition, certain provisions of the Company's charter and bylaws, particularly a
provision limiting voting rights, as well as certain federal regulations, assist
the Company in maintaining its status as an independent publicly owned
corporation. These provisions provide for, among other things, supermajority
voting, staggered boards of directors, noncumulative voting for directors,
limits on the calling of special meetings of shareholders, and limits on the
ability to vote common stock in excess of 5% of outstanding shares (except as to
shares held by the Mutual Holding Company and the ESOP).
10
<PAGE>
Effect on Stockholders of Any Waiver of Dividends by the Mutual Holding Company
It has been the policy of many mutual holding companies to waive the
receipt of dividends declared by their subsidiaries. OTS regulations require
that mutual holding companies request OTS approval before they waive dividends.
The OTS has generally permitted mutual holding companies to waive dividends
under certain conditions. Management believes that one of the conditions to such
permission would be that in the event the Mutual Holding Company converts to
stock form in the future, any waived dividends would reduce the percentage of
the resulting entity's shares of common stock issued to Minority Stockholders in
exchange for their shares of common stock. The Plan of Reorganization also
provides for such an adjustment. See "Regulation--Holding Company Regulation--
Conversion of the Mutual Holding Company to Stock Form."
The Mutual Holding Company has not determined whether it will waive
dividends declared by the Company. There is no assurance that the Mutual Holding
Company will not waive the receipt of cash dividends, or that the OTS would
approve the waiver of dividends should the Mutual Holding Company request it to
do so.
Possible Dilutive Effect of Issuance of Additional Shares
Various possible and planned issuances of common stock could dilute the
interests of prospective stockholders of the Company following consummation of
the Reorganization, as noted below.
The number of shares to be sold in the Reorganization may be increased as a
result of an increase in the Estimated Valuation Range of up to 15% to reflect
changes in the market and financial conditions and demand for the stock
following the commencement of the Offering. In the event that the Estimated
Valuation Range is so increased, it is expected that the Company will issue up
to 4,496,500 shares of common stock. An increase in the number of shares will
decrease net income per share and stockholders' equity per share on a pro forma
basis and will increase the Company's consolidated stockholders' equity and net
income. See "Capitalization" and "Pro Forma Data."
The recognition and retention plan that the Bank intends to implement no
earlier than six months after the Reorganization (the "Recognition Plan")
intends to acquire an amount of common stock equal to 4.0% of the shares of
common stock issued in the Offering. Such shares of common stock may be acquired
in the open market with funds provided by the Company, if permissible, or from
authorized but unissued shares of common stock. See "Pro Forma Data" and
"Management the Bank--Recognition and Retention Plan."
The Company's stock option plan will reserve for future issuance pursuant
to such plan a number of shares of common stock equal to an aggregate of 10% of
the common stock sold in the Offering (159,800 shares, based on the midpoint of
the Offering Range). See "Pro Forma Data" and "Management of the Bank--Stock
Option Plan."
Potential Increased Compensation Expenses after the Reorganization
Management believes that the Bank's salaries and benefits expense is likely
to increase following the Reorganization due to the ESOP, and the Recognition
Plan that the Bank intends to implement no earlier than six months after the
conclusion of the Reorganization. Generally accepted accounting principles will
require the Company to record compensation expense upon the vesting of shares of
restricted stock awarded pursuant to the Recognition Plan and upon the
commitment to release shares under the ESOP. In addition, generally accepted
accounting principles will require the Company to record compensation expense in
an amount equal to the fair value of the shares committed to be released to
employees from the ESOP. Accordingly, future increases and decreases in fair
value of common stock committed to be released will have a corresponding effect
on compensation expense related to the ESOP. To the extent that the fair value
of the Bank's ESOP shares differ from the cost of such shares, the differential
will be charged or credited to equity.
11
<PAGE>
Strong Competition Within the Bank's Market Area
Competition in the banking and financial services industry is intense. In
our market area, we compete with commercial banks, savings institutions,
mortgage brokerage firms, credit unions, finance companies, mutual funds,
insurance companies, and brokerage and investment banking firms operating
locally and elsewhere. Many of these competitors have substantially greater
resources and lending limits than the Bank and may offer certain services that
we do not or cannot provide. Our profitability depends upon our continued
ability to successfully compete in our market area.
Regulatory Oversight and Legislation
The Bank and the Company are subject to extensive regulation, supervision
and examination by the OTS (our chartering authority), and by the FDIC as
insurer of deposits up to applicable limits. We are also a member of the Federal
Home Loan Bank System and are subject to certain limited regulations promulgated
by the Federal Home Loan Bank. Such regulation and supervision are intended
primarily for the protection of the insurance fund and depositors. Regulatory
authorities have extensive discretion in connection with their supervisory and
enforcement activities which are intended to strengthen the financial condition
of the banking and thrift industries, including the imposition of restrictions
on the operation of an institution, the classification of assets by the
institution and the adequacy of an institution's allowance for loan losses. Any
change in such regulation and oversight whether in the form of regulatory
policy, regulations, or legislation, could have a material impact on the Bank,
the Company, and our operations. See "Regulation."
Uncertainty as to Future Growth Opportunities
In an effort to fully deploy the capital we raise in the Offering, and to
increase our loan and deposit growth, we may seek to expand our banking
franchise by acquiring other financial institutions or branches primarily in our
primary market area. Our ability to grow through selective acquisitions of other
financial institutions or branches of such institutions will depend on
successfully identifying, acquiring and integrating such institutions or
branches. We cannot assure prospective purchasers of common stock that we will
be able to generate internal growth or identify attractive acquisition
candidates, make acquisitions on favorable terms or successfully integrate any
acquired institutions or branches into the Company. We currently have no
specific plans, arrangements or understandings regarding any such expansions or
acquisitions, nor have we established criteria to identify potential candidates
for acquisition.
Absence of Market for Common Stock
The Company is a newly organized company which has never issued capital
stock. Consequently, there is no current market for its common stock. The
Company has received conditional approval to have its common stock quoted on the
Nasdaq National Market System under the symbol "______." If the Company is
unable, for any reason, to list the Common Stock on the Nasdaq National Market,
or to continue to be eligible for such listing, then the Holding Company intends
to list the Common Stock on the Nasdaq SmallCap Market under the same symbol, or
on the American Stock Exchange under the symbol "_________," subject to the
applicable listing criteria for such markets. There can be no assurance that an
active and liquid trading market will develop. Trident Securities, Inc. has
indicated its intention to make a market in the common stock subject to
compliance with applicable provisions of federal and securities laws and other
regulatory requirements, and we anticipate that it will be able to secure at
least two additional market makers for the common stock. If you purchase shares,
you may not be able to sell them when you want to at a price that is equal to or
more than the price you paid.
12
<PAGE>
Irrevocability of Orders; Potential Delay in Completion of Offerings
Orders submitted in the Offering are irrevocable without consent from the
Bank. Funds submitted in connection with any purchase of common stock in the
Offering will be held by the Company until the completion or termination of the
Reorganization, including any extension of the expiration date. Because
completion of the Reorganization will be subject to an update of the Independent
Valuation, among other factors, there may be one or more delays in the
completion of the Reorganization. Subscribers will have no access to
subscription funds and/or shares of common stock until the Reorganization is
completed or terminated.
Capability of the Bank's Data Processing Software to Accommodate the Year 2000
Like many financial institutions the Bank relies upon computers for the
daily conduct of its business and for data processing generally. There is
concern among industry experts that commencing on January 1, 2000, computers
will be unable to "read" the new year and there may be widespread computer
malfunctions. Management has assessed the electronic systems, programs,
applications and other electronic components used in the operations of the Bank,
and believes that the Bank's hardware and software has been programmed to be
able to accurately recognize the year 2000, and that significant additional
costs will not be incurred in connection with the year 2000 issue, although
there can be no assurances in this regard.
Regulatory Oversight and Legislation
The Bank is subject to extensive regulation, supervision and examination by
the OTS, as its chartering authority, and by the FDIC as insurer of its deposits
up to applicable limits. The Bank is a member of the FHLB System and is subject
to certain limited regulations promulgated by the FRB. As the holding company of
the Bank, the Company also will be subject to regulation and oversight by the
OTS. Such regulation and supervision govern the activities in which an
institution can engage and are intended primarily for the protection of the
insurance fund and depositors. Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities which are intended to strengthen the financial condition of the
banking and thrift industries, including the imposition of restrictions on the
operation of an institution, the classification of assets by the institution and
the adequacy of an institution's allowance for loan losses. Any change in such
regulation and oversight, whether by the OTS, the FDIC or Congress, could have a
material impact on the Company, the Bank and their respective operations. See
"Regulation."
On September 30, 1996, the Deposit Insurance Funds ("DIF") Act of 1996 was
enacted into law. The DIF Act contemplates the development of a common charter
for all federally chartered depository institutions and the abolition of
separate charters for national banks and federal savings associations. It is not
known what form the common charter may take and what effect, if any, the
adoption of a new charter would have on the financial condition or results of
operations of the Bank. See "Regulation--Federal Regulation of Savings
Institutions."
Legislation is proposed periodically providing for a comprehensive reform
of the banking and thrift industries, and has included provisions that would (i)
require federal savings associations to convert to a national bank or a state-
chartered bank or thrift, (ii) require all savings and loan holding companies to
become bank holding companies and (iii) abolish the OTS. It is uncertain when or
if any of this type of legislation will be passed, and, if passed, in what form
the legislation would be passed. As a result, management cannot accurately
predict the possible impact of such legislation on the Bank.
GASTON FEDERAL HOLDINGS, MHC
The Mutual Holding Company will be formed as a federal mutual holding
company and will initially own 53% of the Company's common stock. The Company
has not yet been formed, although the OTS has approved an application for the
Mutual Holding Company to become a savings and loan holding company. The Mutual
Holding
13
<PAGE>
Company will have all of the powers set forth in its Federal charter and Federal
law and OTS regulations. The Company initially will not conduct any active
business and does not intend to employ any persons other than its officers,
although it may utilize the Bank's support staff from time to time. Although
many federal mutual holding companies waive the receipt of cash dividends
declared by their subsidiaries, the Mutual Holding Company has not determined
whether or not it will do so.
Federal law and OTS regulations, and the Plan of Reorganization, require
that as long as the Mutual Holding Company is in existence it must own a
majority of the Company's common stock. Federal law and OTS regulations, and the
Plan of Reorganization, permit the Mutual Holding Company to convert to the
capital stock form of organization (a "Conversion Transaction"). The manner in
which such a transaction would be conducted and the regulations and policy
affecting such a transaction are described in "Regulation--Holding Company
Regulation."
The Mutual Holding Company's executive office will located at the
administrative offices of the Bank, at 245 West Main Avenue, P.O. Box 2249,
Gastonia, North Carolina 28053-2249. Its telephone number will be (704) 868-
5200.
GASTON FEDERAL BANCORP, INC.
The Company will be formed as a federal corporation and will own 100% of
the Bank's common stock. The Company has not yet been formed, and, accordingly,
its financial statements are not included herein. The OTS has approved an
application for the Company to become a savings and loan holding company through
the acquisition of all of the capital stock of the Bank to be issued and
outstanding upon completion of the Reorganization. The Company will have all of
the powers set forth in its Federal charter and Federal law and OTS regulations.
The Company will retain up to 50% of the net proceeds of the offering. Part
of the net proceeds will be used to fund a loan to the Bank's ESOP which is
expected to purchase up to 8% of the common stock sold in the Offering. The
remainder of the net proceeds will be used for general corporate purposes. The
holding company structure will provide the Company with greater flexibility than
is currently available to the Bank to diversify its business activities, either
through newly-formed subsidiaries or through acquisitions. The business
activities of the Company will be subject to the same restrictions under federal
law as the Mutual Holding Company. The Company has no present plans regarding
diversification, acquisitions or expansion. The Company initially will not
conduct any active business and does not intend to employ any persons other than
its officers, although it may utilize the Bank's support staff from time to
time.
The Company's executive office will be located at the administrative
offices of the Bank, at 245 West Main Avenue, P.O. Box 2249, Gastonia, North
Carolina 28053-2249. Its telephone number will be (704) 868-5200.
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
The Bank was organized in 1904 as a state chartered building and loan
association. The Bank's deposits are insured by the Savings Association
Insurance Fund, as administered by the FDIC, up to the maximum amount permitted
by law. The Bank is a community-oriented savings association engaged primarily
in the business of accepting deposits from customers through its branch offices
and investing those deposits, together with funds generated from operations and
borrowings, in one- to four-family residential, multi-family residential and
commercial real estate loans, commercial business loans, construction loans and
consumer loans, and investment and mortgage-backed securities. At September 30,
1997, the Bank had total assets of $173.5 million, total deposits of $145.4
million and total equity of $20.9 million. The Bank's business is described in
more detail in "Business of the Bank."
The Bank's executive office is located at 245 West Main Avenue, Gastonia,
North Carolina 28053-2249. The Bank's telephone number is (704) 868-5200.
14
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At September 30, 1997, the Bank exceeded each of its regulatory capital
requirements. Set forth below is a summary of the Bank's compliance with the OTS
capital standards as of September 30, 1997, on an historical and pro forma basis
assuming that the indicated number of shares were sold as of such date and
receipt by the Bank of 50% of the net proceeds. For purposes of the table below,
the amount expected to be borrowed by the ESOP and the cost of its shares
expected to be acquired by the Recognition Plan are deducted from pro forma
regulatory capital. See "Management of the Bank."
<TABLE>
<CAPTION>
Pro Forma at September 30, 1997, Based Upon the Sale of
---------------------------------------------------------------------------------------------------
1,358,300 Shares 1,598,000 Shares 1,837,700 Shares 2,113,355 Shares(1)
Historical at at Minimum of at Midpoint of at Maximum of at Adjusted Maximum
September 30, 1997 Offering Range Offering Range Offering Rage of Offering Range
------------------ ------------------ ------------------ ------------------ -------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(s) Amount Assets(2)
------- --------- ------- --------- ------- --------- ------- --------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital.............. $20,868 12.03% $31,999 17.32% $34,061 18.24% $36,122 19.13% $38,493 20.13%
Tangible capital:
Tangible capital (3)..... 20,868 12.03% 31,999 17.32% 34,061 18.24% 36,122 19.13% 38,493 20.13%
Requirement.............. 2,590 1.50 2,758 1.50 2,789 1.50 2,820 1.50 2,856 1.50
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess.................. $18,278 10.53% $29,241 15.82% $31,272 16.74% $33,302 17.63% $35,637 18.63%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Core capital:
Core capital (3)......... 19,790 11.46% 31,021 16.80% 33,083 17.71% 35,144 18.61% 37,515 19.62%
Requirement (4).......... 5,179 3.00 5,516 3.00 5,578 3.00 5,640 3.00 5,711 3.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess.................. $14,611 8.46% $25,505 13.80% $27,505 14.71% $29,504 15.61% $31,804 16.62%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Risk-based capital:
Risk-based capital (3)(5) 20,900 21.52% 32,131 32.33% 34,193 34.26% 36,254 36.18% 38.625 38.36%
Requirement.............. 7,771 8.00 7.951 8.00 7,984 8.00 8,017 8.00 8,054 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess.................. $13,129 13.52% $24,181 24.33% $26,209 26.26% $28,238 28.18% $30,570 30.36%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
___________________________
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Offering Range of up to 15% as a
result of regulatory considerations, demand for the shares, or changes in
market conditions or general financial and economic conditions following
the commencement of the Offering.
(2) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as a percentage of total adjusted assets. Risk-
based capital levels are shown as a percentage of risk-weighted assets.
(3) Pro forma capital levels assume that the Bank funds the Recognition Plan
purchases of a number of shares equal to 4% of the common stock sold in the
Offering, the ESOP purchases 8% of the shares sold in the Offering, and the
Mutual Holding Company is capitalized with $100,000. See "Management of
the Bank" for a discussion of the Recognition Plan and ESOP.
(4) The current core capital requirement for savings associations is 3% of
total adjusted assets. The OTS 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 4% to 5% core capital ratio requirement for all other
thrifts. See "Regulation--Federal Regulation of Savings Institutions--
Capital Requirements."
(5) Assumes net proceeds are invested in assets that carry a risk-weighting
equal to the average risk weighting of the Bank's risk weighted assets as
of September 30, 1997.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the common stock cannot
be determined until the Offering is completed, it is presently anticipated,
based on the assumptions set forth in "Pro Forma Data" that the net proceeds
from the sale of the common stock will be as set forth in the following table.
15
<PAGE>
<TABLE>
<CAPTION>
Net Offering Proceeds
Based upon the Sale for $10.00 per share of
---------------------------------------------
<S> <C> <C> <C> <C>
1,358,300 1,598,000 1,837,700 2,113,355
Shares Shares Shares Shares
--------- --------- --------- ---------
(Dollars in Thousands)
Gross proceeds.............. $ 13,583 $ 15,980 $ 18,377 $ 21,134
Expenses.................... (722) (770) (818) (873)
--------- --------- --------- ---------
Estimated net proceeds...... $ 12,861 $ 15,210 $ 17,559 $ 20,261
========= ========= ========= =========
</TABLE>
The Company will contribute 50% of the net proceeds of the Offering to the
Bank. Such portion of net proceeds received by the Bank from the Company will be
added to the Bank's general funds which the Bank currently intends to utilize
for general corporate purposes, including investments in short- and medium-term
investments. The Bank also intends to utilize funds to increase its origination
of mortgage, consumer and commercial business loans. The Bank may also use such
funds for the expansion of its retail banking franchise, and to expand
operations through acquisitions of other financial institutions, branch offices
or other financial services companies. To the extent that the stock-based
benefit programs which the Company intends to adopt subsequent to the Offering
are not funded with authorized but unissued shares of common stock of the
Company, the Company or Bank may use net proceeds from the Offering to fund the
purchase of stock to be awarded under such stock benefit programs. See "Risk
Factors--Possible Dilutive Effect of Issuance of Additional Shares" and
"Management of the Bank--Stock Option Plan" and "--Recognition and Retention
Plan."
The Company intends to use a portion of the net proceeds it retains to make
a loan directly to the ESOP to enable the ESOP to purchase 8% of the shares sold
in the Offering. See "Management of the Bank--Employee Stock Ownership Plan and
Trust." The remaining net proceeds retained by the Company will initially be
invested in short-and medium-term investments.
The net proceeds retained by the Company may also be used to support the
future expansion of operations through branch acquisitions, the establishment of
branch offices and the acquisition of financial institutions or their assets, or
diversification into other banking related businesses. However, the Company and
the Bank have no current arrangements, understandings or agreements regarding
any such transactions. Upon completion of the Reorganization, the Company will
be regulated as a multiple savings and loan holding company, and will be
permitted to engage only in those activities that are permissible for multiple
savings and loan holding companies under the HOLA and regulations of the OTS.
See "Regulation--Holding Company Regulation."
Upon completion of the Reorganization, the Board of Directors of the
Company will have the authority to repurchase stock, subject to statutory and
regulatory requirements. Based upon facts and circumstances following the
Reorganization and subject to applicable regulatory requirements, the Board of
Directors may determine to repurchase stock in the future. Such facts and
circumstances may include but not be limited to (i) market and economic factors
such as the price at which the 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, and the opportunity to
improve the Company's return on equity; (ii) the avoidance of dilution to
stockholders by not having to issue additional shares to cover the exercise of
stock options or to fund employee stock benefit plans; and (iii) any other
circumstances in which repurchases would be in the best interests of the Company
and its shareholders. In the event the Company determines to repurchases stock,
such repurchases may be made at market prices which may be in excess of the
Subscription Price in the Offering. To the extent that the Company 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 stockholders.
DIVIDEND POLICY
Upon completion of the Offering, the Board of Directors of the Company will
have the authority to declare dividends on the common stock, subject to
statutory and regulatory requirements. The Company intends to pay an
16
<PAGE>
annual cash dividend of $.20, payable quarterly at $.05 per share. The payment
of dividends is expected to begin following the first full quarter after the
completion of the Reorganization.
Dividends will be subject to determination and declaration by the Board of
Directors in its discretion, which will take into account the Company's
consolidated financial condition and results of operations, tax considerations,
industry standards, economic conditions, capital levels, regulatory restrictions
on dividend payments by the Bank to the Company, general business practices and
other factors. The Company will not be subject to OTS regulatory restrictions on
the payment of dividends although the source of such dividends depend in part
upon the receipt of dividends from the Bank. The Bank must provide the OTS with
30 days prior notice of its intention to make a capital distribution to the
Company. OTS regulations in certain circumstances limit the amount of any
capital distribution by federal savings associations. In addition, the portion
of the Bank's earnings which has been appropriated for bad debt reserves and
deducted for federal income tax purposes cannot be used by the Bank to pay cash
dividends to the Company without the payment of federal income taxes by the Bank
at the then current income tax rate on the amount deemed distributed, which
would include the amount of any federal income taxes attributable to the
distribution. The Company does not contemplate any distribution by the Bank that
would result in a recapture of the Bank's bad debt reserve or otherwise create
federal tax liabilities. See "Federal and State Taxation--Federal Taxation" and
Note 7 to the Consolidated Financial Statements, and "Regulation--Federal
Regulation of Savings Institutions--Limitations on Capital Distributions."
Additionally, in connection with the Reorganization, the Company and Bank
have committed to the OTS that during the one-year period following the
consummation of the Reorganization, the Company will not declare an
extraordinary dividend to stockholders which would be treated by recipient
stockholders as a tax-free return of capital for federal income tax purposes
without prior approval of the OTS.
MARKET FOR COMMON STOCK
The Company was recently formed and has never issued capital stock. The
Bank, as a mutual institution, has never issued capital stock. The Company has
received conditional approval to have its common stock quoted on the Nasdaq
National Market under the symbol "_______" subject to the completion of the
Offering and compliance with certain conditions including a minimum market
capitalization, and the presence of at least three market makers and a minimum
number of record holders. Trident Securities has indicated its intention to make
a market in the common stock and assist in obtaining at least two additional
market makers to make a market in the Company's common stock. If the Company is
unable, for any reason, to list the Common Stock on the Nasdaq National Market,
or to continue to be eligible for such listing, then the Holding Company intends
to list the Common Stock on the Nasdaq SmallCap Market under the same symbol, or
on the American Stock Exchange under the symbol "_________," subject to the
applicable listing criteria for such markets.
The existence of a public trading market will depend upon the presence in
the market of both willing buyers and willing sellers at any given time. The
presence of a sufficient number of buyers and sellers at any given time is a
factor over which neither the Company nor any broker or dealer has control. The
absence of an active and liquid trading market may make it difficult to sell the
common stock and may have an adverse effect on the price of the common stock.
Purchasers should consider the potentially illiquid and long-term nature of
their investment in the common stock.
17
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
September 30, 1997, and the pro forma consolidated capitalization of the Company
after giving effect to the Offering, based upon the sale of the number of shares
indicated in the table and the other assumptions set forth under "Pro Forma
Data."
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization
Based Upon the Sale for $10.00 Per Share of
-----------------------------------------------------------------
2,113,355
1,358,300 1,598,000 1,837,700 Shares at
Shares at Shares at Shares at Adjusted
Minimum of Midpoint of Maximum Maximum of
Historical Offering Offering Offering Offering
Capitalization Range Range Range Range (1)
-------------- ----------- ----------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Deposits (2)......................................... $ 145,444 $ 145,444 $ 145,444 $ 145,444 $ 145,444
FHLB advances........................................ 3,500 3,500 3,500 3,500 3,500
---------- ---------- ----------- --------- ----------
Total deposits and borrowed funds.................... $ 148,944 $ 148,944 $148,944 $ 148,944 $ 148,944
========== ========== =========== ========= ==========
Stockholders' equity:
Preferred Stock, $1.00 par value, 1,000,000 shares
authorized; none to be issued (3)............... $ -- $ -- $ -- $ -- $ --
Common stock, $1.00 par value per share:
10,000,000 shares authorized; shares to be issued
as reflected.................................... -- 2,890 3,400 3,910 4,497
Additional paid-in capital (3)..................... -- 9,971 11,810 13,650 15,764
Retained earnings (4).............................. 20,768 20,768 20,768 20,768 20,768
Less:
Common Stock acquired by ESOP (5)............... -- (1,087) (1,278) (1,470) (1,691)
Common Stock acquired by
Recognition Plan (6)....................... -- (543) (639) (735) (845)
---------- ---------- ----------- --------- ----------
Total stockholders' equity................. $ 20,768 $ 31,999 $ 34,061 $ 36,122 $ 38,493
========== ========== ======== ========= ==========
Total stockholders' equity as a percentage of
pro forma total assets............................. 12.0% 17.3% 18.2% 19.1% 20.1%
========== ========== ======== ========= ==========
</TABLE>
- ----------------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Estimated Valuation Range to
reflect changes in market or general financial conditions following the
commencement of the Offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the Offering. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Reflects the sale of shares in the Offering. Does not include proceeds from
the Offering that the Company intends to lend to the ESOP to enable it to
purchase shares of common stock in the Offering. No effect has been given
to the issuance of additional shares of common stock pursuant to the stock
option plan that the Company expects to adopt. If such plan is approved by
stockholders, an amount equal to 10% of the shares of common stock issued
in the Offering will be reserved for issuance upon the exercise of options.
See "Management of the Bank."
(4) The retained earnings of the Bank will be substantially restricted after
the Reorganization. See "Dividend Policy" and "Regulation--Federal
Regulation of Savings Institutions--Limitations on Capital Distributions."
(5) Assumes that 8% of the shares sold in the Offering will be purchased by the
ESOP and that the funds used to acquire the ESOP shares will be borrowed
from the Company. The common stock acquired by the ESOP is reflected as a
reduction of stockholders' equity. See "Management of the Bank--Employee
Stock Ownership Plan and Trust."
(6) Assumes that, subsequent to the Offering, an amount equal to 4% of the
shares of common stock sold in the Offering is purchased by the Recognition
Plan through open market purchases. The common stock to be purchased by the
Recognition Plan is reflected as a reduction of stockholders' equity. See
"Risk Factors--Dilutive Effect of Issuance of Additional Shares," "Pro
Forma Data" and "Management of the Bank."
18
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the Offering is completed. The following estimated pro forma
information is based upon the following assumptions: (i) 300,000 shares of
common stock will be purchased by employees and directors of the Bank and
Company, the ESOP will purchase 8% of the common stock sold in the Offering, and
the remaining shares will be sold in the Subscription and/or Community Offering;
(ii) Trident Securities will receive a fee equal to 2.0% of the aggregate
Subscription Price of shares sold to persons other than employees, directors and
the ESOP; (iii) Reorganization expenses, excluding the fees payable to Trident
Securities, will be approximately $450,000; and (v) the Mutual Holding Company
will be capitalized with $100,000. Actual expenses may vary from those
estimated.
Pro forma consolidated net income of the Company for the year ended
September 30, 1997 has been calculated as if the common stock had been sold at
the beginning of the period and the net proceeds had been invested at 5.44% (the
one year U.S. Treasury bill rate as of September 30, 1997). The tables do not
reflect the effect of withdrawals from deposit accounts for the purchase of
common stock. The pro forma after-tax yield for the Company and the Bank is
assumed to be 3.48% for the fiscal year ended September 30, 1997 (based on an
assumed tax rate of 36%). Historical and pro forma per share amounts have been
calculated by dividing historical and pro forma amounts by the indicated number
of shares of common stock, as adjusted to give effect to the purchase of shares
by the ESOP. No effect has been given in the pro forma stockholders' equity
calculations for the assumed earnings on the net proceeds. As discussed under
"Use of Proceeds," the Company will retain 50% of the net proceeds from the
Offering.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the common stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation.
19
<PAGE>
The following tables summarize historical data of the Bank and pro forma
data of the Company at or for the fiscal year ended September 30, 1997, based on
the assumptions set forth above and in the table and should not be used as a
basis for projections of market value of the common stock following the
Offering. The tables below give effect to the Recognition Plan, which is
expected to be adopted by the Company following the Offering and presented to
stockholders for approval. See"Management of the Bank--Recognition and Retention
Plan." No effect has been given in the tables to the possible issuance of
additional shares reserved for future issuance pursuant to the stock option plan
to be adopted by the Board of Directors of the Company and presented to
stockholders for approval, nor does stockholders' equity as presented give any
effect to the tax effect of the bad debt reserve and other factors.
See "Management of the Bank--Stock Option Plan."
<TABLE>
<CAPTION>
At or For the Fiscal Year Ended September 30, 1997
Based upon the Sale for $10.00 per share of
----------------------------------------------------
1,358,300 1,598,000 1,837,700 2,113,355
Shares Shares Shares Shares (1)
--------- --------- --------- ----------
(Dollars and Number of Shares in Thousands)
<S> <C> <C> <C> <C>
Gross proceeds............................................................... $ 13,583 $ 15,980 $ 18,377 $ 21,134
Expenses..................................................................... (722) (770) (818) (873)
--------- --------- --------- ---------
Estimated net proceeds..................................................... 12,861 15,210 17,559 20,261
Common Stock purchased by ESOP (2)......................................... (1,087) (1,278) (1,470) (1,690)
Common Stock purchased by Recognition Plan (3)............................. (543) (639) (735) (845)
--------- --------- --------- ---------
Estimated net proceeds................................................... $ 11,231 $ 13,293 $ 15,354 $ 17,725
========= ========= ========= =========
For the fiscal year ended September 30, 1997:
Net income:
Historical................................................................. $ 1,432 $ 1,432 $ 1,432 $ 1,432
Pro forma adjustments:
Income on net proceeds..................................................... 391 463 534 617
ESOP (2)................................................................... (70) (82) (94) (108)
Recognition Plan (3)....................................................... (70) (82) (94) (108)
--------- --------- --------- ---------
Pro forma net income..................................................... $ 1,683 $ 1,731 $ 1,778 $ 1,833
========= ========= ========= =========
Net income per share:
Historical................................................................. $ 0.51 $ 0.44 $ 0.38 $ 0.33
Pro forma adjustments:
Income on net proceeds..................................................... 0.14 0.14 0.14 0.14
ESOP (2)................................................................... (0.02) (0.02) (0.02) (0.02)
Recognition Plan (3)....................................................... (0.02) (0.02) (0.02) (0.02)
--------- --------- --------- ---------
Pro forma net income per share (2)(3)(4)................................. $ 0.61 $ 0.53 $ 0.48 $ 0.43
========= ========= ========= =========
Price to pro forma earnings.................................................. 16.95x 19.18x 20.75x 23.12x
========= ========= ========= =========
"Fully converted" price to earnings (5)...................................... 13.11x 14.63x 16.00x 17.42x
========= ========= ========= =========
At September 30, 1997:
Stockholders' equity:
Historical................................................................. $ 20,768 $ 20,768 $ 20,768 $ 20,768
Estimated net proceeds..................................................... 12,861 15,210 17,559 20,261
Less: Common Stock acquired by ESOP (2).................................... (1,087) (1,278) (1,470) (1,691)
Common Stock acquired by Recognition Plan (3)........................ (543) (639) (735) (845)
--------- --------- --------- ---------
Pro forma stockholders' equity (6)......................................... 31,999 34,061 36,122 38,493
--------- --------- --------- ---------
Pro form tangible stockholders' equity..................................... $ 31,999 $ 34,061 $ 36,122 $ 38,493
========= ========= ========= =========
Stockholders' equity per share:
Historical................................................................. $ 7.19 $ 6.11 $ 5.31 $ 4.62
Estimated net proceeds..................................................... 4.45 4.47 4.49 4.51
Less: Common stock acquired by ESOP (2).................................... (0.38) (0.38) (0.38) (0.38)
Common stock acquired by Recognition Plan (3)........................ (0.19) (0.19) (0.19) (0.19)
Pro forma stockholders' equity per share (6)............................... 11.07 10.02 9.24 8.56
--------- --------- --------- ---------
Pro forma tangible stockholders' equity per share (3)(4)................... $ 11.07 $ 10.02 $ 9.24 $ 8.56
========= ========= ========= =========
Offering price as a percentage of pro forma stockholders'
equity per share........................................................... 90.31% 99.82% 108.24% 116.81%
========= ========= ========= =========
"Fully converted" offering price as percentage of pro forma
stockholders' equity per share (5)......................................... 64.12% 68.75% 72.62% 76.36%
========= ========= ========= =========
</TABLE>
(Footnotes begin on next page)
20
<PAGE>
- ------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Estimated Valuation Range to
reflect changes in market or general financial conditions following the
commencement of the Offering.
(2) It is assumed that 8% of the shares sold in the Offering will be purchased
by the ESOP. For purposes of this table, the funds used to acquire such
shares are assumed to have been borrowed by the ESOP from the Company. The
amount to be borrowed is reflected as a reduction of stockholders' equity.
The Bank intends to make annual contributions to the ESOP in an amount at
least equal to the principal and interest requirement of the debt. The
Bank's total annual payment of the ESOP debt is based upon ten equal annual
installments of principal, with an assumed interest rate of 8.5%. The pro
forma net earnings information makes the following assumptions: (i) the
Bank's contribution to the ESOP is equivalent to the debt service
requirement for a full year and was made at the end of the period; (ii)
10,866, 12,784, 14,696 and 16,907 shares at the minimum, midpoint, maximum
and adjusted maximum of the Offering Range, respectively, were committed to
be released during the year ended September 30, 1997, at an average fair
value of $10.00 per share in accordance with Statement of Position ("SOP")
93-6; and (iii) only the ESOP shares committed to be released were
considered outstanding for purposes of the net earnings per share
calculations. See "Management of the Bank--Employee Stock Ownership Plan
and Trust."
(3) Gives effect to the Recognition Plan expected to be adopted by the Company
following the Offering. This plan intends to acquire a number of shares of
common stock equal to 4% of the shares sold in the Offering, or 54,332,
63,920, 73,508, and 84,534 shares of common stock at the minimum, midpoint,
maximum and adjusted maximum of the Offering Range, respectively, either
through open market purchases, if permissible, or from authorized but
unissued shares of common stock or treasury stock of the Company, if any.
Funds used by the Recognition Plan to purchase the shares will be
contributed to the plan by the Bank. In calculating the pro forma effect of
the Recognition Plan, it is assumed that the shares were acquired by the
plan in open market purchases at the beginning of the period presented for
a purchase price equal to the Subscription Price, and that 20% of the
amount contributed was an amortized expense during the period. The issuance
of authorized but unissued shares of the Company's common stock to the
Recognition Plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 4% and pro forma net
earnings per share would be $0.62, $0.54, $0.49 and $0.44 at the minimum,
midpoint, maximum and adjusted maximum of the Offering Range, respectively,
and pro forma stockholders' equity per share would be $11.02, $10.00, $9.25
and $8.60 at the minimum, midpoint, maximum and adjusted maximum of the
Offering Range, respectively. There can be no assurance that the actual
purchase price of the shares granted under the Recognition Plan will be
equal to the Subscription Price. See "Management of the Bank--Recognition
and Retention Plan."
(4) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plan expected to be adopted by the
Company following the Offering. Under the stock option plan, an amount
equal to 10% of the common stock sold in the Offering, or 135,830, 159,800,
183,770 and 211,335 shares at the minimum, midpoint, maximum and adjusted
maximum of the Offering Range, respectively, will be reserved for future
issuance upon the exercise of options to be granted under the stock option
plan. The issuance of common stock pursuant to the exercise of options
under the stock option plan will result in the dilution of existing
stockholders' interests. Assuming all options were exercised at the end of
the period at an exercise price equal to the Subscription Price, at the
minimum, midpoint, maximum and adjusted maximum of the Offering Range the
pro forma net earnings per share would be $0.56, $0.49, $0.44 and $0.40,
respectively, and the pro forma stockholders' equity per share would be
$10.46, $9.50, $8.79 and $8.17, respectively. See "Management of the Bank--
Stock Option Plan."
(5) This information is presented for comparative purposes only, and makes the
following assumptions: (i) all shares issued by the Company are sold in the
Offering for the Subscription Price (and no shares are issued to the Mutual
Holding Company), (ii) assumptions regarding the ESOP, Recognition Plan,
marketing agent fee and rate at which net proceeds are reinvested apply to
all of the shares assumed to be sold in the Offering, (iii) shares are
committed to be released by the ESOP in the same proportion as set forth
above.
(6) The retained earnings of the Bank will continue to be substantially
restricted after the Offering. See "Dividend Policy" and "Regulation--
Federal Regulation of Savings Institutions."
21
<PAGE>
PARTICIPATION BY MANAGEMENT
The following table sets forth information regarding intended common stock
subscriptions by each of the Directors and executive officers of the Bank and
Directors of the Company who do not serve as directors of the Bank and their
families, and by all such Directors and executive officers as a group. In the
event the individual maximum purchase limitation is increased, persons
subscribing for the maximum amount may increase their purchase order. This table
excludes shares to be purchased by the ESOP, as well as any Recognition Plan
awards or stock option grants that may be made no earlier than six months after
the completion of the Reorganization. See "Management of the Bank--Recognition
and Retention Plan" and "--Stock Option Plan."
<TABLE>
<CAPTION>
Percent of
Aggregate Price Shares Issued
Position Total Shares of Shares in the
Name With the Bank Total Shares Aggregate Price Offering (1)
- --------------------- --------------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
B. Frank Matthews, II N/A (2) 20,000 $ 200,000 1.3%
Sen. David W. Hoyle Chairman 25,000 250,000 1.6
Ben R. Rudisill, III Vice Chairman 25,000 250,000 1.6
Robert W. Williams Vice Chairman 25,000 250,000 1.6
Martha B. Beal Director 25,000 250,000 1.6
James J. Fuller Director 10,000 100,000 *
William H. Keith Director 5,000 50,000 *
Charles D. Massey Director 25,000 250,000 1.6
Kim S. Price President, Chief 25,000 250,000 1.6
Executive Officer
Paul L. Teem, Jr. Executive Vice 25,000 250,000 1.6
President, Secretary,
Chief Operations Officer
Gary F. Hoskins Vice President, Treasurer 20,000 200,000 1.3
and Chief Financial Officer ------- ---------- ----
All directors and executive officers
as a group (11 persons) 230,000 $2,300,000 14.4%
======= ========== ====
</TABLE>
- ----------------
*Less than 1%.
(1) At the midpoint of the Offering Range.
(2) Mr. Matthews serves as a Director of the Company and does not serve as a
Director of the Bank.
22
<PAGE>
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of the Bank for the fiscal
years ended September 30, 1997 and 1996 have been audited by Cherry, Bekaert &
Holland, L.L.P., independent certified public accountants, whose report thereon
appears elsewhere in this Prospectus. These statements should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------
1997 1996
---------- --------
(In Thousands)
<S> <C> <C>
Interest income:
Loans........................................ $10,826 $10,218
Investment securities........................ 1,321 1,361
Mortgage-backed and related securities....... 789 939
------- -------
Total interest income....................... 12,936 12,518
Interest expense:
Deposits..................................... 6,805 7,293
Borrowed funds............................... 147 88
------- -------
Total interest expense...................... 6,952 7,381
------- -------
Net interest income......................... 5,984 5,137
Provision for loan losses..................... 293 47
------- -------
Net income after provision for loan losses.. 5,691 5,090
------- -------
Noninterest income:
Service charges on deposit accounts.......... 209 189
Gain on sale of securities................... 52 --
Other income................................. 255 228
------- -------
Total noninterest income.................... 516 417
------- -------
Noninterest expenses:
Salaries and benefits........................ 2,228 1,976
Occupancy expense............................ 465 500
Deposit insurance............................ 139 1,197
Computer expense............................. 139 164
Advertising.................................. 220 144
Professional services........................ 184 175
Other........................................ 581 490
------- --------
Total noninterest expense................... 3,956 4,646
------- --------
Income before income taxes.................... 2,251 861
Provision for income taxes.................... 819 351
------- --------
Net income.................................... $ 1,432 $ 510
======= ========
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company has only recently been formed and accordingly, has no results
of operations. The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the income earned on its loan
and securities portfolios and its cost of funds, consisting primarily of the
interest paid on deposits and borrowings. Results of operations are also
affected by the Bank's provision for loan losses, securities sales, and service
charges on its deposit accounts. The Bank's non-interest expense primarily
consists of salaries and employee benefits, occupancy expense, federal deposit
insurance premiums, advertising 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.
Operating Strategy
We have implemented several strategies designed to continue the
institution's profitability consistent with safety and soundness. These
strategies include: (i) emphasizing one- to four-family residential real estate
lending; (ii) growing our portfolio of high-yielding loans in a controlled, safe
and sound manner; (iii) maintaining asset quality as we implement our
strategies; and (iv) assembling a new management team with substantial banking
experience.
Emphasizing Traditional One- to Four-Family Residential Real Estate
Lending. Historically, the Bank has emphasized one- to four-family residential
lending within the Piedmont region of North Carolina. As of September 30, 1997,
approximately 76.5% of our total loan portfolio consisted of one- to four-family
residential real estate loans. During the fiscal year ended September 30, 1997,
we originated $12.6 million of one- to four-family residential real estate
loans, and our portfolio of such loans totaled $126.1 million. Although the
yields on these type of loans are often less than on other types of loans that
we originate, we intend to continue to emphasize this type of lending to
complement the strategies described below because our experience has shown these
loans to be high quality loans with relatively few delinquencies.
Complementing Our Traditional Lending by Growing our Portfolio of
High-Yielding Loans. To complement our traditional emphasis on one- to four-
family residential real estate lending, we intend to grow our portfolio of
higher-yielding loans in a controlled, safe and sound manner. As of September
30, 1997, our portfolio of construction and commercial and multifamily
residential real estate loans totaled $19.7 million, our portfolio of commercial
business loans totaled $5.6 million, and our portfolio of consumer loans totaled
$7.4 million. In the aggregate, $32.7 million, or 23.5%, of our total loan
portfolio consisted of these loans. Because the yields on these types of loans
are generally higher than the yields on one- to four-family residential real
estate loans, our goal over the next several years is to increase our portfolio
of these loans in a controlled, safe and sound manner. To accomplish the growth
that we desire in this area, we have hired, in addition to the persons
identified below, two additional commercial lenders and a branch manager with
substantial consumer loan experience. Although our experience has shown that we
are able to safely originate these loans, most industry experts believe them to
expose lenders to greater risk of loss than one- to four-family residential real
estate loans.
Maintaining Asset Quality as We Implement Our Lending Strategies. As of
September 30, 1997, we had $1.3 million of nonperforming assets, which
represented .75% of total assets, and we had $1.1 million of nonperforming
loans, which represented .79% of net loans. Our allowance for loan losses as of
September 30, 1997 was $1.1 million, or 63.4% of net loans and 104.8% of
nonperforming loans. During the fiscal years ended September 30, 1997 and 1996,
we charged-off loans totaling $13,000 and $3,000, respectively. Our goal is to
maintain our assets quality and gradually increase our reserves as we increase
our portfolio of higher yielding loans. To accomplish this objective we intend
to maintain strict underwriting standards. It also may be necessary to increase
our provision for loan losses, which will have an adverse effect on our net
income.
24
<PAGE>
Assembling a New Management Team. To accomplish the objectives described
above we have assembled a management team with substantial banking experience,
including a new president and chief executive officer, Kim S. Price, and a new
chief financial officer, Gary F. Hoskins. Over the past six years, Mr. Price has
overseen loan production at a national bank, and has substantial experience in
originating both real estate and non-real estate loans, which will complement
our traditional experience in real estate lending. The Board of Directors
believes that these new officers, along with the current executive officer, Paul
L. Teem, Jr. will enable the Bank to implement the strategies established by the
Bank.
Management of Interest Rate Risk
Generally. The principal objective of the Bank's interest rate risk
management is to evaluate the interest rate risk inherent in the Bank's assets
and liabilities, determine the level of risk appropriate given the Bank's
business strategy, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with the guidelines
approved by the Board of Directors. Through such management, the Bank seeks to
reduce the vulnerability of its operations to changes in interest rates. The
Bank's Asset/Liability Committee comprises the Bank's senior management under
the direction of the Board of Directors, with senior management responsible for
reviewing with the Board of Directors its activities and strategies, the effect
of those strategies on the Bank's net interest margin, the fair value of the
portfolio and the effect that changes in interest rates will have on the Bank's
portfolio and the Bank's exposure limits. See "Risk Factors--Potential Effects
of Changes in Interest Rates and the Current Interest Rate Environment."
In recent years, the Bank has utilized the following strategies to manage
interest rate risk: (1) emphasizing the origination and retention of one-to
four-family residential ARM loans and fixed-rate loans with maturities of 15
years or less, (2) emphasizing the origination and retention of commercial and
multi-family residential real estate loans and commercial business loans with
adjustable interest rates, and (3) emphasizing the origination of home equity
lines of credit that have adjustable interest rates and mature in 15 years or
less and other consumer loans that mature in five years or less, and (4)
investing in shorter term securities which generally bear lower yields as
compared to longer term investments, but which better position the Bank for
increases in market interest rates. Management recognizes that the long-term
effect of interest rate changes on the Bank's income can be substantial.
Accordingly, management has increased the attractiveness of its 10 to 15 year
mortgage loans with below-market rates. In addition, the Bank aggressively
markets shorter term non-mortgage loans and adjustable rate home equity lines of
credit.
Net Portfolio Value. In recent years, we have measured our interest rate
sensitivity by computing the "gap" between the assets and liabilities which were
expected to mature or reprice within certain time periods, based on assumptions
regarding loan prepayment and deposit decay rates formerly provided by the OTS.
However, the OTS now requires the computation of amounts by which the net
present value of an institution's cash flow from assets, liabilities and off
balance sheet items (the institution's net portfolio value or "NPV") would
change in the event of a range of assumed changes in market interest rates.
These computations estimate the effect on an institution's NPV from
instantaneous and permanent 1% to 4% (100 to 400 basis points) increases and
decreases in market interest rates. The following table presents our NPV at
September 30, 1997, as calculated by the OTS, which is based upon quarterly
information that we voluntarily provided to the OTS.
25
<PAGE>
<TABLE>
<CAPTION>
Percentage Change in Net Portfolio Value
------------------------------------------
Changes Board
in Market Projected Policy
Interest Rates Change (1) Limit (2)
-------------- ---------- ---------
(basis points)
<S> <C> <C>
+ 400 (52.00)% (65.00)%
+ 300 (38.00)% (45.00)%
+ 200 (24.00)% (30.00)%
+ 100 (12.00)% (15.00)%
0 0.00% 0.00%
(100) 7.00% (15.00)%
(200) 13.00% (30.00)%
(300) 16.00% (45.00)%
(400) 20.00% (65.00)%
- -------------------
</TABLE>
(1) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(2) Limits are established by our Board of Directors.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes in NPV requires the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV table presented assumes that the composition of the Bank's 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, although the NPV table provides an indication of the
Bank's interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Bank's net interest income and
will differ from actual results.
Comparison of Financial Condition at September 30, 1997 and 1996
Assets. Total assets for the fiscal year ended September 30, 1997,
increased by $1.5 million, or 0.9%, from $172.0 million to $173.5 million.
While the increase in total assets was moderate, there were significant changes
in the overall asset portfolio mix during the fiscal year. Cash and cash
equivalents increased by $2.4 million, or 109.1%, from $2.2 million to $4.6
million. Investments and mortgage-backed securities decreased by $4.5 million,
or 13.6%, from $33.2 million to $28.7 million. Also, total loans increased by
$3.7 million, or 2.8%, from $130.8 million to $134.5 million. This change in
asset mix was due, in part, to the declining interest rate environment which
resulted in higher loan demand, increased prepayments on mortgage-backed
securities, and increased calls on U.S. Government Agency callable securities.
Liabilities. Total liabilities for the fiscal year ended September 30,
1997, decreased by $300,000, or 2.0%, from $152.9 million to $152.6 million.
This slight decrease was primarily due to a $600,000 decrease in deposits from
$146.0 million to $145.4 million which resulted, in part, from the increased
competition in the Bank's local market area. Also during the period, Federal
Home Loan Bank advances decreased by $250,000 to $3.5 million.
Total Equity. Total equity for the fiscal year ended September 30, 1997,
increased by $1.9 million, or 8.2%, from $19.1 million to $20.9 million. The
increase in total equity was due to the transfer of $1.4 million in net income
to retained earnings and a $400,000 increase in the unrealized gain on
securities held as available for sale.
26
<PAGE>
Analysis of Results of Operations
Net Interest Income. Net interest income represents the difference between
income on interest-earning assets and expense on interest-bearing liabilities.
Net interest income also depends on the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid on
them, respectively. The following table sets forth certain information relating
to the Bank at September 30, 1997 and for the years ended September 30, 1997 and
1996. For the periods indicated the total dollar amount of interest income from
average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, is expressed both in
dollars and rates. No tax equivalent adjustments were made. All average
balances are monthly averages.
<TABLE>
<CAPTION>
For The Years Ended September 30,
----------------------------------------------------------------
At September 30, 1997 1997 1996
--------------------- -------------------------------- ----------------------------
Average Interest Average Interest
Outstanding Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Rate Balance Paid Rate Balance Paid Rate
----------- ------ ----------- -------- ------ ----------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1).................... $134,491 8.01% $132,529 $10,826 8.17% $126,503 $10,218 8.08%
Investment securities (2)............... 18,655 5.93 18,226 1,232 6.76 18,501 1,265 6.84
Interest-earning deposits............... 2,203 4.04 1,049 89 8.48 1,817 96 5.28
Mortgage-backed securities.............. 10,087 7.82 11,612 789 6.79 13,528 939 6.94
-------- ------- -------- ------- ------- -------- ------- ----
Total interest-earning assets............ 165,436 7.71 163,416 12,936 7.81 160,349 12,518 7.72
Non-interest-earning assets.............. 8,034 7,751 9,144
-------- -------- -------
Total assets............................. $173,470 $171,167 $169,493
======== ======== ========
Interest-bearing liabilities:
Demand deposits and money market
demand accounts....................... $ 28,929 2.32 $ 27,201 672 2.47 $ 25,773 685 2.66
Passbook savings........................ 14,197 2.73 14,037 387 2.76 13,695 394 2.88
Certificate of deposit.................. 102,318 5.62 105,119 5,746 5.47 107,196 6,215 5.80
Borrowed funds.......................... 3,500 4.20 2,309 147 6.37 1,403 88 6.27
-------- -------- -------- ------- -------- -------- ------- ----
Total interest-bearing liabilities....... 148,944 4.67% 148,666 6,952 4.68% 148,067 7,382 4.99
======== -------- ======== ------- ----
Non-interest-bearing liabilities......... 3,658 3,098 2,912
-------- --------
Total liabilities........................ 152,602 151,764 150,979
Total equity............................. 20,868 19,403 18,514
-------- -------- -------
Total liabilities and retained earnings.. $173,470 $171,167 $169,493
======== ======== ========
Net interest income...................... $ 5,809 $ 5,000
======== =======
Interest rate spread (2)................. 3.24% 2.82%
======= ========
Net yield on interest-earning assets (3). 3.66% 3.20%
======= ========
Ratio of average interest-earning assets
to interest-bearing liabilities......... 109.92% 108.29%
======== ========
- --------------------------
</TABLE>
(1) Average balances include nonaccrual loans.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
27
<PAGE>
The table below sets forth information regarding changes in our interest
income and interest expense for the periods indicated. For each category of our
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (changes in volume
multiplied by old rate); (ii) changes in rate (changes in rate multiplied by old
volume); (iii) changes in rate-volume (changes in rate multiplied by the change
in volume).
<TABLE>
<CAPTION>
For The Year Ended
September 30, 1996 vs September 30, 1997
Increase (Decrease)
Due to
----------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
<S> <C> <C> <C> <C>
(Dollars in thousands)
Interest Income:
Securities and other interest earning assets....... $ (70) $ 31 $(2) $ (40)
Mortgage-backed and related securities............. (133) (20) 3 (150)
Loan portfolio..................................... 487 116 6 608
----- ----- --- -----
Total interest-income........................... 284 127 7 418
----- ----- --- -----
Interest expense:
Deposits........................................... (15) (474) 1 (488)
Borrowed funds..................................... 57 1 1 59
----- ----- --- -----
Total interest-expense.......................... 42 (472) 1 (430)
----- ----- --- -----
Net interest income.................................... $ 242 $ 599 $ 6 $ 847
===== ===== === =====
</TABLE>
Comparison of Operating Results For the Fiscal Years Ended September 30, 1997
and 1996
General. The earnings of the Bank depend primarily on its level of net
interest income, which is the difference between interest earned on the Bank's
interest-earning assets, consisting primarily of real estate loans, commercial
business loans, consumer loans, investment securities and mortgage-backed
securities, and the interest paid on interest-bearing liabilities, consisting
primarily of deposits and borrowed funds. Net interest income is a function of
the Bank's interest rate spread, which is the difference between the average
yield earned on interest-earning assets and the average rate paid on interest-
bearing liabilities, as well as a function of the average balance of interest-
earning assets as compared to interest-bearing liabilities. The Bank's earnings
also are affected by its level of service charges and gains on sale of assets,
as well as its level of non-interest expenses, including salaries and benefits,
occupancy, deposit insurance, advertising, professional services and other non-
interest expenses.
Net Income. Net income for the fiscal year ended September 30, 1997
increased by $922,000, to $1.4 million for the fiscal year ended September 30,
1997 from $510,000 for the prior fiscal year. The increase was primarily due to
an $847,000 increase in net interest income, a $690,000 decrease in noninterest
expenses (primarily do to a special assessment to recapitalize the SAIF as
discussed below in "--Noninterest Expenses"), and a $99,000 increase in
noninterest income. The effects of these increases were partially offset by a
$246,000 increase in the provision for loan losses and a $468,000 increase in
the provision for income taxes. These changes are discussed below.
Interest Income. Interest income increased by $418,000, or 3.3%, to $12.9
million for the fiscal year ended September 30, 1997 from $12.5 million for the
prior fiscal year. The increase was due to a $608,000 increase in income from
loans, the effects of which were partially offset by a $40,000 decrease in
income from investment securities, a slight decrease in income from interest-
earning deposits, and a $150,000 decrease in income from mortgage-backed
securities. The increase in income from loans was attributable to a $6.0
million, or 4.8%, increase
28
<PAGE>
in the average balance of loans to $132.5 million from $126.5 million and an 9
basis point increase in the average yield on loans to 8.17% from 8.08%. The
increase in the Bank's average loan portfolio was attributable to $21.9 million
of loan originations resulting in increases in the Bank's portfolio of one- to
four-family residential and commercial real estate loans, commercial business
loans and home equity lines of credit. The Bank's strategy is to continue to
prudently grow its loan portfolio, although there can be no assurances that the
Bank will be able to do so. The increase in yield on loans receivable resulted,
in part, from a change in the composition of the Bank's loan portfolio from
lower yielding residential mortgage loans to higher yielding commercial loans
and nonmortgage loans. During the fiscal year, commercial mortgage loans
increased from $6.5 million to $7.3 million, or from 4.8% to 5.3% of the Bank's
total loan portfolio. Also, nonmortgage loans increased from $11.6 million to
$13.0 million, or from 8.5% to 9.3% of the Bank's total loan portfolio. The
yield also increased due to repricing of teaser rate ARMs which were originated
during the fiscal year ended September 30, 1996.
Interest income from the Bank's investment securities decreased by $40,000,
or 2.9%, to $1.32 million from approximately $1.36 million. The decrease in
interest income from investment securities resulted from a $275,000 decrease in
average investment securities to $18.2 million from $18.5 million, and an 8
basis point decrease in the yield on average investment securities to 6.76% from
6.84%. Interest income on mortgage-backed securities decreased by $150,000, or
16.0%, to $789,000 from $939,000. The decrease in income from mortgage-backed
securities resulted from a $1.9 million, or 14.1% decrease in average mortgage-
backed securities to $11.6 million from $13.5 million, and a 15 basis point
decrease in the yield on average mortgage-backed securities to 6.79% from 6.94%.
In addition, income from interest-earning deposits decreased slightly. The
changes in average balances of the Bank's investment securities and mortgage-
backed securities resulted from an increase in calls on U.S. Government Agency
callable securities and an increase in prepayments on mortgage-backed securities
due to an overall decrease in interest rates during the fiscal year. This
decrease in market interest rates also resulted in an 8 basis point decrease in
the average yield on the Bank's investment securities and mortgage-backed
securities portfolio.
Interest Expense. Interest expense decreased by $429,000, or 5.8%, to $7.0
million for the fiscal year ended September 30, 1997 from $7.4 million for the
prior fiscal year. This decrease was the result of a decrease in the Bank's
average cost of funds, the effects of which were partially offset by a slight
increase in the Bank's average interest bearing liabilities. The increase in
average interest-bearing liabilities resulted from increases in the average
balances of demand deposits and money market demand accounts, passbook savings
and borrowed funds, partially offset by a decrease in the Bank's certificates of
deposit. The decrease in the average cost of the Bank's interest-bearing
liabilities resulted from an overall decrease in market interest rates during
the fiscal year and a change in the portfolio mix of the Bank's deposits. From
September 30, 1996 to September 30, 1997, higher-costing certificates of deposit
decreased from $106.1 million to $102.3 million, or from 72.7% to 70.3% of the
Bank's total deposit portfolio, respectively. This was offset by a corresponding
increase in lower-costing NOW accounts and passbook savings accounts which
increased from $39.9 million to $43.1 million, or from 27.3% to 29.7% of the
Bank's total deposits.
Provision for Loan Losses. The Bank establishes provisions for loan losses,
which are charged to operations, in order to maintain the allowance for loan
losses at a level which is deemed appropriate to absorb future charge-offs of
loans deemed uncollectible. In determining the appropriate level of the
allowance for loan losses, management considers past and anticipated loss
experience, evaluations of real estate collateral, current and anticipated
economic conditions, volume and type of lending and the levels of nonperforming
and other classified loans. The amount of the allowance is based on estimates
and the ultimate losses may vary from such estimates. Management of the Bank
assesses the allowance for loan losses on a quarterly basis and makes provisions
for loan losses monthly in order to maintain the adequacy of the allowance.
The Bank provided $293,000 and $47,000 in loan loss provisions during the
fiscal years ended September 30, 1997 and 1996, respectively. At September 30,
1997 and 1996 the Bank's allowance for possible loan losses was $1.1 million and
$830,000, respectively, and the Bank's nonperforming loans were $1.1 million and
$1.2 million, respectively. The Bank's allowance for loan losses as a percentage
of total nonperforming loans at September 30,
29
<PAGE>
1997 and 1996 was 104.8% at and 69.5%, respectively. While management uses
available information to recognize losses on loans, future loan loss provisions
may be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses and may require the Bank to
recognize additional provisions based on their judgment of information available
to them at the time of their examination. See "Risk Factors--Lending Risks
Associated With Commercial Real Estate, Multi-Family and Consumer Lending" and
"Business of the Bank--Nonperforming Assets and Delinquencies" and "--Allowance
for Loan Losses".
Noninterest Income. Noninterest income is composed of service charges on
deposit accounts, gain on sale of securities and other income. Noninterest
income increased by $99,000, or 23.7%, to $516,000 for the fiscal year ended
September 30, 1997 from $417,000 for the prior fiscal year, as service charges
on deposit accounts increased by $20,000, gain on sale of securities increased
by $52,000, and other income increased by $27,000. Management's goal is to
continue to increase the Bank's noninterest income by increasing the balance of
the Bank's demand deposit accounts and the associated service charges, although
there can be no assurances that the Bank will be successful in this strategy. In
addition, management has recently adjusted its fee structure in its mortgage
loan area with the goal of improving noninterest income.
Noninterest Expenses. Noninterest expenses decreased by $688,000, or 14.8%,
to $4.0 million for the fiscal year ended September 30, 1997 from $4.6 million
for the prior fiscal year. The decrease was primarily due to a $1.1 million
decrease in deposit insurance as a result of legislation, enacted in September
1996, to recapitalize the Savings Association Insurance Fund (the "SAIF") by a
one-time assessment on all SAIF-insured deposits held as of March 31, 1995. The
assessment was 65.7 basis points per $100 in deposits, payable on November 30,
1996. For the Bank, the assessment amounted to $867,000 (or approximately
$552,000 when adjusted for taxes), based on the Bank's SAIF-insured deposits as
of March 31, 1995. In addition, beginning January 1, 1997, pursuant to the
legislation, interest payments on FICO bonds issued in the late 1980's by the
Financing Corporation to recapitalize the former Federal Savings and Loan
Insurance Corporation will be paid jointly by institutions insured by the Bank
Insurance Fund (the "BIF") and SAIF-insured institutions. The FICO assessment
will be 1.29 basis points per $100 in BIF deposits and 6.44 basis points per
$100 in SAIF deposits. Beginning January 1, 2000, the FICO interest payments
will be paid pro-rata by banks and thrifts based on deposits (approximately 2.4
basis points per $100 in deposits). The BIF and SAIF will be merged on January
1, 1999, provided the bank and saving association charters are merged by that
date. In that event, pro-rata FICO sharing will begin on January 1, 1999.
Salaries and benefits increased by $252,000, or 12.8%, to $2.2 million for
the fiscal year ended September 30, 1997 from $2.0 million for the prior fiscal
year. Management believes that increases in salaries and benefits expense is
likely to continue due to the ESOP, and the Recognition Plan that the Bank
intends to implement no earlier than six months after the conclusion of the
Reorganization. Generally accepted accounting principles require the Company to
record compensation expense upon the vesting of shares of restricted stock
awarded pursuant to the Recognition Plan and upon the commitment to release
shares under the ESOP. In addition, generally accepted accounting principles
will require the Company to record compensation expense in an amount equal to
the fair value of the shares committed to be released to employees from the
ESOP. Accordingly, future increases and decreases in fair value of common stock
committed to be released will have a corresponding effect on compensation
expense related to the ESOP. To the extent that the fair value of the Bank's
ESOP shares differ from the cost of such shares, the differential will be
charged or credited to equity.
Provision for Income Taxes. The Bank's provision for income taxes was
$819,000 and $351,000 for the fiscal years ended September 30, 1997 and 1996.
The higher provision for the fiscal year ended September 30, 1997 related
primarily to an increase in income before income taxes.
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<PAGE>
Impact of New Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128 "Earnings Per Share." SFAS No. 128 supersedes APB Opinion No. 15
"Earnings Per Share" and specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
stock or potential publicly held common stock. Essentially, this standard
replaces the primary EPS and fully diluted EPS presentations under APB Opinion
No. 15 with a basic EPS and diluted EPS presentation. SFAS No. 128 is effective
for financial statements for both interim and annual periods ending after
December 15, 1997, earlier application is not permitted.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." SFAS No. 129 summarizes previously issued disclosure
guidance contained within APB Opinions Nos. 10 and 15 as well as SFAS No. 47.
There will be no changes to the Bank's disclosures pursuant to the adoption of
SFAS No. 129. This statement is effective for financial statements for periods
ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The comprehensive income and related cumulative equity impact of comprehensive
income items will be required to be disclosed prominently as part of the notes
to the financial statements. Only the impact of unrealized gains or losses on
securities available for sale is expected to be disclosed as an additional
component of the Bank's income under the requirements of SFAS No. 130. This
statement is effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about segments of their business on their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity wide
disclosures about the products and services an entity provides, the foreign
countries in which it holds assets and reports revenues, and its major
customers. This statement is effective for fiscal years beginning after December
15, 1997.
BUSINESS OF THE COMPANY
The Company is currently not an operating company. Following the
Reorganization, in addition to directing, planning and coordinating the business
activities of the Bank, the Company will initially invest net proceeds it
retains primarily in short and medium-term investments. The Company also intends
to fund the loan to the ESOP to enable the ESOP to purchase 8% of the common
stock sold in the Offering. In the future, the Company may acquire or organize
other operating subsidiaries, including other financial institutions and
financial services companies. See "Use of Proceeds." Presently, there are no
agreements or understandings for an expansion of the Company's operations.
Initially, the Company will neither own nor lease any property from any third
party, but will instead use the premises, equipment and furniture of the Bank.
At the present time, the Company does not intend to employ any persons other
than certain officers of the Bank, who will not be separately provided cash
compensation by the Company. The Company may utilize support staff of the Bank
from time to time, if needed. Additional employees will be hired as appropriate
to the extent the Company expands its business in the future.
BUSINESS OF THE BANK
General
The Bank operates, and intends to continue to operate, as a community
oriented financial institution and is devoted to serving the needs of its
customers. The Bank's business consists primarily of attracting retail deposits
from
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the general public and using those funds to originate real estate, commercial
and consumer loans. See "--Lending Activities."
Market Area
All of the Bank's offices are located in the County of Gaston. The main
office and two branches are located in the City of Gastonia, and one branch is
located in the City of Mount Holly. Gaston County is located on the I-85
corridor in the Southern Piedmont region of North Carolina, not far from the
regional banking center of Charlotte, North Carolina, and the South Carolina
state line. Gaston County is bounded by the North Carolina Counties of
Mecklenburg, Lincoln and Cleveland, and the South Carolina County of York. The
Bank considers Gaston and these contiguous counties to be its primary market
area.
Gaston County has a population of approximately 183,000 and an economy
based on manufacturing, especially textiles, apparel, fabricated metals,
machinery, chemicals, and automotive transportation equipment, and has developed
a strong base in service industries, especially construction and retail trade.
Twenty-one Fortune 500 companies operate in Gaston County. Among the largest
employers in Gaston County are Freightliner, Firestone, Parkdale Mills, Pharr
Yarns, Dana Corporation, Gaston Memorial Hospital and Gaston College.
The Bank faces intense competition from many financial institutions for
deposits and loan originations. See "Risk Factors--Strong Competition Within the
Bank's Market Area."
Lending Activities
General. At September 30, 1997, the Bank's net loans receivable totaled
$134.5 million, or 77.5% of total assets at that date. The Bank has
traditionally concentrated its lending activities on conventional first mortgage
loans secured by one- to four-family properties, with such loans amounting to
$106.4 million, or 76.5% of the net loans receivable at September 30, 1997. In
addition, the Bank originates construction loans, commercial real estate loans,
multi-family residential real estate loans, land loans, commercial business
loans and consumer loans. A substantial portion of the Bank's loan portfolio is
secured by real estate, either as primary or secondary collateral, located in
its primary market area.
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Loan Portfolio Analysis. The following table sets forth the composition of
the Bank's loan portfolio at the dates indicated. The Bank had no concentration
of loans exceeding 10% of total gross loans other than as disclosed below.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------
1997 1996
---------------------- ---------------------
Amount Percent Amount Percent
-------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family................... $106,422 76.50% $104,363 76.72%
Construction.......................... 5,869 4.22 6,827 5.02
Commercial............................ 7,318 5.26 6,458 4.75
Multi-family residential.............. 6,514 4.68 6,843 5.03
-------- -------- -------- ------
Total real estate loans.............. 126,123 90.66 124,491 91.52
Commercial business loans................. 5,558 4.00 5,160 3.79
Consumer loans:
Home equity lines of credit........... 5,651 4.06 4,747 3.49
Loans on deposits..................... 688 0.49 709 0.52
Other................................. 1,091 0.78 923 0.68
-------- -------- -------- ------
Total consumer loans.............. 7,430 5.34 6,379 4.69
-------- -------- -------- ------
Total loans........................... 139,111 100.00% 136,030 100.00%
======== ======
Less:
Loans in process...................... 2,990 3,812
Deferred loan origination fees........ 520 526
Allowance for loan losses............. 1,110 830
-------- --------
Total loans, net.......................... .$134,491 $130,862
======== ========
</TABLE>
One- to Four-Family Real Estate Lending. Historically, the Bank has
concentrated its lending activities on the origination of loans secured by first
mortgage loans on existing one- to four-family residences located in its primary
market area. At September 30, 1997, $106.4 million, or 76.5% of the Bank's net
loans receivable, consisted of one- to four-family residential real estate
loans. The Bank originated $12.6 million and $18.5 million of one- to four-
family residential mortgage loans during the fiscal years ended September 30,
1997 and 1996, respectively.
Generally, the Bank's fixed-rate one- to four-family mortgage loans have
maturities ranging from ten to 30 years and are fully amortizing with monthly
payments sufficient to repay the total amount of the loan with interest by the
end of the loan term. Generally, they are originated under terms, conditions and
documentation which permit them to be sold to U.S. Government sponsored agencies
such as Fannie Mae, although the Bank rarely sells fixed-rate loans. The Bank's
fixed-rate loans customarily include "due on sale" clauses, which give the Bank
the right to declare a loan immediately due and payable in the event the
borrower sells or otherwise disposes of the real property subject to the
mortgage and the loan is not paid.
Management intends to institute a residential wholesale correspondent
lending program in 1998. This program would authorize and enable the Bank to
purchase one- to four-family residential mortgage loans from private mortgage
bankers. The bank intends to confine this practice to select mortgage banking
companies located only in North Carolina. The purpose of this program is to
provide an additional medium by which the Bank can invest its new capital in
conservative interest sensitive assets such as residential loan products with
three, five, seven and ten year rate adjustments or balloons.
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<PAGE>
The Bank offers ARM loans at rates and terms competitive with market
conditions. At September 30, 1997, $34.1 million, or 24.5% of the Bank's gross
loan portfolio, were subject to periodic interest rate adjustments.
Substantially all of the Bank's ARM loan originations meet the underwriting
standards of Fannie Mae even though the Bank originates ARM loans primarily for
its own portfolio. The Bank's ARM loans provide for an interest rate which
adjusts every year based on the one year Treasury constant maturity index,
although the Bank's portfolio includes less than $500,000 of loans based on
other indices. The Bank's ARMs are typically based on up to a 30-year
amortization schedule. For loans with a loan to value ratio of 80% or less, the
Bank qualifies the borrowers on its ARM loans based on the initial rate. For
loans with a loan to value ratio of more than 80%, the Bank qualifies the
borrowers on its ARM loans based on the initial rate plus 2%. The Bank's current
ARM loans do not provide for negative amortization. The Bank's ARM loans
generally provide for annual and lifetime interest rate adjustment limits of 2%
and 5 1/2%, respectively. The Bank offers discounted or "teaser" initial
interest rates that may be more than 2% below the interest rate to which the
loan would adjust after the first year based on the market rates of interest at
the time the loan was originated.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.
The retention of ARM loans in the Bank's loan portfolio helps reduce the
Bank's exposure to changes in interest rates. There are, however, unquantifiable
credit risks resulting from the potential of increased costs due to changed
rates to be paid by the customer. It is possible that during periods of rising
interest rates the risk of default on ARM loans may increase as a result of
repricing and the increased payments required by the borrower. See "Risk
Factors--Potential Changes in Interest Rates and the Current Interest Rate
Environment." In addition, although ARM loans allow the Bank to increase the
sensitivity of its asset base to changes in the interest rates, the extent of
this interest sensitivity is limited by the annual and lifetime interest rate
adjustment limits. Because of these considerations, the Bank has no assurance
that yields on ARM loans will be sufficient to offset increases in the Bank's
cost of funds. The Bank believes these risks, which have not had a material
adverse effect on the Bank to date, generally are less than the risks associated
with holding fixed-rate loans in portfolio during a rising interest rate
environment.
The Bank generally requires title insurance insuring the status of its lien
or an acceptable attorney's opinion on all loans where real estate is the
primary source of security. The Bank also requires that fire and casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount at
least equal to the outstanding loan balance.
Pursuant to underwriting guidelines adopted by the Bank's Board of
Directors, the Bank can lend up to 95% of the appraised value of the property
securing a one- to four-family residential loan. For loans of up to 80% of the
appraised value of the property, the Bank does not require private mortgage
insurance, for loans of more than 80% to up to 95% of the appraised value of the
property, the Bank requires private mortgage insurance for between 20% and 30%
of the amount of the loan.
Construction Lending. The Bank originates residential construction loans to
local home builders, generally with whom it has an established relationship, and
to individuals who have a contract with a builder for the construction of their
residence. The Bank's construction loans are generally secured by property
located in the Bank's primary market area. At September 30, 1997, construction
loans amounted to $5.9 million, or 4.2% of the Bank's total loan portfolio.
The Bank's construction loans to home builders generally have fixed
interest rates and are for a term of twelve months. Construction loans to
individuals are typically made in connection with the granting of the permanent
financing on the property. Construction loans to individuals convert to a fully
amortizing adjustable- or fixed-rate loan at the end of the six month
construction term; if the construction is not complete after six months, the
Bank will generally modify the loan so that the term is for a period necessary
to complete construction. Construction loans to
34
<PAGE>
builders are typically originated with a maximum loan to value ratio of 80%.
Construction loans to individuals are generally originated pursuant to the same
policy regarding loan to value ratios as are used in connection with loans
secured by one- to four-family residential real estate.
The Bank's construction loans to builders are made on either a pre-sold or
speculative (unsold) basis. However, the Bank generally limits the number of
outstanding loans on unsold homes under construction to individual builders,
with the amount dependent on the financial strength of the builder, the present
exposure of the builder, the location of the property and prior sales of homes
in the development. At September 30, 1997, speculative construction loans
amounted to $2.5 million. At September 30, 1997, the largest amount of
construction loans outstanding to one builder was $558,000.
Prior to making a commitment to fund a construction loan, the Bank requires
an appraisal of the property by an independent state-licensed and qualified
appraiser approved by the Board of Directors. The Bank's staff or an independent
appraiser retained by the Bank, reviews and inspects each project prior to
disbursement of funds during the term of the construction loan. Loan proceeds
are disbursed after inspection of the project based on a percentage of
completion. Monthly payment of accrued interest is required, with all accrued
interest collected at maturity.
Construction lending affords the Bank the opportunity to charge higher
interest rates with shorter terms to maturity relative to single-family
permanent mortgage lending. Construction lending, however, is generally
considered to involve a higher degree of risk than single-family permanent
mortgage lending because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost proves
to be inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value upon completion proves to be inaccurate, the Bank may be confronted at or
prior to the maturity of the loan with a project the value of which is
insufficient to assure full repayment. Projects may also be jeopardized by
disagreements between borrowers and builders and by the failure of builders to
pay subcontractors. Loans to builders to construct homes for which no purchaser
has been identified carry more risk because the payoff for the loan is dependent
on the builder's ability to sell the property prior to the time that the
construction loan is due. The Bank has attempted to minimize the foregoing risks
by, among other things, limiting its construction lending primarily to
residential properties and generally requiring personal guarantees from the
principals of its corporate borrowers.
Commercial Real Estate Lending. The Bank originates mortgage loans for the
acquisition and refinancing of commercial real estate properties. At September
30, 1997, $7.3 million, or 5.2% of the Bank's total loan portfolio consisted of
loans secured by commercial real estate properties. The majority of the Bank's
commercial real estate properties are secured by office buildings, churches, and
retail shops, which are generally located in the Bank's primary market area. The
interest rates for the Bank's commercial real estate loans generally have
interest rates that adjust at either one-, three-, or five-year intervals, based
on the constant maturity Treasury index, with annual and lifetime interest rate
adjustment limits of 2% and 5%, respectively, and are originated to amortize in
a maximum of 20 years. At September 30, 1997, the average balance of the Bank's
commercial real estate loans was $98,600, and the largest such loan had a
balance of $664,000.
The Bank requires appraisals of all properties securing commercial real
estate loans. Appraisals are performed by an independent appraiser designated by
the Bank, all of which are reviewed by management. The Bank considers the
quality and location of the real estate, the credit of the borrower, the cash
flow of the project and the quality of management involved with the property.
Loan to value ratios on the Bank's commercial real estate loans are
generally limited to 80% of the appraised value of the secured property. As part
of the criteria for underwriting commercial real estate loans, the Bank
generally imposes a debt coverage ratio (the ratio of net cash from operations
before payment of debt service to debt service)
35
<PAGE>
of not less than 1.25. It is also the Bank's policy to obtain personal
guarantees from the principals of its corporate borrowers on its commercial real
estate loans.
The Bank originates a limited number of loans to existing customers to
purchase real estate on which the borrower's principal residence will be
constructed. The Bank does not solicit such land loans and such loans totaled
$41,000 as of September 30, 1997.
Commercial real estate lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from one- to four-family
residential lending. However, loans secured by such properties usually have
higher balances and are more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than one- to four-family residential mortgage
loans. If the estimate of value proves to be inaccurate, in the event of default
and foreclosure the Bank may be confronted with a property the value of which is
insufficient to assure full repayment. Because payments on such loans are often
dependent on the successful development, operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy. The Bank seeks to minimize these risks by
limiting the maximum loan-to-value ratio and strictly scrutinizing the financial
condition of the borrower, the quality of the collateral and the management of
the property securing the loan. The Bank also obtains loan guarantees from
financially capable parties based on a review of personal financial statements.
Multi-Family Residential Real Estate Loans. The Bank originates mortgage
loans secured by multi-family dwelling units (more than four units). At
September 30, 1997, $6.5 million, or 4.7% of the Bank's total loan portfolio
consisted of loans secured by multi-family residential real estate. The majority
of the Bank's multi-family residential real estate loans are secured by
apartment buildings located in the Bank's primary market area. The interest
rates for the Bank's multi-family residential real estate loans generally have
interest rates that adjust at either one-, three-, or five-year intervals, based
on the constant maturity Treasury index, with annual and lifetime interest rate
adjustment limits of 2% and 5%, respectively, and are originated to amortize in
a maximum of 20 years. At September 30, 1997, the average balance of the Bank's
multi-family residential real estate loans was $237,000, and the largest such
loan had a balance of $1.2 million.
The Bank requires appraisals of all properties securing multi-family
residential real estate loans. Appraisals are performed by an independent
appraiser designated by the Bank, all of which are reviewed by management. The
Bank considers the quality and location of the real estate, the credit of the
borrower, the cash flow of the project and the quality of management involved
with the property.
Loan-to-value ratios on the Bank's multi-family residential real estate
loans are generally limited to 80%. As part of the criteria for underwriting
multi-family residential real estate loans, the Bank generally imposes a debt
coverage ratio (the ratio of net cash from operations before payment of debt
service to debt service) of not less than 1.25. It is also the Bank's policy to
obtain personal guarantees from the principals of its corporate borrowers on its
multi-family residential real estate loans.
Multi-family residential real estate lending affords the Bank an
opportunity to receive interest at rates higher than those generally available
from one- to- four family residential lending. However, loans secured by such
properties usually have higher balances and are more difficult to evaluate and
monitor and, therefore, involve a greater degree of risk than one- to four-
family residential mortgage loans. If the estimate of value proves to be
inaccurate, in the event of default and foreclosure the Bank may be confronted
with a property the value of which is insufficient to assure full repayment.
Because payments on such loans are often dependent on the successful operation
and management of the properties, repayment of such loans may be affected by
adverse conditions in the real estate market or the economy. The Bank seeks to
minimize these risks by limiting the maximum loan-to-value ratio and strictly
scrutinizing the financial condition of the borrower, the quality of the
collateral and the management of the property securing the loan. The Bank also
obtains loan guarantees from financially capable parties based on a review of
personal financial statements.
36
<PAGE>
Consumer Lending. The Bank originates a variety of consumer loans primarily
on a secured basis. Consumer loans include home equity lines of credit, loans
secured by savings accounts, automobiles, recreational vehicles and second
mortgages, and unsecured personal loans. The Bank's home equity lines of credit
are secured by a first or second mortgage on residential property, have variable
interest rates that are tied to The Wall Street Journal prime lending rate (the
"Prime Rate") and may adjust monthly, and generally mature in 15 years. Other
consumer loans are made with fixed interest rates and have terms that generally
do not exceed five years. At September 30, 1997, consumer loans amounted to $7.4
million, or 5.2% of the total loan portfolio.
At September 30, 1997, the largest component of the consumer loan portfolio
consisted of home equity lines of credit, which totaled $5.7 million, or 4.1% of
the total loan portfolio. At September 30, 1997, unused commitments to extend
credit under home equity lines of credit totaled $6.4 million.
The majority of the Bank's consumer loans are made to existing customers,
although the Bank actively promotes consumer loans by contacting existing
customers and by other promotions and advertising directed at existing and
prospective customers. The Bank's consumer loans are originated on a secured and
unsecured basis, and the secured loans on rare occasions may have loan balances
that exceed the value of the collateral.
The Bank views consumer lending as an important part of its business
because consumer loans generally have shorter terms and higher yields, thus
reducing exposure to changes in interest rates. In addition, the Bank believes
that offering consumer loans helps to expand and create stronger ties to its
customer base. Subject to market conditions, the Bank intends to continue
emphasizing consumer lending. Consumer loans entail greater risk than do
residential mortgage loans, particularly in the case of consumer loans that are
unsecured or secured by rapidly depreciating assets. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and are more likely
to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount that can
be recovered on such loans. The Bank believes that these risks are not as
prevalent in the case of the Bank's consumer loan portfolio because a large
percentage of the portfolio consists of home equity lines of credit that are
underwritten in a manner such that they result in credit risk that is
substantially similar to one- to- four family residential mortgage loans.
Nevertheless, home equity lines of credit have greater credit risk than one- to
four-family residential mortgage loans because they often are secured by
mortgages subordinated to the existing first mortgage on the property, which may
or may not be held by the Bank. At September 30, 1997, the Bank had no consumer
loans that were delinquent in excess of 90 days.
The Bank employs strict underwriting procedures for consumer loans. These
procedures include an assessment of the applicant's credit history and the
ability to meet existing and proposed debt obligations. Although the applicant's
creditworthiness is the primary consideration, the underwriting process also
includes a comparison of the value of the security, if any, to the proposed loan
amount. The Bank generally underwrites and originates its consumer loans
internally, which the Bank believes limits its exposure to credit risks
associated with loans underwritten or purchased from brokers and other external
sources.
Commercial Business Loans. The Bank also originates commercial business
loans, generally to customers who are well known to the Bank. Commercial
business loans are frequently secured by real estate, although the decision to
grant a commercial business loan depends primarily on the creditworthiness and
cash flow of the borrower (and any guarantors) and secondarily on the value of
and ability to liquidate the collateral. The Bank generally requires annual
financial statements from its corporate borrowers and personal guarantees from
the corporate principals. The Bank also generally requires an appraisal of any
real estate that secures the loan. In addition, the Bank's portfolio of
commercial business loans as of September 30, 1997 includes residential
acquisition and development loans ("A&D loans"), all of which were made to
builders with whom the Bank has a longstanding
37
<PAGE>
relationship and are secured by real estate located in Gaston County. At
September 30, 1997, the Bank had $5.6 million of commercial business loans which
represented 4.0% of the total loan portfolio. On such date, the average balance
of the Bank's commercial business loans was $70,426, and the largest such loan
had a balance of $1.0 million. As of September 30, 1997, unsecured commercial
business loans totaled $524,000.
The Bank's A&D loans are originated to local developers for the purpose of
developing land for sale by, for example, installing roads, sewers, water and
other utilities. A&D loans are secured by a lien on the property, are made for a
period of three years with interest rates that are tied to the Prime Rate. The
Bank requires monthly interest payments during the term of the loan. The Bank's
A&D loans are structured so that the Bank is repaid in full upon the sale by the
borrower of approximately 75% of the available lots. All of the Bank's A&D loans
are secured by property located in its primary market area. In addition, the
Bank obtains personal guarantees from the principals of its corporate borrowers
and generally originates A&D loans to developers with whom its has established
relationships.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential and commercial real estate lending. Real estate
lending is generally considered to be collateral based, with loan amounts based
on predetermined loan to collateral values and liquidation of the underlying
real estate collateral is viewed as the primary source of repayment in the event
of borrower default. Although commercial business loans may be collateralized by
equipment or other business assets, the liquidation of collateral in the event
of a borrower default is often an insufficient source of repayment because
equipment and other business assets may be obsolete or of limited use, among
other things. Accordingly, the repayment of a commercial business loan depends
primarily on the creditworthiness of the borrower (and any guarantors), while
liquidation of collateral is a secondary and often insufficient source of
repayment.
Maturity of Loan Portfolio. The following table sets forth certain
information at September 30, 1997 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity, but does
not include scheduled payments or potential prepayments. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as becoming due within one year. Loan balances do not include
undisbursed loan proceeds, unearned discounts, unearned income and allowance for
loans losses.
<TABLE>
<CAPTION>
Real Estate Loans
------------------------------------------------------
One- to Four- Multi- Commercial
Family Family Business and
Residential Construction Commercial Residential Consumer Total
------------- ------------ ------------ ----------- ------------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Amounts Due:
Within 1 year................ $ 619 $3,002 $ 3 $ -- $ 3,966 $ 7,590
Over 1 to 2 years............ 73 133 14 -- 969 1,189
Over 2 to 3 years............ 195 -- 17 -- 388 600
Over 3 to 5 years............ 1,785 -- 870 40 965 3,460
Over 5 to 10 years........... 16,412 -- 1,529 984 443 19,368
Over 10 to 20 years.......... 38,674 907 5,085 4,899 6,175 55,740
Over 20 years................ 48,664 1,827 -- 591 82 51,164
-------- ------ ------ ------ ------- --------
Total amount due............. $106,422 $5,869 $7,318 $6,514 $12,988 $139,111
======== ====== ====== ====== ======= ========
</TABLE>
The following table sets forth the dollar amount of all loans for which
final payment is not due until after September 30, 1998. The table also shows
the amount of loans which have fixed rates of interest and those which have
adjustable rates of interest.
38
<PAGE>
<TABLE>
<CAPTION>
Fixed Rates Adjustable Rates Total
------------ ---------------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Real Estate Loans:
One- to four-family residential.......... $ 71,725 $ 34,078 $ 105,803
Construction............................. 2,103 764 2,867
Commercial real estate................... 198 7,117 7,315
Multi-family residential................. -- 6,514 6,514
-------- -------- ---------
Total real estate loans.................... (74,026) (48,473) (122,499)
Commercial and consumer.................... 1,422 7,600 9,022
-------- -------- ---------
Total loans.............................. $ 75,448 $ 56,073 $ 131,521
======== ======== =========
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of mortgage loans tends to increase, however, when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are substantially
higher than current mortgage loan market rates. Furthermore, management believes
that a significant number of the Bank's residential mortgage loans are
outstanding for a period less than their contractual terms because of the
transitory nature of many of the borrowers who reside in its primary market
area.
Loan Solicitation and Processing. The Bank's lending activities are subject
to the written, non-discriminatory, underwriting standards and loan origination
procedures established by the Bank's Board of Directors and management. Loan
originations come from a number of sources. The customary sources of loan
originations are real estate agents, home builders, walk-in customers, referrals
and existing customers. The Bank also advertises its loan products by television
and newspaper. In its marketing, the Bank emphasizes its community ties,
customized personal service and an efficient underwriting and approval process.
The Bank uses professional fee appraisers for most residential real estate loans
and construction loans and all commercial real estate and land loans. The Bank
requires hazard, title and, to the extent applicable, flood insurance on all
security property.
Mortgage loan applications are initiated by loan officers. All loans of
$500,000 or more must be approved by the Board of Directors. Loans of less than
$500,000 may be approved by the Bank's Loan Committee, a management committee
consisting of the Bank's President and three senior lending officers. In
addition, individual lending officers have lending authority up to limits
established by the Board of Directors.
39
<PAGE>
Loan Originations, Sales and Purchases. The following table sets forth
total loans originated and repaid during the periods indicated.
<TABLE>
<CAPTION>
For the Years Ended
September 30,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
(Dollars in Thousands)
Total loans receivable at beginning of period.. $136,030 $123,710
Total loan originations:
One- to four-family residential............... 12,608 18,466
Construction.................................. 7,536 8,645
Commercial real estate........................ 1,747 1,235
Multifamily................................... -- 2,513
Commercial business and consumer.............. 9,430 10,360
-------- --------
Total loans originated......................... 31,321 41,219
Loans purchased................................ -- 254
Principal repayments........................... (28,240) (29,153)
-------- --------
Net loan activity.............................. 3,081 12,320
-------- --------
Total loans receivable at end of period........ $139,111 $136,030
</TABLE>
Loan Commitments. The Bank issues commitments for mortgage loans
conditioned upon the occurrence of certain events. Such commitments are made in
writing on specified terms and conditions and are honored for up to 60 days from
approval, depending on the type of transaction. At September 30, 1997, the Bank
had loan commitments (excluding undisbursed portions of interim construction
loans of $3.0 million) of $2.0 million and unused lines of credit of $1.5
million. See Note __ of Notes to the Consolidated Financial Statements.
Loan Fees. In addition to interest earned on loans, the Bank receives
income from fees in connection with loan originations, loan modifications, late
payments and for miscellaneous services related to its loans. Income from these
activities varies from period to period depending upon the volume and type of
loans made and competitive conditions.
The Bank charges loan origination fees which are calculated as a percentage
of the amount borrowed. In accordance with applicable accounting procedures,
loan origination fees and discount points in excess of loan origination costs
are deferred and recognized over the contractual remaining lives of the related
loans on a level yield basis. Discounts and premiums on loans purchased are
accreted and amortized in the same manner. The Bank recognized $170,000 and
$125,700 of deferred loan fees during the fiscal years ended September 30, 1997
and 1996, respectively, in connection with loan refinancings, payoffs, sales and
ongoing amortization of outstanding loans.
Nonperforming Assets and Delinquencies. When a borrower fails to make a
required payment on a loan, the Bank attempts to cure the deficiency by
contacting the borrower and seeking the payment. Computer generated late notices
are mailed 15 days after a payment is due. In most cases, deficiencies are cured
promptly. If a delinquency continues, additional contact is made either through
a notice or other means and the Bank will attempt to work out a payment schedule
and actively encourage delinquent borrowers to seek home ownership counseling.
While the Bank generally prefers to work with borrowers to resolve such
problems, the Bank will institute foreclosure or other proceedings, as
necessary, to minimize any potential loss.
Loans are placed on nonaccrual status generally if, in the opinion of
management, principal or interest payments are not likely in accordance with the
terms of the loan agreement, or when principal or interest is past due 90 days
or more. Interest accrued but not collected at the date the loan is placed on
nonaccrual status is reversed
40
<PAGE>
against income in the current period. Loans may be reinstated to accrual status
when payments are under 90 days past due and, in the opinion of management,
collection of the remaining past due balances can be reasonably expected.
The Bank's Board of Directors is informed monthly of the status of all
mortgage loans delinquent more than 60 days, all consumer and commercial
business loans delinquent more than 30 days, all loans in foreclosure and all
foreclosed and repossessed property owned by the Bank.
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. As of such dates, the Bank had no
restructured loans within the meaning of SFAS No. 15.
<TABLE>
<CAPTION>
At September 30,
------------------------
1997 1996
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
One- to four-family residential real estate loans........................... $ 876 $1,053
Multi-family residential real estate loans.................................. 183 141
------ ------
Total nonaccrual loans....................................................... 1,059 1,194
Accruing loans which were contractually past due 90 days or more............. -- --
------ ------
Total nonperforming loans.................................................... 1,059 1,194
Real estate owned............................................................ 247 258
------ ------
Total nonperforming assets................................................... $1,306 $1,452
====== ======
Nonaccrual loans and loans 90 days past due as a percentage of net loans..... 0.79% 0.91%
====== ======
Nonaccrual loans and loans 90 days past due as a percentage of total assets.. 0.76% 0.88%
====== ======
Total nonperforming assets as a percentage of total assets................... 0.75% 0.84%
====== ======
</TABLE>
Interest income that would have been recorded for the fiscal years ended
September 30, 1997 and 1996 had nonaccruing loans been current in accordance
with their original terms amounted to $42,000 and $46,000, respectively. The
Bank did not include any interest income on such loans for such periods.
Real Estate Acquired in Settlement of Loans. Real estate acquired by the
Bank as a result of foreclosure or by deed-in-lieu of foreclosure is classified
as real estate acquired in settlement of loans until sold. Pursuant to American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") 92-3, which provides guidance on determining the balance sheet treatment
of foreclosed assets in annual financial statements for periods ended on or
after December 15, 1992, there is a rebuttal presumption that foreclosed assets
are held for sale and such assets are recommended to be carried at fair value
minus estimated cost to sell the property. After the date of acquisition, all
costs incurred in maintaining the property are expensed and costs incurred for
the improvement or development of such property are capitalized up to the extent
of their net realizable value. The Bank's accounting for its real estate
acquired in settlement of loans complies with SOP 92-3. At September 30, 1997,
the Bank had $246,700 of real estate acquired in settlement of loans.
Restructured Loans. Under GAAP, the Bank is required to account for certain
loan modifications or restructuring as a "troubled debt restructuring." In
general, the modification or restructuring of a debt constitutes a troubled debt
restructuring if the Bank for economic or legal reasons related to the
borrower's financial difficulties grants a concession to the borrowers that the
Bank would not otherwise consider. Debt restructurings or loan modifications for
a borrower do not necessarily always constitute troubled debt restructurings,
however, and troubled debt restructurings do not necessarily result in
nonaccrual loans. The Bank had no restructured loans as of September 30, 1997.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem
41
<PAGE>
assets and, if appropriate, require them to be classified. There are three
classifications for problem assets: substandard, doubtful and loss. Substandard
assets have one or more defined weaknesses and are characterized by the distinct
possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified as loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. If an asset or
portion thereof is classified as loss, the insured institution establishes
specific allowances for loan losses for the full amount of the portion of the
asset classified as loss. All or a portion of general loan loss allowances
established to cover possible losses related to assets classified substandard or
doubtful can be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital. Assets that do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" and monitored
by the Bank.
As of September 30, 1997, the aggregate amount of the Bank's assets
classified as substandard was $2.3 million, no assets were classified as
doubtful or loss, and the aggregate amount not classified but designated special
mention was $312,000. As of September 30, 1996, the aggregate amount of the
Bank's assets classified as substandard was $2.3 million, no assets were
classified as doubtful or loss, and the aggregate amount not classified but
designated special mention was $432,000.
Allowance for Loan Losses. The Bank has established a systematic
methodology for the determination of provisions for loan losses. The methodology
is set forth in a formal policy and takes into consideration the need for an
overall general valuation allowance as well as specific allowances that are tied
to individual loans.
In originating loans, the Bank recognizes that losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. The Bank increases its allowance for loan losses by
charging provisions for loan losses against the Bank's income.
The general valuation allowance is maintained to cover losses inherent in
the loan portfolio. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and current
economic conditions. Specific valuation allowances are established to absorb
losses on loans for which full collectibility cannot be reasonably assured. The
amount of the allowance is based on the estimated value of the collateral
securing the loan and other analyses pertinent to each situation. Generally, a
provision for losses is charged against income monthly to maintain the
allowances.
At September 30, 1997, the Bank had an allowance for loan losses of $1.1
million. Management believes that the amount maintained in the allowance at
September 30, 1997 will be adequate to absorb losses inherent in the portfolio.
Although management believes that it uses the best information available to make
such determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while the Bank believes it has
established its existing allowance for loan losses in accordance with GAAP,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request the Bank to increase significantly its allowance for
loan losses. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loans deteriorate as a result of
the factors discussed above. Any material increase in the allowance for loan
losses may adversely affect the Bank's financial condition and results of
operations.
42
<PAGE>
The following table sets forth an analysis of the Bank's allowance for loan
losses.
<TABLE>
<CAPTION>
At and For the Fiscal Years
Ended September 30,
-----------------------------
1997 1996
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Total loans outstanding........................................... $134,491 $130,862
======== ========
Average loans outstanding......................................... $132,529 $126,503
======== ========
Allowance at beginning of period.................................. $ 830 $ 786
Provision......................................................... 293 47
Recoveries........................................................ -- --
Charge-offs....................................................... 13 3
-------- --------
Allowance at end of period........................................ $ 1,110 $ 830
======== ========
Allowance for loan losses as a percentage of total
loans outstanding................................................ 0.83% 0.63%
======== ========
Net loans charged off as a percentage of total loans outstanding.. 0.01% --%
======== ========
Ratio of allowance to nonperforming loans......................... 104.82% 69.51%
======== ========
</TABLE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------
1997 1996
---------------------------- ------------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to Four-family residential.. $ 643 76.50% $450 76.72%
Construction..................... 55 4.22 50 5.02
Commercial....................... 105 5.26 88 4.75
Multi-family residential......... 100 4.68 75 5.03
Commercial and consumer............ 207 9.34 167 8.48
------ ------ ---- ------
Total allowance for loan losses.... $1,100 100.00% $830 100.00%
====== ====== ==== ======
</TABLE>
Investment Activities
The Bank is permitted under federal law to invest in various types of
liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the FHLB-
Atlanta, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, the
Bank may also invest a portion of its assets in commercial paper and corporate
debt securities. Savings institutions like the Bank are also required to
maintain an investment in FHLB stock. The Bank is required under federal
regulations to maintain a minimum amount of liquid assets. See "Regulation" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
43
<PAGE>
The Bank purchases investment securities with excess liquidity arising when
investable funds exceed loan demand. The Bank's investment securities purchases
have been limited to U.S. Government and agency securities generally with
contractual maturities of between one and five years.
The Bank's investment policies generally limit investments to U.S.
Government and agency securities, municipal bonds, certificates of deposit,
marketable corporate debt obligations, mortgage-backed securities and certain
types of mutual funds. The Bank's investment policy does not permit engaging
directly in hedging activities or purchasing high risk mortgage derivative
products or non-investment grade corporate bonds. Mutual funds held by the Bank
may periodically engage in hedging activities and invest in derivative
securities. Investments are made based on certain considerations, which include
the interest rate, yield, settlement date and maturity of the investment, the
Bank's liquidity position, and anticipated cash needs and sources (which in turn
include outstanding commitments, upcoming maturities, estimated deposits and
anticipated loan amortization and repayments). The effect that the proposed
investment would have on the Bank's credit and interest rate risk and risk-based
capital is also considered.
The following table sets forth the amortized cost and fair value of our
investment and mortgage-backed securities, at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
Net Net
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gain(Loss) Value Cost Gain(Loss) Value
--------- ---------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Investment Securities:
U.S. Government and agency securities
held to maturity......................... $10,407 $ 18 $10,425 $14,751 $ (88) $14,663
U.S. Government and agency securities
available for sale....................... 1,988 22 2,010 -- -- --
------- ------ ------- ------- ------ -------
Total investment securities................. $12,395 $ 40 $12,435 $14,751 $ (88) $14,663
======= ====== ======= ======= ====== =======
Mortgage-backed securities:
FHLMC held to maturity.................... $ 5,238 $ 94 $ 5,332 $ 6,813 $ 15 $ 6,828
FNMA held to maturity..................... 3,588 (18) 3,570 4,663 (94) 4,569
GNMA held to maturity..................... 1,261 30 1,291 1,442 7 1,449
------- ------ ------- ------- ------ -------
Total mortgage-backed securities............ $10,087 $ 106 $10,193 $12,918 $ (72) $12,846
======= ====== ======= ======= ====== =======
Other Investments available for sale:
US League Asset Management Fund........... $ 1,375 $ 14 $ 1,389 $ 1,295 $ 9 $ 1,304
Federated Government Trust................ 3,036 228 3,264 2,861 183 3,044
FHLMC stock............................... 44 1,542 1,586 44 1,073 1,117
Other..................................... -- -- -- 50 -- 50
------- ------ ------- ------- ------ -------
Total other investments available for sale.. $ 4,455 $1,784 $ 6,239 $ 4,250 $1,265 $ 5,515
======= ====== ======= ======= ====== =======
</TABLE>
(1) All other investments are classified as AFS
44
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for our investment securities portfolio at September 30, 1997 by
contractual maturity. The following table does not take into consideration the
effects of scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
At September 30, 1997
-----------------------------------------------------------------------------------------------------------------
Less than 1 year 1 to 5 years Over 5 to 10 years Over 10 years Total Securities
------------------- ------------------- ------------------ ------------------ ----------------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield(1) Value Yield(1) Value Yield(1) Value Yield(1) Value Yield(1) Value
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
securities.... $1,000 5.59% $ 2,503 6.33% $-- --% $-- --% $ 3,502 6.12% $ 3,506
U.S. Agency
securities.... 1,049 5.63 7,617 6.38 -- -- 248 7.58 8,914 6.34 8,928
------ ---- ------- ---- --- -- ---- ---- ------- ---- -------
Total........... $2,049 5.63% $10,120 6.38% $-- --% $248 7.58% $12,416 6.28% $12,434
====== ==== ======= ==== === == ==== ==== ======= ==== =======
</TABLE>
- --------------------
(1) Yields on tax exempt obligations have been computed on a tax equivalent
basis.
45
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for the Bank's
lending and other investment activities. In addition, the Bank also generates
funds internally from loan principal repayments and prepayments and maturing
investment securities. Scheduled loan repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and money market conditions. Borrowings
from the FHLB-Atlanta may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. Presently, the Bank
has no other borrowing arrangements.
Deposit Accounts. The Bank's deposit products include a broad selection of
deposit instruments, including NOW accounts, demand deposit accounts, money
market accounts, regular passbook savings, statement savings accounts and term
certificate accounts. Deposit account terms vary with the principal difference
being the minimum balance deposit, early withdrawal penalties and the interest
rate. The Bank reviews its deposit mix and pricing weekly. The Bank does not
utilize brokered deposits, nor has it aggressively sought jumbo certificates of
deposit.
The Bank believes it is competitive in the type of accounts and interest
rates it offers on its deposit products. The Bank does not seek to pay the
highest deposit rates but a competitive rate. The Bank determines the rates paid
based on a number of conditions, including rates paid by competitors, rates on
U.S. Treasury securities, rates offered on various FHLB-Atlanta lending
programs, and the deposit growth rate the Bank is seeking to achieve.
The Bank may use premiums to attract new checking accounts, particularly in
conjunction with new branch openings. Should they be used, these premium offers
would be reflected in an increase in the Bank's advertising and promotion
expense, as well as its cost of funds. The Bank also plans to seek business
checking accounts and to promote individual retirement accounts ("IRAs") and
Self Employment Plan retirement accounts to businesses.
In the unlikely event the Bank is liquidated after the Reorganization,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to the Company as the sole stockholder of the Bank.
46
<PAGE>
The following table sets forth information concerning the Bank's time
deposits and other interest-bearing deposits at September 30, 1997.
<TABLE>
<CAPTION>
Balance
Minimum (in thousands) Percentage
Balance as of September of Total
Category Term Interest Rate Amount 30, 1997 Deposits
- -------- --------- ------------- ------- --------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-interest NOW
accounts.................. None --% $ 100 $ 3,023 2.08%
NOW accounts................ None 1.99% $ 100 6,763 4.65
Super Now accounts.......... None 3.05% $ 1,000 4,903 3.37
Money market accounts....... None 3.05% $ 1,000 14,240 9.79
Passbook accounts........... None 2.79% $ 100 14,197 9.76
Certificates of deposit..... 91 days 4.34% $ 500 1,101 0.76
Certificates of deposit..... 6 months 5.23% $ 500 30,466 20.95
Certificates of deposit..... 12 months 5.31% $ 500 16,996 11.69
Certificates of deposit..... 18 months 5.35% $ 500 3,692 2.54
Certificates of deposit..... 24 months 6.02% $ 500 3,962 2.72
Certificates of deposit..... 30 months 6.16% $ 500 10,849 7.46
Certificates of deposit..... 36 months 5.93% $ 500 2,344 1.61
Certificates of deposit(1).. Various 5.86% $50,000 13,862 9.53
Certificates of deposit
variable rate IRA......... 18 months 5.48% $ 25 70 0.05
Certificates of deposit
fixed rate IRA............ 18 months 5.44% $ 500 18,975 13.05
-------- ------
Total deposits.............. $145,444 100.00%
======== ======
</TABLE>
- ----------
(1) Generally includes "jumbo" and "mini-jumbo" deposits ($50,000 or more);
however, it includes all deposits which have a negotiated interest rate
higher than the standard rate offered at the time the deposit was accepted.
The following table indicates the amount of the Bank's certificate accounts
with a principal balance greater than $100,000 by time remaining until maturity
as of September 30, 1997. Jumbo certificate accounts have principal balances of
$100,000 or more.
<TABLE>
<CAPTION>
Maturity Period Certificates of Deposit
- --------------- -----------------------
(Dollars in Thousands)
<S> <C>
Within three months...................... $ 4,197
Three to six months...................... 7,056
Six through twelve months................ 4,848
Over twelve months....................... 1,511
-------
Total jumbo certificates of deposit..... $17,612
=======
</TABLE>
Deposit Flow. The following table sets forth the balances (inclusive of
interest credited) and changes in dollar amounts of deposits in the various
types of accounts offered by the Bank between the dates indicated.
47
<PAGE>
Time Deposits by Rates. The following table sets forth the amount of time
deposits in the Bank categorized by rates at the dates indicated.
<TABLE>
<CAPTION>
As of September 30,
----------------------
1997 1996
---------- ----------
(Dollars in Thousands)
Interest Rate
- -------------
<S> <C> <C>
2.00-4.00%........................................ $ 172 $ 24
4.01-6.00%........................................ 92,311 84,163
6.01-8.00%........................................ 9,835 21,902
-------- --------
$102,318 $106,089
======== ========
</TABLE>
Time Deposits by Maturities. The following table sets forth the amount of
time deposits in the Bank categorized by rates and maturities at September 30,
1997.
<TABLE>
<CAPTION>
After
Interest Rate September 30, 1998 September 30, 1999 September 30, 2000 September 30, 2000 Total
- ------------- ------------------ ------------------ ------------------ ------------------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
2.01-4.0%........ $ 127 $ 45 $ -- $ -- $ 172
4.01-6.0%........ 77,747 98,931 3,630 3 92,311
6.01-8.0%........ 8,825 650 250 110 9,835
------- ------- ------ ---- --------
Total............ $87,699 $10,626 $3,880 $113 $102,318
======= ======= ====== ==== ========
</TABLE>
Deposit Activity. The following table set forth the deposit activity of the
Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1997 1996
---------- -----------
(Dollars in Thousands)
<S> <C> <C>
Beginning balance........................................... $145,975 $141,432
Net increase (decrease) before interest credited............ (7,386) (2,751)
Interest credited........................................... 6,805 7,294
-------- --------
Net increase (decrease) in savings deposits................. (531) 4,543
-------- --------
Ending balance.............................................. $145,444 $145,975
======== ========
</TABLE>
Borrowings. Savings deposits are the primary source of funds for the Bank's
lending and investment activities and for its general business purposes. The
Bank has the ability to use advances from the FHLB- Atlanta to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. The FHLB-
Atlanta functions as a central reserve bank providing credit for savings
associations and certain other member financial institutions. As a member of the
FHLB-Atlanta, the Bank is required to own capital stock in the FHLB-Atlanta and
is authorized to apply for advances on the security of such stock and certain of
its mortgage loans and other assets (principally securities that are obligations
of, or guaranteed by, the U.S. Government) provided certain creditworthiness
standards have been met. Advances are made pursuant to several different credit
programs. Each credit program has its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based on the
financial condition of the member institution and the adequacy of collateral
pledged to secure the credit. The maximum outstanding balances of the Bank's
FHLB advances for the fiscal years ended September 30, 1997 and 1996 were $3.8
million and $3.8 million, respectively, the average balances outstanding were
$2.3 million and $1.6 million, respectively, and the weighted average interest
rates were 6.28% and 4.36%, respectively. The Bank's outstanding balances of
FHLB advances as of September 30, 1997 and 1996, were $3.5 million and $3.8
million, respectively.
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Competition
The Bank faces intense competition in its primary market area for the
attraction of savings deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for savings deposits has
historically come from commercial banks, credit unions, other thrifts operating
in its market area, and other financial institutions such as brokerage firms and
insurance companies. As of June 1996, the Bank ranked fourth in deposit share
among depository institutions in Gaston County, with approximately 9.9% of the
County's deposits. As of September 30, 1997, there were 38 financial
institutions, including commercial banks, thrifts and credit unions operating in
Gaston County, North Carolina. Particularly in times of high interest rates, the
Bank has faced additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. The Bank's competition for loans comes from commercial banks, thrift
institutions, credit unions and mortgage bankers. Such competition for deposits
and the origination of loans may limit the Bank's growth in the future. See
"Risk Factors--Strong Competition Within the Bank's Market Area."
Subsidiary Activities
Under OTS regulations, the Bank generally may invest up to 3% of its assets
in service corporations, provided that at least one-half of investment in excess
of 1% is used primarily for community, inner-city and community development
projects. The Bank's investment in its wholly-owned service corporation, Gaston
Financial Services, Inc. doing business as Gaston Federal Investment Services
("GFS") which was $533,399 at September 30, 1997, did not exceed these limits. A
licensed insurance agent, GFS markets annuities, mutual funds and life
insurance, and provides discount brokerage services.
Properties
The following table sets forth certain information regarding the Bank's
offices at September 30, 1997, all of which are owned by the Bank.
<TABLE>
<CAPTION>
Location Year Opened Approximate Square Feet Deposits
- -------- ----------- ----------------------- --------
<S> <C> <C> <C>
245 West Main Avenue......... 1971 12,400 $43.4 million
Gastonia, NC 28052-4140
1670 Neal Hawkins Road....... 1987 5,322 $21.4 million
Gastonia, NC 28056-6429
1535 Burtonwood Drive........ 1976 4,739 $44.7 million
Gastonia, NC 28054-4011
233 South Main Street........ 1990 2,372 $36.1 million
Mount Holly, NC 28120-1620 -------------
</TABLE>
At September 30, 1997, the net book value of the Bank's office properties
and the Bank's fixtures, furniture, and equipments was $2.1 million.
Employees
As of September 30, 1997, the Bank had 57 full-time and 8 part-time
employees, none of whom is represented by a collective bargaining unit. The Bank
believes its relationship with its employees is good.
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Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties in
which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's
business. The Bank is not a party to any pending legal proceedings that it
believes would have a material adverse effect on the financial condition or
operations of the Bank.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Mutual Holding Company, the Company and the Bank will be
subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of
federal taxation is intended only to summarize certain pertinent federal income
tax matters and is not a comprehensive description of the tax rules applicable
to the Bank.
Method of Accounting. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
tax year ending December 31 for filing its consolidated federal income tax
returns. The Small Business Protection Act of 1996 (the "1996 Act") eliminated
the use of the reserve method of accounting for bad debt reserves by savings
institutions, effective for taxable years beginning after 1995.
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
September 30, 1996 over those established as of September 30, 1998. The amount
of such reserve subject to recapture as of September 30, 1997, was approximately
$1.4 million.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions or cease to maintain a bank
charter. At September 30, 1997, the Bank's total federal pre-1988 reserve was
approximately $1.4 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no Federal income tax provision has
been made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At September 30, 1997, the Bank had no net
operating loss carryforwards for federal income tax purposes.
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Corporate Dividends-Received Deduction. The Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. Following completion of the Reorganization and
Offering, the Mutual Holding Company will own less than 80% of the outstanding
common stock of the Company. As such, the Mutual Holding Company will not be
permitted to file a consolidated federal income tax return with the Company and
the Bank. The corporate dividends-received deduction is 80% in the case of
dividends received from corporations with which a corporate recipient does not
file a consolidated return, and corporations which own less than 20% of the
stock of a corporation distributing a dividend may deduct only 70% of dividends
received or accrued on their behalf.
State Taxation
State of North Carolina. Under North Carolina law, the corporate income tax
is 7.75% of federal taxable income as computed under the Code, subject to
certain prescribed adjustments. In addition, for tax years beginning in 1991,
1992, 1993 and 1994, corporate taxpayers were required to pay a surtax equal to
4%, 3%, 2% and 1%, respectively, of the state income tax otherwise payable by
it. An annual state franchise tax is imposed at a rate of 0.15% applied to the
greatest of the institutions (i) capital stock, surplus and undivided profits,
(ii) investment in tangible property in North Carolina or (iii) 55% of the
appraised valuation of property in North Carolina.
REGULATION
As a federally chartered SAIF-insured stock savings bank, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. The Bank is a member of the Federal Home Loan Bank ("FHLB") system. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The Bank also is subject to regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained against deposits and certain other
matters. The OTS examines the Bank and prepares reports for the consideration of
the Bank's Board of Directors on any deficiencies that they may find in the
Bank's operations. The FDIC also examines the Bank in its role as the
administrator of the SAIF. The Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents. Any change in such regulation, whether
by the FDIC, OTS, or Congress, could have a material adverse impact on the
Company and the Bank and their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are governed by
the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act (the "FDI Act") and the regulations issued by the
agencies to implement these statutes. These laws and regulations delineate the
nature and extent of the activities in which savings association may engage. The
description of statutory provisions and regulations applicable to savings
associations set forth herein does not purport to be a complete description of
such statutes and regulations and their effect on the Bank.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to a single or related group of
borrowers. Generally, this limit is 15% of the Bank's unimpaired capital and
surplus plans and an additional 10% of unimpaired capital and surplus, if such
loan is secured by readily-marketable collateral, which is defined to include
certain financial instruments and bullion. The OTS by regulation has amended the
loans to one borrower rule to permit savings associations meeting certain
requirement to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units.
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<PAGE>
Qualified Thrift Lender Test. In general, savings associations are required
to maintain at least 65% of their portfolio assets in certain qualified thrift
investments (which consist primarily of loans and other investments related to
residential real estate and certain other assets). A savings association that
fails the qualified thrift lender test is subject to substantial restrictions on
activities and to other significant penalties. Recent legislation permits a
savings association to qualify as a qualified thrift lender not only by
maintaining 65% of portfolio assets in qualified thrift investments (the "QTL
test") but also, in the alternative, by qualifying under the Code as a "domestic
building and loan association." The Bank is a domestic building and loan
association as defined in the Code.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and education loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assets, plus an
additional 10 percent for small business loans. Loans for personal, family and
household purposes (other than credit card, small business and educational
loans) are now included without limit with other assets that, in the aggregate,
may account for up to 20% of total assets. At September 30, 1997, under the
expanded QTL test, approximately 88.8% of the Bank's portfolio assets were
qualified thrift investments.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution, such as the
Bank, that exceeds all fully phased-in capital requirements before and after a
proposed capital distribution ("Tier 1 Association") and has not been advised by
the OTS that it is in need of more than normal supervision, could, after prior
notice but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of: (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters; provided that the institution would not
be undercapitalized, as that term is defined in the OTS Prompt Corrective Action
regulations, following the capital distribution. Any additional capital
distributions would require prior regulatory approval. In the event the Bank's
capital fell below its fully-phased in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus
borrowings payable in one year or less. OTS regulations also require each
savings institution to maintain an average daily balance of short-term liquid
assets at a specified percentage (currently 1%) of the total of its net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's average liquidity ratio for the quarter ended September
30, 1997 was 13.5%, which exceeded the then applicable requirements. The Bank
has never been subject to monetary penalties for failure to meet its liquidity
requirements.
Community Reinvestment Act and Fair Lending Laws. Savings association share
a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to complete with the Fair Lending
Laws could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice. The Bank received a
satisfactory CRA rating under the current CRA regulations in its most recent
federal examination by the OTS.
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<PAGE>
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides 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 the institution as those prevailing at the time for comparable
transactions with non-affiliated companies.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, 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 and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Under the
FDI Act, the FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken with respect to a particular savings institution. If
action is not taken by the Director, the FDIC has authority to take such action
under certain circumstances.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
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 adopted a final regulation and Interagency Guidelines
Prescribing Standards for Safety and Soundness ("Guidelines") to implement the
safety and soundness standards required under the FDI Act. The 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. The Guidelines address internal controls and
information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation, fees
and benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core
capital is defined as common stockholder's equity (including retained earnings),
certain non-cumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights ("MSRs") and credit card relationships.
The OTS 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 OTS prompt corrective action regulation provides that a
savings institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest CAMELS examination rating) 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%. In determining the amount of risk-
weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight of 0% to 100%,
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<PAGE>
as assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of core capital are equivalent to
those discussed earlier under the 3% 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 OTS 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. A savings association's interest that risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association'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 an risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director of
the OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. The OTS has postponed the date that the component will first
be deducted from an institution's total capital to provide it with an
opportunity to review the interest rate risk approaches taken by the other
federal banking agencies.
At September 1997, the Bank met each of its 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 the OTS tangible, leverage
and risk-based capital requirements, the Bank's historical amounts and
percentages at September 30, 1997, and pro forma amounts and percentages based
upon the issuance of the shares within the Offering Range and assuming that a
portion of the net proceeds are retained by the Company.
Thrift Charter. Congress has been considering legislation in various forms
that would require federal thrifts, such as the Bank, to convert their charters
to national or state bank charters. Recent legislation required the Treasury
Department to prepare for Congress a comprehensive study on development of a
common charter for federal savings association and commercial banks; and, in the
event that the thrift charter was eliminated by January 1, 1999, would require
the merger of the BIF and the SAIF into a single deposit insurance fund on that
date. The Bank cannot determine whether, or in what form, such legislation may
eventually be enacted and there can be no assurance that any legislation that is
enacted would not adversely affect the Bank and the Company.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is 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 total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has the total
risk-based capital less than 6.0%, a Tier 1 core 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." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically
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<PAGE>
undercapitalized." The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date an institution receives
notice that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." In addition, numerous mandatory supervisory
actions become immediately applicable to the institution, including, but not
limited to, restrictions on growth, investment activities, capital
distributions, and affiliate transactions. The OTS 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 FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC 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. The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in that FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. As of September 30, 1997, the Bank was in
compliance with this requirement.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). At September 30, 1997, the Bank
was in compliance with these reserve requirements. The balances maintained to
meet the reserve requirements imposed by the FRB may be used to satisfy
liquidity requirements imposed by the OTS.
Holding Company Regulation
Generally. The Mutual Holding Company and the Company are non-diversified
mutual savings and loan holding companies within the meaning of the HOLA, as
amended. As such, the Mutual Holding Company and the Company are registered with
the OTS and are subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement authority over the
Mutual Holding Company and the Company and any non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution.
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Permitted Activities. Pursuant to Section 10(o) of the HOLA and OTS
regulations and policy, a mutual holding company and a federally chartered mid-
tier holding company such as the Company may engage in the following activities:
(i) investing in the stock of a savings association; (ii) acquiring a mutual
association through the merger of such association into a savings association
subsidiary of such holding company or an interim savings association subsidiary
of such holding company; (iii) merging with or acquiring another holding
company; one of whose subsidiaries is a savings association; (iv) investing in a
corporation, the capital stock of which is available for purchase by a savings
association under federal law or under the law of any state where the subsidiary
savings association or associations share their home offices; (v) furnishing or
performing management services for a savings association subsidiary of such
company; (vi) holding, managing or liquidating assets owned or acquired from a
savings subsidiary of such company; (vii) holding or managing properties used or
occupied by a savings association subsidiary of such company properties used or
occupied by a savings association subsidiary of such company; (viii) acting as
trustee under deeds of trust; (ix) any other activity (A) that the Federal
Reserve Board, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the
Director, by regulation, prohibits or limits any such activity for savings and
loan holding companies; or (B) in which multiple savings and loan holding
companies were authorized (by regulation) to directly engage on March 5, 1987;
and (x) purchasing, holding, or disposing of stock acquired in connection with a
qualified stock issuance if the purchase of such stock by such savings and loan
holding company is approved by the Director. If a mutual holding company
acquires or merges with another holding company, the holding company acquired or
the holding company resulting from such merger or acquisition may only invest in
assets and engage in activities listed in (i) through (x) above, and has a
period of two years to cease any non-conforming activities and divest of any
non-conforming investments.
The HOLA prohibits a savings and loan holding company, including the
Company and the Mutual Holding Company, directly or indirectly, or through one
or more subsidiaries, from acquiring another savings institution or holding
company thereof, without prior written approval of the OTS. It also prohibits
the acquisition or retention of, with certain exceptions, more than 5% of a non-
subsidiary savings institution, a non-subsidiary holding company, or a non-
subsidiary company engaged in activities other than those permitted by the HOLA;
or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources,
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.
The OTS 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, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) 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.
Waivers of Dividends by the Mutual Holding Company. OTS regulations require
the Mutual Holding Company to notify the OTS of any proposed waiver of its right
to receive dividends. It is the OTS' recent practice to review dividend waiver
notices on a case-by-case basis, and, in general, not object to any such waiver
if: (i) the mutual holding company's board of directors determines that such
waiver is consistent with such directors' fiduciary duties to the mutual holding
company's members; (ii) for as long as the savings association subsidiary is
controlled by the mutual holding company, the dollar amount of dividends waived
by the mutual holding company are considered as a restriction on the retained
earnings of the savings association, which restriction, if material, is
disclosed in the public financial statements of the savings association as a
note to the financial statements; (iii) the amount of any dividend waived by the
mutual holding company is available for declaration as a dividend solely to the
mutual holding company, and, in accordance with SFAS 5, where the savings
association determines that the payment of such dividend to the mutual holding
company is probable, an appropriate dollar amount is recorded as a liability;
(iv) the amount of any waived dividend is considered as having been paid by the
savings association in evaluating any proposed dividend under OTS capital
distribution regulations; and (v) in the event the mutual holding company
converts to stock
56
<PAGE>
form, the appraisal submitted to the OTS in connection with the conversion
application takes into account the aggregate amount of the dividends waived by
the mutual holding company.
Conversion of the Mutual Holding Company to Stock Form. OTS regulations and
the Plan of Reorganization permit the Mutual Holding Company to convert from the
mutual to the capital stock form of organization (a "Conversion Transaction").
There can be no assurance when, if ever, a Conversion Transaction will occur,
and the Board of Directors has no current intention or plan to undertake a
Conversion Transaction. In a Conversion Transaction a new holding company would
be formed as the successor to the Company (the "New Holding Company"), the
Mutual Holding Company's corporate existence would end, and certain depositors
of the Bank would receive the right to subscribe for additional shares of the
New Holding Company. In a Conversion Transaction, each share of common stock
held by Minority Stockholders would be automatically converted into a number of
shares of common stock of the New Holding Company determined pursuant an
exchange ratio that ensures that after the Conversion Transaction, subject to
the Dividend Waiver Adjustment described below and a slight adjustment to
reflect the receipt of cash in lieu of fractional shares, the percentage of the
to-be outstanding shares of the New Holding Company issued to Minority
Stockholders in exchange for their common stock would be equal to the percentage
of the outstanding shares of common stock held by Minority Stockholders
immediately prior to the Conversion Transaction. The total number of shares held
by Minority Stockholders after the Conversion Transaction would also be affected
by any purchases by such persons in the offering that would be conducted as part
of the Conversion Transaction.
The Dividend Waiver Adjustment would adjust the percentage of the to-be
outstanding shares of common stock of the New Holding Company issued to Minority
Stockholders in exchange for their shares of common stock to reflect (i) the
aggregate amount of dividends waived by the Mutual Holding Company and (ii)
assets other than common stock held by the Mutual Holding Company. Pursuant to
the Dividend Waiver Adjustment, the percentage of the to-be outstanding shares
of the New Holding Company issued to Minority Stockholders in exchange for their
shares of common stock would be equal to the percentage of the outstanding
shares of common stock held by Minority Stockholders multiplied by the Dividend
Waiver Fraction. The Dividend Waiver Fraction is equal to the product of (a) a
fraction, of which the numerator is equal to the Company's stockholders' equity
at the time of the Conversion Transaction less the aggregate amount of dividends
waived by the Mutual Holding Company and the denominator is equal to the
Company's stockholders' equity at the time of the Conversion Transaction, and
(b) a fraction, of which the numerator is equal to the appraised pro forma
market value of the New Holding Company minus the value of the Mutual Holding
Company's assets other than common stock and the denominator is equal to the pro
forma market value of the New Holding Company.
Federal Securities Laws
The common stock of the Company to be issued in the Offering will be
registered with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934 (the "Exchange Act"). The Company will be
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.
Company common stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
57
<PAGE>
MANAGEMENT OF THE COMPANY
Directors of the Company
Generally. The Board of Directors of the Company will initially
consist of nine members, including the eight directors of the Bank and B. Frank
Matthews. Directors of the Company will serve three-year staggered terms so
that approximately one-third of the Directors will be elected at each annual
meeting of stockholders. The class of directors whose term of office expires at
the first annual meeting of shareholders following completion of the
Reorganization consists of Directors Beal, Fuller, and Massey. The class of
directors whose term expires at the second annual meeting of shareholders
following completion of the Reorganization consists of Directors Hoyle, Rudisill
and Williams. The class of directors whose term of office expires at the third
annual meeting of shareholders following the completion of the Reorganization
consists of Directors Matthews, Keith and Price.
Biographical Information. B. Frank Matthews, II, age 69, served as a
Director of the Bank from 1962, most recently as Chairman of the Board, until
his retirement from the Board in January 1998. Mr. Matthews is the Executive
Vice President of Matthews-Belk Co., Inc., a retail department store, and has
served in that position since 1949. Biographical information regarding the
eight other initial members of the Board of Directors of the Company is set
forth under "Management of the Bank--Directors and Executive Officers of the
Bank."
Executive Officers of the Company
The following individuals will be executive officers of the Company
and hold the offices set forth below opposite their names. The biographical
information for each executive officer is set forth under "Management of the
Bank--Directors and Executive Officers of the Bank."
<TABLE>
<CAPTION>
Name Age* Position
- ------------------------- ---- --------
<S> <C> <C>
Kim S. Price 41 President and Chief Executive Officer
Paul L. Teem, Jr. 49 Executive Vice President, Secretary and Chief Operations Officer
Gary F. Hoskins 34 Vice President, Treasurer and Chief Financial Officer
- -------------------------
</TABLE>
*As of September 30, 1997
None of the executive officers has received remuneration from the Company.
It is not anticipated that the executive officers of the Company will initially
receive any remuneration in his capacity as an executive officer. For
information concerning compensation of executive officers of the Bank, see
"Management of the Bank."
Board of Directors and Committees of the Company After the Reorganization
Following the Reorganization, the Board of Directors of the Company is
expected to meet quarterly, or more often as may be necessary. The eight
directors of the Company who are also directors of the Bank will not initially
receive fees for serving on the Company's Board of Directors. Mr. Matthews will
initially receive an annual retainer fee of $12,000. In addition, in November
1997 Mr. Matthews received the first of what will be 180 monthly payments of
$425 under the Supplemental Executive Retirement Plan, which plan was instituted
by the Bank in February 1992. In October 1998, Mr. Matthews will receive the
first of what will be 120 monthly payments of $1,026 under the Deferred
Compensation and Income Continuation Agreement, which agreement was implemented
by the Bank in May 1986. See "Management of the Bank--Compensation of
Directors."
58
<PAGE>
The Board of Directors initially is expected to have, among others, a
standing Executive Committee and Audit Committee. The Company's Nominating
Committee will comprise the directors servicing on the Executive Committee, or
the full Board of Directors. The Company does not intend initially to have a
compensation committee, as it is not anticipated that the officers of the
Company will initially be compensated as such.
The Executive Committee initially will consist of Directors Hoyle (who will
serve as Chairman), Rudisill, Matthews, Keith and Price. The Executive Committee
is expected to meet as necessary when the Board is not in session to exercise
general control and supervision in all matters pertaining to the interests of
the Company, subject at all times to the direction of the Board of Directors.
The Audit Committee initially will consist of Directors Massey (who will
serve as Chairman), Rudisill, Keith, and Beale. The Audit Committee is expected
to meet at least quarterly to examine and approve the audit report prepared by
the independent auditors of the Bank, to review and recommend the independent
auditors to be engaged by the Company, to review the internal accounting
controls of the Company, and to review and approve audit policies.
MANAGEMENT OF THE BANK
Directors and Executive Officers of the Bank
Upon completion of the Reorganization, the directors of the Bank will
consist of those persons who currently serve on the Board of Directors of the
Bank. The directors of the Bank will have three year terms which will be
staggered to provide for the election of approximately one-third of the board
members each year. Directors of the Bank will be elected by the Company as sole
stockholder of the Bank. The directors and executive officers of the Bank as of
January 31, 1998 are as follows:
<TABLE>
<CAPTION>
Age at Current
Name September 30, 1997 Position (1) Director Since Term Expires
- ---- ------------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Directors:(2)
Senator David W. Hoyle 58 Chairman 1975 2000
Ben R. Rudisill, II 54 Vice Chairman 1977 2000
Robert W. Williams, Sr. 69 Vice Chairman 1975 1999
Martha B. Beal 66 Director 1993 1999
James J. Fuller 54 Director 1972 1999
William H. Keith 68 Director 1991 2001
Charles D. Massey 60 Director 1971 1999
Kim S. Price 41 President, Chief Executive 1997 2001
Officer and Director
Executive Officers who are Not Directors:
Paul L. Teem, Jr. 49 Executive Vice President,
Secretary and Chief Operations
Officer
Gary F. Hoskins 34 Vice President, Treasurer and
Chief Financial Officer
</TABLE>
- --------------------
(1) As of January 31, 1998
(2) B. Frank Matthews, II, served as a Director since 1962, most recently as
Chairman until his retirement from the Board in January 1998. Mr. Matthews
will serve on the Company's Board of Directors. See "Management of the
Company" and "Management of the Bank - Compensation of Directors."
The business experience for the past five years for each of the Bank's
directors and executive officers is as follows:
59
<PAGE>
Senator David W. Hoyle has served as a Director of the Bank since 1975.
Senator Hoyle is a North Carolina State Senator and has served in that position
since 1993. Prior to that Senator Hoyle was a self-employed real estate
developer and investor.
Ben R. Rudisill, II has served as a Director of the Bank since 1977. Mr.
Rudisill is the President of Rudisill Enterprises, Inc., a wholesale beverage
distributor and has served in that position since 1976.
Robert W. Williams, Sr. has served as a Director of the Bank since 1975.
Mr. Williams served as President and Chief Executive Officer of Gaston Federal
Savings and Loan Association from 1975 to August 1997 and continues to serve as
Vice Chairman of the Board of Directors.
Martha B. Beal has served as a Director of the Bank since 1993. Mrs. Beal
is the Vice President and Financial Officer of Chelsea House, Inc., a
manufacturer of decorative arts, accessories and furniture and has served in
that position since 1976.
James J. Fuller has served as a Director of the Bank since 1972. Mr. Fuller
is the President of Mount Holly Furniture Company, Inc., and has served in that
position since 1972.
William H. Keith has served as a Director of the Bank since 1991. Mr. Keith
is retired and was a Senior Vice President and Area Executive for First Union
National Bank of North Carolina from 1959 to 1988.
Charles D. Massey has served as a Director of the Bank since 1971.
Mr. Massey is the Director of Information Services of The Massey Company, Inc.,
a wholesale industrial distributor and has served in various positions with The
Massey Company.
Kim S. Price is the President and Chief Executive Officer and a Director of
Gaston Federal Savings and Loan Association and has served in that position
since August 1997. From 1991 to 1997 Mr. Price served as Vice President for Loan
Production for First National Bank of Shelby.
Paul L. Teem, Jr. has served as Executive Vice President, Secretary and
Chief Operations Officer of the Bank since 1983.
Gary F. Hoskins has served as Vice President, Treasurer and Chief Financial
Officer of the Bank since August 1997. Prior to that Mr. Hoskins served as a
Senior Vice President, Treasurer and Chief Financial Officer of Cherryville
Federal Savings and Loan Association from 1995 to 1997. From 1986 to 1995, Mr.
Hoskins served as a Thrift Examiner for the Office of Thrift Supervision.
Meetings of the Board of the Bank
The Board of Directors of the Bank meets monthly and may have additional
special meetings as may be called by the Chairman or as otherwise provided by
law. During the fiscal year ended September, 1997, the Board held 15 meetings.
No director attended fewer than 75% in the aggregate of the total number of
meetings of the Board or Board Committees on which such Director served during
fiscal 1997.
Compensation of Directors
Fees. During the fiscal year ended September 30, 1997, non-employee
Directors of the Bank received a retainer fee of $9,150 ($12,750 for the
Chairman), plus a fee of $300 per Board meeting attended, $400 per month for
serving on the Executive Committee, and $350 per month for other committee
meetings. As of October 1, 1997, non-employee Directors of the Bank receive a
retainer fee of $12,000 ($15,600 for the Chairman), plus a fee of $300
60
<PAGE>
per Board meeting attended, $400 per meeting for attendance at Executive
Committee meetings and $300 per meeting for all other committee meetings.
Deferred Compensation and Income Continuation Agreement. In May 1986 we
entered into non-qualified deferred compensation agreements ("DCA") for the
benefit of Directors Hoyle, Williams, Rudisill, Fuller, Massey and former
Director Matthews. The DCAs provide each director with the opportunity to defer
up to $20,000 of their usual compensation into the DCA. In the event of a
director's termination of employment, amounts credited to his account under the
DCA will be paid to him in 120 equal monthly installments beginning not later
than the sixth month following the end of the Bank's year in which the director
reaches age 70. In the event of death, amounts under the DCA will be paid to the
director's designated beneficiary(ies). The DCA is an unfunded plan for tax
purposes and for purposes of ERISA. All obligations arising under the DCA are
payable from the general assets of the Bank.
Supplemental Executive Retirement Plan. In February 1992 the Bank entered
into non-qualified supplemental retirement agreements ("SRA") for Directors
Keith, Williams, Massey, Hoyle, Fuller, Rudisill, and former Director Matthews.
The SRAs directors provide for an annual benefit that ranges from $1,275 to
$5,100. Monthly benefits are provided for designated beneficiaries of directors
who die before or after age 70 (except as a result of suicide or related
injuries therefrom). Amounts not paid to the director, beneficiaries or spouse
are paid to the estate of the director in a lump sum. Benefits under the SRA are
forfeited if the director's service is terminated for cause. The SRA is
considered an unfunded plan for tax and ERISA purposes. All obligations arising
under the SRA are payable from the general assets of the Bank.
Executive Compensation
Summary Compensation Table. The following table sets forth for the year
ended September 30, 1997, certain information as to the total remuneration paid
by the Bank to the persons who served as a Chief Executive Officer of the Bank
during any part of the fiscal year ended September 30, 1997, as well as to the
four most highly compensated executive officers of the Bank at September 30,
1997, other than the Chief Executive Officer, who received total annual
compensation in excess of $100,000 (together, "Named Executive Officers").
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------ --------------------------------------------
Awards Payouts
------------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other
Year Annual Restricted Options/ All
Ended Compensation Stock SARS LTIP Compensation
Name and Principal Position September 30(1) Salary(2) Bonus(3) (4) Awards(5) (#)(6) Payouts (7)
- ---------------------------- --------------- --------- -------- ------------ ---------- -------- -------- ------------
Kim S. Price (8) 1997 $ 15,000 $ -- -- -- -- -- $ --
Robert W. Williams, Sr. (9) 1997 113,808 11,861 -- -- -- -- 7,470
</TABLE>
- --------------------------
(1) In accordance with the rules on executive officer and director compensation
disclosure adopted by the SEC, Summary Compensation information is excluded
for the fiscal years ended September 30, 1996 and 1995, as the Bank was not
a public company during such periods.
(2) Includes compensation deferred at the election of executives pursuant to
the 401 (k) plan of the Bank.
(3) Includes bonuses deferred at the election of executives pursuant to the 401
(k) plan of the Bank.
(4) The Bank provides certain members of senior management with certain other
personal benefits, the aggregate value of which did not exceed the lesser
of $50,000 or 10% of the total annual salary and bonus reported for each
officer. The value of such persons/benefits is not included in this table.
(5) Does not include awards pursuant to the recognition and retention plan, as
such awards were not earned, vested or granted in 1997. For a discussion
of the terms of the restricted stock plan which is intended to be adopted
by the Company, see "--Recognition and Retention Plan."
(6) No stock options or SARs were earned or granted in 1997. For a discussion
of the stock option plan which is intended to be adopted by the Company,
see "--Stock Option Plan."
(7) Includes employer contributions to the Bank's 401(K) Plan on behalf of
Named Executive Officers.
(8) Mr. Price became Chief Executive Officer on August 4, 1997.
(9) Mr. Williams resigned as Chief Executive Officer and was appointed Vice
Chairman in August 1997.
61
<PAGE>
Employment Agreements
The Bank intends to enter into an employment agreement with Mr. Price which
will provide for a term of thirty-six months. On each anniversary date, the
agreement may be extended for an additional twelve months, so that the remaining
term shall be thirty-six months. If the agreement is not renewed, the agreement
will expire thirty-six months following the anniversary date. The current Base
Salary for Mr. Price is $110,000. The Base Salary may be increased but not
decreased. In addition to the Base Salary, the agreement provides for, among
other things, participation in stock benefit plans and other employee and fringe
benefits applicable to executive personnel. The agreement provides for
termination by the Bank for cause at any time. In the event the Bank terminates
the executive's employment for reasons other than for cause, or in the event of
the executive's resignation from the Bank upon (i) failure to re-elect the
executive to his current offices, (ii) a material change in the executive's
functions, duties or responsibilities, or relocation of his principal place of
employment by more than 30 miles, (iii) liquidation or dissolution of the Bank,
or (iv) a breach of the agreement by the Bank, the executive, or in the event of
death, his beneficiary would be entitled to severance pay in an amount equal to
three times the annual rate of Base Salary (which includes any salary deferred
at the election of Mr. Price) at the time of termination, plus the highest
annual cash bonus paid to him during the prior three years. The Bank would also
continue the executive's life, health, dental and disability coverage for the
remaining unexpired term of the agreement. In the event the payments to the
executive would include an "excess parachute payment" as defined by Code Section
280G (relating to payments made in connection with a change in control), the
payments would be reduced in order to avoid having an excess parachute payment.
The executive's employment may be terminated upon his attainment of normal
retirement age (i.e., age 65) or in accordance with any retirement policy
established by the Bank (with Mr. Price's consent with respect to him). Upon Mr.
Price's retirement, he will be entitled to all benefits available to him under
any retirement or other benefit plan maintained by the Bank. In the event of the
executive's disability for a period of six months, the Bank may terminate the
agreement provided that the Bank will be obligated to pay the executive his Base
Salary for the remaining term of the agreement or one year, whichever is longer,
reduced by any benefits paid to the executive pursuant to any disability
insurance policy or similar arrangement maintained by the Bank. In the event of
the executive's death, the Bank will pay his Base Salary to his named
beneficiaries for one year following his death, and will also continue medical,
dental, and other benefits to his family for one year.
The employment agreement provides that, following termination of
employment, the executive will not compete with the Bank for a period of one
year, provided, however, that in the event of a termination in connection with a
change in control within the meaning of HOLA and the rules and regulations
thereunder, the non-compete provisions will not apply.
Defined Benefit Pension Plan
The Bank maintains the Financial Institutions Retirement Fund, which is a
qualified, tax-exempt defined benefit plan ("Retirement Plan"). All employees
age 20 or older who have worked at the Bank for a period of 5 months are
eligible for membership in the Plan for vesting purposes; however, only
employees that have been credited with 1,000 or more hours of service with the
Bank during the year are eligible to accrue benefits under the Retirement Plan.
The Bank annually contributes an amount to the Retirement Plan necessary to
satisfy the actuarially determined minimum funding requirements in accordance
with the Employee Retirement Income Security Act ("ERISA").
The regular form of all retirement benefits (normal, early or disability)
is guaranteed for the life of the retiree, but not less than 120 monthly
installments. An optional form of benefit may be selected. These optional forms
include various annuity forms as well as a lump sum payment after age 55.
Benefits payable upon death may be made in a lump sum, installments over 10
years, or a lifetime annuity. For a married participant, the normal form of
benefit is a joint and survivor annuity where, upon the participant's death, the
participant's spouse is entitled to receive a benefit equal to 50% of that paid
during the participant's lifetime.
62
<PAGE>
The normal retirement benefit payable at age 65 with 25 years of service,
is an amount equal to 45% of a participant's average compensation based on the
average of the five years providing the highest average. A reduced benefit is
payable upon retirement at age 65 with less than 25 years of service and at or
after completion of five years of service. For the plan year ended June 30,
1997, the Bank made a contribution to the Retirement Plan of $75,700.
The following table indicates the annual retirement benefit that would be
payable under the Retirement Plan upon retirement at age 65 in calendar year
1997, expressed in the form of a single life annuity for the average salary and
benefit service classifications specified below.
<TABLE>
<CAPTION>
High Five-Year Years of Service and Benefit Payable at Retirement
Average ---------------------------------------------------------
Compensation 15 20 25 30 35 40
-------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
$50,000 $13,500 $18,000 $22,500 $22,500 $22,500 $22,500
$75,000 $20,300 $27,000 $33,800 $33,800 $33,800 $33,800
$100,000 $27,000 $36,000 $45,000 $45,000 $45,000 $45,000
$125,000 $33,800 $45,000 $56,300 $56,300 $56,300 $56,300
$150,000 $40,500 $54,000 $67,500 $67,500 $67,500 $67,500
</TABLE>
As of September 30, 1997, Mr. Robert W. Williams had 22 years of credited
service (i.e., benefit service), under the plan.
Supplemental Executive Retirement Plan
The Bank has entered into a non-qualified supplemental retirement agreement
("SRA") with Mr. Robert W. Williams, as an executive of the Bank. The SRA for
Mr. Williams provides an annual retirement benefit of $5,249 payable in equal
monthly installments over a period of 180 months, commencing on or after age 70.
Monthly benefits are provided for Mr. Williams' designated beneficiary(ies)
if he dies before or after age 70 (except as a result of suicide or related
injuries therefrom). Amounts not paid to Mr. Williams, his beneficiary(ies) or
spouse are paid to his estate in a lump sum. Benefits under the SRA are
forfeited if Mr. William's service is terminated for cause.
The SRA is considered an unfunded plan for tax and ERISA purposes. All
obligations arising under the SRA are payable from the general assets of the
Bank.
Employee Stock Ownership Plan and Trust
The Bank intends to implement the ESOP in connection with the
Reorganization. Employees with at least one year of employment with the Bank and
who have attained age 21 are eligible to participate. As part of the
Reorganization, the ESOP intends to borrow funds from the Company and use those
funds to purchase a number of shares equal to up to 8.0% of the common stock to
be sold in the Offering. Collateral for the loan will be the common stock
purchased by the ESOP. The loan will be repaid principally from the Bank's
discretionary contributions to the ESOP over a period of not less than ten
years. It is anticipated that the interest rate for the loan will be a floating
rate equal to the Prime Rate. Shares purchased by the ESOP will be held in a
suspense account for allocation among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account in
an amount proportional to the repayment of the ESOP loan will be allocated among
ESOP participants on the basis of compensation in the year of allocation.
Participants in the ESOP will receive credit for service prior to the effective
date of the ESOP. A participant is 100% vested in his benefits after five years
or upon normal retirement (as defined in the ESOP), early retirement, disability
or death of the participant. A participant who terminates employment for reasons
other than
63
<PAGE>
death, retirement, or disability prior to five years of credited service will
forfeit his benefits under the ESOP. Benefits will be payable in the form of
common stock and/or cash upon death, retirement, early retirement, disability or
separation from service. The Bank's contributions to the ESOP are discretionary,
subject to the loan terms and tax law limits, and, therefore, benefits payable
under the ESOP cannot be estimated. Pursuant to SOP 93-6, the Bank is required
to record compensation expense in an amount equal to the fair market value of
the shares released from the suspense account.
In connection with the establishment of the ESOP, the Bank will establish a
committee of non-employee directors to administer the ESOP. The Bank will either
appoint an independent financial institution to serve as trustee of the ESOP.
The ESOP trustee, subject to its fiduciary duty, must vote all allocated shares
held in the ESOP in accordance with the instructions of participating employees.
Under the ESOP, nondirected shares, and shares held in the suspense account,
will be voted in a manner calculated to most accurately reflect the instructions
it has received from participants regarding the allocated stock so long as such
vote is in accordance with the provisions of ERISA.
Stock Option Plan
At a meeting of the Company's shareholders to be held no earlier than six
months after the completion of the Offering, the Board of Directors intends to
submit for shareholder approval a stock option plan for directors and officers
of the Bank and of the Company (the "Stock Option Plan"). If approved by the
shareholders, common stock in an aggregate amount equal to 10% of the shares
sold in the Offering would be reserved for issuance by the Company upon the
exercise of the stock options granted under the Stock Option Plan. Ten percent
of the shares issued in the Offering would amount to 135,830 shares, 159,800
shares, 183,770 shares or 211,336 shares at the minimum, midpoint, maximum and
adjusted maximum of the Offering Range, respectively. No options would be
granted under the Stock Option Plan until the date on which shareholder approval
is received.
It is anticipated that options would be granted for terms of 10 years (in
the case of incentive options) or 10 years and one day (in the case of non-
qualified options). The exercise price of the options granted under the Stock
Option Plan will be equal to the fair market value of the shares on the date of
grant of the stock options. If the Stock Option Plan is adopted within one year
following the Offering, options will become exercisable at a rate of 20% at the
end of each 12 months of service with the Bank after the date of grant, subject
to early vesting in the event of death or disability. Options granted under the
Stock Option Plan would be adjusted for capital changes such as stock splits and
stock dividends. Notwithstanding the foregoing, awards will be 100% vested upon
termination of employment due to death or disability, and if the Stock Option
Plan is adopted more than 12 months after the Offering, awards would be 100%
vested upon normal retirement or a change in control of the Bank or the Company.
Under OTS rules, if the Stock Option Plan is adopted within the first 12 months
after the Offering, no individual officer can receive more than 25% of the
awards under the plan, no outside director can receive more than 5% of the
awards under the plan, and all outside directors as a group can receive no more
than 30% of the awards under the plan in the aggregate.
The Stock Option Plan would be administered by a Committee of non-employee
members of the Company's Board of Directors. Options granted under the Stock
Option Plan to employees could be "incentive" stock options designed to result
in a beneficial tax treatment to the employee but no tax deduction to the
Company. Non-qualified stock options could also be granted under the Stock
Option Plan, and will be granted to the non-employee directors who receive
grants of stock options. In the event an option recipient terminated his
employment or service as an employee or director, the options would terminate
during certain specified periods.
Recognition and Retention Plan
At a meeting of the Company's shareholders to be held no earlier than six
months after the completion of the Offering, the Board of Directors also intends
to submit a Recognition and Retention Plan (the "Recognition Plan") for
shareholder approval. The Recognition Plan will provide the Bank's directors and
officers an ownership interest
64
<PAGE>
in the Company in a manner designed to encourage them to continue their service
with the Bank. The Bank will contribute funds to the Recognition Plan from time
to time to enable it to acquire an aggregate amount of common stock equal to up
to 4% of the shares of common stock sold in the Offering, either directly from
the Company or in open market purchases. Four percent of the shares issued in
the Offering would amount to 54,332 shares, 63,920 shares, 73,508 or 84,534
shares at the minimum, midpoint, maximum and adjusted maximum of the Offering
Range, respectively. In the event that additional authorized but unissued shares
would be acquired by the Recognition Plan after the Offering, the interests of
existing shareholders would be diluted. The executive officers and directors
will be awarded common stock under the Recognition Plan without having to pay
cash for the shares. No awards under the Recognition Plan would be made until
the date the Recognition Plan is approved by the Company's shareholders.
Awards under the Recognition Plan would be nontransferable and
nonassignable, and during the lifetime of the recipient could only be earned by
him. If the Recognition Plan is adopted within one year following the Offering,
the shares which are subject to an award would vest and be earned by the
recipient at a rate of 20% of the shares awarded at the end of each full 12
months of service with the Bank after the date of grant of the award. Awards
would be adjusted for capital changes such as stock dividends and stock splits.
Notwithstanding the foregoing, awards would be 100% vested upon termination of
employment or service due to death or disability, and if the Recognition Plan is
adopted more than 12 months after the Offering, awards would be 100% vested upon
normal retirement or a change in control of the Bank or the Company. If
employment or service were to terminate for other reasons, the award recipient
would forfeit any nonvested award. If employment or service is terminated for
cause (as would be defined in the Recognition Plan), shares not already
delivered under the Recognition Plan would be forfeited. Under OTS rules, if the
Recognition Plan is adopted within the first 12 months after the Offering, no
individual officer can receive more than 25% of the awards under the plan, no
outside director can receive more than 5% of the awards under the plan, and all
outside directors as a group can receive no more than 30% of the awards under
the plan in the aggregate.
When shares become vested under the Recognition Plan, the participant will
recognize income equal to the fair market value of the common stock earned,
determined as of the date of vesting, unless the recipient makes an election
under (S) 83(b) of the Code to be taxed earlier. The amount of income recognized
by the participant would be a deductible expense for tax purposes for the
Company. If the Recognition Plan is adopted within one year following the
Offering, dividends and other earnings will accrue and be payable to the award
recipient when the shares vest. If the Recognition Plan is adopted within one
year following the Offering, shares not yet vested under the Recognition Plan
will be voted by the trustee of the Recognition Plan, taking into account the
best interests of the recipients of the Recognition Plan awards. If the
Recognition Plan is adopted more than one year following the Offering, dividends
declared on unvested shares will be distributed to the participant when paid,
and the participant will be entitled to vote the unvested shares.
Transactions With Certain Related Persons
The Bank offers to directors, officers, and employees real estate mortgage
loans secured by their principal residence. All loans to the Bank's directors,
officers and employees are made on substantially the same terms, including
interest rates and collateral as those prevailing at the time for comparable
transactions, and do not involve more than minimal risk of collectibility.
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THE REORGANIZATION AND OFFERING
The OTS has approved the Plan and the offering of the common stock subject
to the approval of the Bank's members and the satisfaction of certain conditions
imposed by the OTS. However, such approval does not constitute a recommendation
or endorsement of the Offering or the Plan by the OTS.
Description of and Reasons for the Reorganization
Our Board of Directors unanimously adopted the Plan and the OTS has
approved the Plan. Pursuant to our Plan, we will reorganize into what we call a
"two-tier" mutual holding company structure. We call it a two-tier structure
because we will have two levels of holding companies--a "mid-tier" stock holding
company and a "top-tier" mutual holding company. Under the terms of the Plan (i)
we will form the company as a Federal corporation; (ii) we will form the Mutual
Holding Company as a Federal mutual holding company; (iii) we will reorganize
the Bank into the capital stock form of organization and issue 100% of our to-be
outstanding common stock to the Company; and (iv) the Company will issue shares
of common stock to the public and the Mutual Holding Company. The number of
shares of common stock sold to the public pursuant to this Prospectus will be
equal to 47% of the shares issued in the Reorganization and the number of shares
issued to the Mutual Holding Company will be equal to 53% of the shares issued
in the Reorganization. In this Prospectus we will refer to all of these steps
that are part of this transaction as the "Reorganization," and we will refer to
the issuance of 47% of the Company's common stock pursuant to this Prospectus as
the "Offering." The two-tier mutual holding company structure is most easily
understood by considering the following schematic:
---------------------- ----------------------
The Mutual Holding Public
Company Stockholders
(a federal mutual
holding company)
---------------------- ----------------------
|53% of the |47% of the
| common | common
| stock | stock
--------------------------------------------------
The Company (a Federal corporation)
--------------------------------------------------
| 100% of the
| common stock
--------------------------------------------------
The Bank
(a Federal stock savings bank)
--------------------------------------------------
In adopting the Plan, our Board of Directors determined that the
Reorganization is in the best interest of the Bank. The primary purpose of the
Reorganization is to establish a structure that will enable us to compete and
expand more effectively in the financial services marketplace, and that will
enable our depositors, employees, management and directors to obtain an equity
ownership interest in the Bank. Our new structure will permit the Company to
issue capital stock, which is a source of capital not available to mutual
savings banks, and we will take advantage of this new ability by issuing common
stock in the Offering. Since the Company is not offering all of its common stock
for
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sale to depositors and the public in the Offering (but is issuing a majority of
its stock to the Mutual Holding Company), the Reorganization will result in less
capital raised in comparison to a standard mutual-to-stock conversion. The
Reorganization, however, will also offer the Bank the opportunity to raise
additional capital since the stock held by the Mutual Holding Company will be
available for sale in the future in the event of the Mutual Holding Company
decides to convert to the capital stock form of organization. See "Regulation--
Holding Company Regulation--Conversion of the Mutual Holding Company to Stock
Form."
The Reorganization will also give us greater flexibility to structure and
finance the expansion of our operations, including the potential acquisition of
other financial institutions, and to diversify into other financial services.
The holding company form of organization is expected to provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with other
financial institutions, as well as other companies. Although we have no current
arrangements, understandings or agreements regarding any such opportunities, the
Company will be in a position after the Reorganization, subject to regulatory
limitations and the Company's financial position, to take advantage of any such
opportunities that may arise. Lastly, the Reorganization will enable us to
better manage our capital by giving us broader investment opportunities through
the holding company structure, and enable us to distribute capital to
stockholders of the Company in the form of dividends and stock repurchases.
Because only a minority of the common stock will be offered for sale in the
Offering, our current mutual form of ownership and our ability to remain an
independent savings bank and to provide community-oriented financial services
will be preserved through the mutual holding company structure.
The Board of Directors believes that these advantages outweigh the
potential disadvantages of the mutual holding company structure, which may
include: (i) the inability of stockholders other than the Mutual Holding Company
to obtain majority ownership of the Company and the Bank, which may result in
the perpetuation of the management and Board of Directors of the Bank and the
Company; and (ii) that the mutual holding company structure is a relatively new
form of corporate ownership, and new regulatory policies relating to the mutual
interest in the Mutual Holding Company that may be adopted from time-to-time may
have an adverse impact on minority stockholders. A majority of the voting stock
of the Company will be owned by the Mutual Holding Company, which is a mutual
institution that will be controlled by members. While this structure will permit
management to focus on the Company's and the Bank's long-term business strategy
for growth and capital redeployment without undue pressure from stockholders, it
will also serve to perpetuate the existing management and directors of the Bank.
The Mutual Holding Company will be able to elect all members of the Board of
Directors of the Company, and will be able to control the outcome of all matters
presented to the stockholders of the Company for resolution by vote except for
certain matters that must be approved by more than a majority of stockholders of
the Company. No assurance can be given that the Company will not take action
adverse to the interests of the Minority Stockholders. For example, the Company
could revise the dividend policy or defeat a candidate for the Board of
Directors of the Bank or other proposals put forth by the Minority Stockholders.
The Reorganization does not preclude the conversion of the Mutual Holding
Company from the mutual to stock form of organization. A conversion of the
Mutual Holding Company from the mutual to stock form of organization is not
anticipated for the foreseeable future. See "Regulation--Holding Company
Regulation--Conversion of the Mutual Holding Company to Stock Form."
Following the completion of the Reorganization, all members of Bank as of
the effective date of the Reorganization will become members of the Mutual
Holding Company so long as they continue to hold deposit accounts with the Bank.
In addition, all persons who become depositors subsequent to the Reorganization
will become members of the Mutual Holding Company.
All insured deposit accounts of the Bank that are transferred to the Stock
Bank will continue to be federally insured by the FDIC and the SAIF up to the
legal maximum limit in the same manner as deposit accounts existing in the Bank
immediately prior to the Reorganization. Upon completion of the Reorganization,
the Bank may exercise
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any and all powers, rights and privileges of, and shall be subject to all
limitations applicable to, capital stock savings banks under Federal law and OTS
regulations. Although the Company will have the power to issue shares of
capital stock to persons other than the Mutual Holding Company, as long as the
Mutual Holding Company is in existence, the Mutual Holding Company will be
required to own a majority of the voting stock of the Company. The Company may
issue any amount of non-voting stock to persons other than the Mutual Holding
Company and the Company must own 100% of the voting stock of the Bank. The Bank
and the Company may issue any amount of non-voting stock or debt to persons
other than the Mutual Holding Company.
Stock Pricing and Number of Shares to be Issued in the Reorganization and
Offering
The Plan of Conversion and Federal and state regulations require that the
aggregate purchase price of the common stock issued in the Offering must be
based on the appraised pro forma market value of the common stock, as determined
by an independent valuation. The Bank has retained Feldman Financial, which has
prepared the Independent Valuation. For its services in making such appraisal,
Feldman Financial will receive a fee of $17,500 (which amount does not include a
fee of $5,000 to be paid to Feldman Financial for assistance in preparation of a
business plan). The Bank and the Company have agreed to indemnify Feldman
Financial and its employees and affiliates against certain losses (including any
losses in connection with claims under the federal securities laws) arising out
of its services as appraiser, except where Feldman Financial's liability results
from its negligence or bad faith.
The Independent Valuation was prepared by Feldman Financial in reliance
upon the information contained in the Prospectus, including the Consolidated
Financial Statements. Feldman Financial also considered the following factors,
among others: the present and projected operating results and financial
condition of the Bank and the economic and demographic conditions in the Bank's
existing marketing area; certain historical, financial and other information
relating to the Bank; a comparative evaluation of the operating and financial
statistics of the Bank with those of other publicly traded savings institutions
located in the Southeast region and on a national basis; the aggregate size of
the Offering; the impact of the Reorganization on the Bank's stockholders'
equity and earnings potential; the proposed dividend policy of the Company; and
the trading market for securities of comparable institutions and general
conditions in the market for such securities.
The Independent Valuation states that as of December 11, 1997, the
estimated pro forma market value of the common stock ranged from a minimum of
$28,900,000 to a maximum of $39,100,000 with a midpoint of $34,000,000 (the
"Estimated Valuation Range"). The Bank's Board of Directors determined to the
offer the shares in the Offering for the Subscription Price of $10.00 per share.
Based on the Estimated Valuation Range and the Subscription Price, the number of
shares of common stock that the Company will issue will range from between
2,890,000 shares to 3,910,000 shares, with a midpoint of 3,400,000 shares. The
Bank's Board of Directors determined offer 47% of such shares in the Offering,
or between 1,350,300 shares and 1,837,700 shares with a midpoint of 1,598,000
shares (the "Offering Range"). The 53% of the to-be outstanding shares of common
stock that are not sold in the Offering will be issued to the Mutual Holding
Company.
The Board of Directors reviewed the Independent Valuation and, in
particular, considered (i) the Bank's financial condition and results of
operations for the year ended September 30, 1997,(ii) financial comparisons of
the Bank in relation to financial institutions of similar size and asset
quality, and (iii) stock market conditions generally and in particular for
financial institutions, all of which are set forth in the Independent Valuation.
The Board also reviewed the methodology and the assumptions used by Feldman
Financial in preparing the Independent Valuation. The Estimated Valuation Range
may be amended with the approval of the OTS (if required), if necessitated by
subsequent developments in the financial condition of the Bank or market
conditions generally. In the event the Independent Valuation is updated to
increase the pro forma market value of the common stock to more than $44,965,000
or less than $28,900,000, such appraisal will be filed with the Securities and
Exchange Commission by post-effective amendment.
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<PAGE>
Following commencement of the Subscription Offering, the maximum of the
Estimated Valuation Range may be increased by up to 15% to up to 44,965,000,
which will result in a corresponding increase in the maximum of the Offering
Range to up to 2,113,355 shares to reflect changes in the market and financial
conditions, without the resolicitation of subscribers. The minimum of the
Estimated Valuation Range and the minimum of the Offering Range may not be
decreased without a resolicitation of subscribers. The Subscription Price of
$10.00 per share will remain fixed. See "--Limitations on Purchases of Common
Stock" as to the method of distribution and allocation of additional shares that
may be issued in the event of an increase in the Offering Range to fill unfilled
orders in the Subscription and Community Offerings.
The Independent Valuation, however, is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
such shares. Feldman Financial did not independently verify the Consolidated
Financial Statements and other information provided by the Bank, nor did Feldman
Financial value independently the assets or liabilities of the Bank. The
Independent Valuation considers the Bank as a going concern and should not be
considered as an indication of the liquidation value of the Bank. Moreover,
because such valuation is necessarily based upon estimates and projections of a
number of matters, all of which are subject to change from time to time, no
assurance can be given that persons purchasing such shares in the Offering will
thereafter be able to sell such shares at prices at or above the Subscription
Price.
The Independent Valuation will be updated at the time of the completion of
the Offering. If the update to the Independent Valuation at the conclusion of
the Offering results in an increase in the maximum of the Estimated Valuation
Range to more than $44,965,000 and a corresponding increase in the Offering
Range to more than 2,113,355 shares, or a decrease in the minimum of the
Estimated Valuation Range to less than $28,900,000 and a corresponding decrease
in the Offering Range to fewer than 1,358,300 shares, then the Company, after
consulting with the OTS, may terminate the Plan of Reorganization and return all
funds promptly with interest at the Bank's passbook rate of interest on payments
made by check, certified or teller's check, bank draft or money order, extend or
hold a new Subscription Offering, Community Offering, or both, establish a new
Estimated Valuation Range and Offering Range, commence a resolicitation of
subscribers or take such other actions as permitted by the OTS in order to
complete the Reorganization and the Offering. In the event that a resolicitation
is commenced, unless an affirmative response is received within a reasonable
period of time, all funds will be promptly returned to investors as described
above. A resolicitation, if any, following the conclusion of the Subscription
and Community Offerings would not exceed 45 days unless further extended by the
OTS for periods of up to 90 days not to extend beyond 24 months following the
Special meeting, or ____________, 2000.
An increase in the Independent Valuation and the number of shares to be
issued in the Offering would decrease both a subscriber's ownership interest and
the Company's pro forma earnings and stockholders equity on a per share basis
while increasing pro forma earnings and stockholder's equity on an aggregate
basis. A decrease in the Independent Valuation and the number of shares to be
issued in the Offering would increase both a subscriber's ownership interest and
the Company's pro forma earnings and stockholder's equity on a per share basis
while decreasing pro forma net income and stockholder's equity on an aggregate
basis. For a presentation of the effects of such changes, see "Pro Forma Data."
Copies of the appraisal report of Feldman Financial and the detailed
memorandum of the appraiser setting forth the method and assumptions for such
appraisal are available for inspection at the main office of the Bank and the
other locations specified under "Additional Information."
No sale of shares of common stock may be consummated unless, prior to such
consummation, Feldman Financial confirms to the Bank and the OTS that, to the
best of its knowledge, nothing of a material nature has occurred that, taking
into account all relevant factors, would cause Feldman Financial to conclude
that the Independent Valuation is incompatible with its estimate of the pro
forma market value of the common stock of the Company at the conclusion of the
Offering. Any change that would result in an aggregate purchase price that is
below the minimum or above the maximum of the Estimated Valuation Range would be
subject to OTS approval. If such confirmation
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<PAGE>
is not received, the Bank may extend the Offering, reopen or commence a new
offering, establish a new Estimated Valuation Range and commence a
resolicitation of all purchasers with the approval of the OTS or take such other
actions as permitted by the OTS in order to complete the Offering.
Purchase Priorities and Method of Offering Shares in the Offering
Concurrent with the Reorganization, the Company is offering shares of
common stock to persons other than the Mutual Holding Company. An offering of
between 1,358,300 and 1,837,700 shares of the common stock (subject to
adjustment to up to 2,113,355 shares in the event of an increase in the maximum
of the Estimated Valuation Range. The shares of common stock that will be sold
in the Offering will constitute no more than 47% of the shares that will be
outstanding immediately at the conclusion of the Offering. Following the
Reorganization and the Offering, the Company also will be authorized to issue
additional common stock or preferred stock to persons other than the Mutual
Holding Company, without prior approval of the holders of the common stock.
Subject to the preceding paragraph and the limitations set forth in the
"--Limitations upon Purchases of Common Stock" section, the priorities for the
purchase of shares are as follows:
Priority 1: Eligible Account Holders. Each depositor with aggregate
savings account balances of $50 or more (a "Qualifying Deposit") as of March 31,
1996 (the "Eligibility Record Date," and such account holders, "Eligible Account
Holders") will receive, without payment therefor, nontransferable subscription
rights to subscribe for up to the greater of 25,000 shares, .10% of the total
offering of shares, or 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares to be issued in the
Offering 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 the
Eligibility Record Date, subject to the overall purchase limitation and
exclusive of shares purchased by the ESOP from any increase in the shares
offered pursuant to an increase in the maximum of the Offering Range. See "--
Limitations on Common Stock Purchases." If there are not sufficient shares
available to satisfy all subscriptions, shares first will be allocated so as to
permit each subscribing Eligible Account Holder to purchase a number of shares
sufficient to make his total allocation equal to the lesser of 100 shares or the
number of shares for which he subscribed. Thereafter, unallocated shares (except
for additional shares issued to the ESOP upon an increase in the maximum of the
Offering Range) will be allocated to each subscribing Eligible Account Holder
whose subscription remains unfilled in the proportion that the amount of his
aggregate Qualifying Deposit bears to the total amount of Qualifying Deposits of
all subscribing Eligible Account Holders whose subscriptions remain unfilled. If
an amount so allocated exceeds the amount subscribed for by any one or more
Eligible Account Holders, the excess shall be reallocated among those Eligible
Account Holders whose subscriptions are not fully satisfied until all available
shares have been allocated. Additional shares issued in the event of an increase
in the maximum of the Offering Range will be sold first to the ESOP.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his Order Form all deposit accounts in which he has an ownership
interest on the Eligibility Record Date. Failure to list an account could result
in fewer shares being allocated than if all accounts had been disclosed. The
subscription rights of Eligible Account Holders who are also directors or
officers of the Bank 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 the Eligibility Record
Date. For allocation purposes, Qualifying Deposits will be divided in the case
of multiple orders.
Priority 2: Employee Plans. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by Eligible Account Holders, the
ESOP will receive, without payment therefor, nontransferable subscription rights
to purchase Common Stock in the Offering on behalf of ESOP participants subject
to the purchase limitations described herein. The ESOP intends to subscribe for
8% of the Common Stock issued in the Offering, including 8% of the total number
of shares issued if the maximum of the Offering Range is increased.
Priority 3: Supplemental Eligible Account Holders. To the extent that there
are sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the ESOP, each depositor with a Qualifying Deposit
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<PAGE>
as of December 31, 1997 (the "Supplemental Eligibility Record Date") who is not
an Eligible Account Holder ("Supplemental Eligible Account Holder") will
receive, without payment therefor, nontransferable subscription rights to
subscribe for the greater of up to 25,000 shares, .10% of the total offering of
shares, or 15 times the product (rounded down to the next whole number) obtained
by multiplying the number of shares issued in the Offering 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 the
Supplemental Eligibility Record Date, subject to the overall purchase
limitation. See "--Limitations on Common Stock Purchases." If there are not
sufficient shares available to satisfy all subscriptions, shares first will be
allocated so as to permit each subscribing Supplemental Eligible Account Holder
to purchase a number of shares sufficient to make his total allocation equal to
the lesser of 100 shares or the number of shares for which he subscribed.
Thereafter, unallocated shares will be allocated to each subscribing
Supplemental Eligible Account Holder and whose subscription remains unfilled in
the proportion that the amount of his Qualifying Deposit bears to the total
amount of Qualifying Deposits of all subscribing Supplemental Eligible Account
Holders whose subscriptions remain unfilled.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his Order Form all deposit accounts in which he has an
ownership interest on the Supplemental Eligibility Record Date. Failure to list
an account could result in less shares being allocated than if all accounts had
been disclosed. For allocation purposes, Qualifying Deposits will be divided in
the case of multiple orders.
Priority 4: Other Members. To the extent that there are shares remaining
after satisfaction of subscriptions by Eligible Account Holders, the Employee
Plans, and Supplemental Eligible Account Holders, each depositor with a
Qualifying Deposit or a loan outstanding on the Voting Record Date ("Other
Members") will receive, without payment therefor, nontransferable subscription
rights to subscribe for up to the greater of 25,000 shares, or .10% of the total
offering of shares, subject to the overall purchase limitation. See
"--Limitations on Stock Purchases." If there are not sufficient shares available
to satisfy all subscriptions, available shares will be allocated in proportion
to the amounts of the subscriptions.
Community Offering
Any shares of common stock not subscribed for in the Subscription Offering
may be offered for sale in a Community Offering. This will involve an offering
of unsubscribed shares directly to the general public. If a Community Offering
is conducted, it will be for a period of not more than 45 days unless extended
by the Company and the Bank, and may commence concurrently with, during or
promptly after the Subscription Offering. The common stock will be offered and
sold in the Community Offering, in accordance with OTS regulations, so as to
achieve the widest distribution of the common stock. No person, by himself or
herself, or with an associate or group of persons acting in concert, may
subscribe for or purchase more than $250,000 of common stock offered in the
Community Offering. Further, the Company may limit total subscriptions so as to
assure that the number of shares available for the public offering may be up to
a specified percentage of the number of shares of common stock. Finally, the
Company may reserve shares offered in the Community Offering for sales to
institutional investors.
In the event of an oversubscription for shares in the Community Offering,
shares may be allocated in the sole discretion of the Bank (to the extent shares
remain available) first to cover any reservation of shares for a Community
Offering, or institutional orders, next to cover orders of natural persons
residing in the Bank's local community of Gaston County, North Carolina (the
"Community"), then to cover the orders of any other person subscribing for
shares in the Community Offering so that each such person may receive 1,000
shares, and thereafter, on a pro rata basis to such persons based on the amount
of their respective subscriptions.
The terms "residence," "reside," "resided" or "residing" as used herein
with respect to any person shall mean any person who occupied a dwelling within
the Bank's Community, has an intent to remain within the Community for a period
of time, and manifests the genuineness of that intent by establishing an ongoing
physical presence within
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the Community together with an indication that such presence within the
Community is something other than merely transitory in nature. To the extent the
person is a corporation or other business entity, the principal place of
business or headquarters shall be in the Community. To the extent a person is a
personal benefit plan, the circumstances of the beneficiary shall apply with
respect to this definition. In the case of all other benefit plans, the
circumstances of the director shall be examined for purposes of this definition.
The Bank may utilize deposit or loan records or such other evidence provided to
it to make a determination as to whether a person is a resident. In all cases,
however, such a determination shall be in the sole discretion of the Bank.
The Bank and the Company, in their sole discretion, may reject
subscriptions, in whole or in part, received from any person.
Syndicated Community Offering
Depending on market conditions, the common stock may be offered for sale to
the general public on a best efforts basis in the Syndicated Community Offering
by a selling group (the "Selling Group") of broker-dealers ("Selected Dealers")
to be managed by Trident Securities. Trident Securities, in its discretion, will
instruct Selected Dealers as to the number of shares to be allocated to each
Selected Dealer. Only upon allocation of shares to Selected Dealers may Selected
Dealers take orders from their customers. Investors who desire to purchase
shares in the Community Offering directly through a Selected Dealer, which may
include Trident Securities, are advised that the members of the Selling Group
are required either (a) upon receipt of an executed Order Form or direction to
execute an Order Form on behalf of an investor, to forward the appropriate
purchase price to the Bank for deposit in a segregated account on or before
twelve noon, prevailing time, of the business day next following such receipt or
execution; or (b) upon receipt of confirmation by such member of the Selling
Group of an investor's interest in purchasing shares, and following a mailing of
an acknowledgment by such member to such investor on the business day next
following receipt of confirmation, to debit the account of such investor on the
fifth business day next following receipt of confirmation and to forward the
appropriate purchase price to the Bank for deposit in the segregated account on
or before twelve noon, prevailing time, of the business day next following such
debiting. Payment for any shares purchased pursuant to alternative (a) above
must be made by check in full payment therefor. Payment for shares purchased
pursuant to alternative (b) above may be made by wire transfer to the Bank.
It is expected that the Syndicated Community Offering will commence as soon
as practicable after termination of the Subscription Offering and the Community
Offering, if any. The Syndicated Community Offering shall be completed within 45
days after the termination of the Subscription Offering, unless such period is
extended as provided herein. If for any reason a Syndicated Community Offering
of unsubscribed shares of common stock cannot be effected and any shares remain
unsold after the Subscription Offering and the Community Offering, if any, the
Boards of Directors of the Company and the Bank will seek to make other
arrangements for the sale of the remaining shares. Such other arrangements will
be subject to the approval of the OTS and to compliance with applicable state
and federal securities laws.
Restrictions on Agreements or Understandings Regarding Transfer of Common Stock
to be Purchased in the Offering
Prior to the completion of the Offering, no depositor may transfer or enter
into an agreement or understanding to transfer the legal or beneficial ownership
of the shares of common stock to be purchased by such person in the Offering.
Each depositor and borrower who submits an Order Form will be required to
certify that the purchase of common stock by such person is solely for the
purchaser's own account and there is no agreement or understanding regarding the
sale or transfer of such shares. The Bank intends to pursue any and all legal
and equitable remedies in the event it becomes aware of any such agreement or
understanding, and will not honor orders reasonably believed by the Bank to
involve such an agreement or understanding.
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Procedure for Purchasing Shares
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date, Prospectuses may not be mailed any later than five
days prior to such date or be hand delivered any later than two days prior to
such date. Order forms may only be distributed with a Prospectus.
Expiration Date. The Offering will terminate at 12:00 noon, local time on
February __, 1998, unless extended by the Bank for up to an additional 45 days
or, if approved by the OTS, for an additional period after such 45-day extension
(as so extended, the "Expiration Date"). The Bank is not required to give
purchasers notice of any extension unless the Expiration Date is later than
__________, 1998, in which event purchasers will be given the right to increase,
decrease, confirm, or rescind their orders. If the minimum number of shares
offered in the Offering (1,358,300 shares) is not sold by the Expiration Date,
the Bank may terminate the Offering and promptly refund all orders for common
stock. A reduction in the number of shares below the minimum of the Estimated
Valuation Range will not require the approval of depositors or an amendment to
the Independent Valuation. If the number of shares is reduced below the minimum
of the Estimated Valuation Range, purchasers will be given an opportunity to
increase, decrease, or rescind their orders.
Use of Order Forms. In order to purchase the common stock, each purchaser
must complete an Order Form except for certain persons purchasing in the
Syndicated Community Offering as more fully described below. Any person
receiving an Order Form who desires to purchase common stock may do so by
delivering (by mail or in person) to the Bank a properly executed and completed
Order Form, together with full payment for the shares purchased. The Order Form
must be received prior to 12:00 noon, local time on February __, 1998. Once
tendered, an Order Form cannot be modified or revoked without the consent of the
Bank. Each person ordering shares is required to represent that they are
purchasing such shares for their own account. The interpretation by the Bank of
the terms and conditions of the Plan and of the acceptability of the Order Forms
will be final. The Bank is not required to accept copies of Order Forms. Order
Forms cannot and will not be accepted without the execution of the certification
appearing on the reverse side of the Order Form. Neither the Bank, the Company,
nor Trident Securities is obligated to deliver a Prospectus and an Order Form by
any means other than the U.S. Postal Service.
Payment for Shares. Payment for all shares will be required to accompany
all completed Order Forms for the purchase to be valid. Payment for shares may
be made by (i) check or money order, or (ii) authorization of withdrawal from
passbook accounts or certificates of deposit maintained with the Bank.
Appropriate means by which such withdrawals may be authorized are provided in
the Order Forms. Once such a withdrawal amount has been authorized, a hold will
be placed on such funds, making them unavailable to the depositor until the
Offering has been completed or terminated. In the case of payments authorized to
be made through withdrawal from deposit accounts, all funds authorized for
withdrawal will continue to earn interest at the contract rate until the
Offering is completed or terminated. Interest penalties for early withdrawal
applicable to certificate accounts will not apply to withdrawals authorized for
the purchase of shares; however, if a withdrawal results in a certificate
account with a balance less than the applicable minimum balance requirement, the
certificate shall be canceled at the time of withdrawal without penalty, and the
remaining balance will earn interest at the Bank's passbook rate subsequent to
the withdrawal. In the case of payments made by check or money order, such funds
will be placed in a segregated savings account and interest will be paid by the
Bank at the Bank's passbook rate, from the date payment is received until the
Offering is completed or terminated. Such interest will be paid by check, on all
funds held, including funds accepted as payment for shares of common stock,
promptly upon completion or termination of the Offering. An executed Order Form,
once received by the Bank, may not be modified, amended or rescinded without the
consent of the Bank, unless the Offering is not completed by __________, 1998,
in which event purchasers may be given the opportunity to increase, decrease,
confirm or rescind their orders for a specified period of time.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of common stock in the Offering. Individuals who are participants in
self-directed tax qualified plans maintained by self-employed individuals
("Keogh Plans") may use the assets in their self-directed Keogh Plan accounts to
purchase shares of common stock
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in the Offering. In addition, the provisions of ERISA and IRS regulations
require that executive officers, directors, and 10% stockholders who use self-
directed IRA funds and/or Keogh Plan accounts to purchase shares of common stock
in the Offering, make such purchase for the exclusive benefit of the IRA and/or
Keogh Plan participant.
If the ESOP purchases shares of the common stock, such plan will not
be required to pay for such shares until consummation of the Offering, provided
that there is in force from the time the order is received a loan commitment to
lend to the ESOP the amount of funds necessary to purchase the number of shares
ordered.
Delivery of Stock Certificates. Certificates representing common
stock issued in the Offering will be mailed by the Bank to the persons entitled
thereto at the registration address noted on the Order Form, as soon as
practicable following consummation of the Offering. Any certificates returned
as undeliverable will be held by the Bank until claimed by persons legally
entitled thereto or otherwise disposed of in accordance with applicable law.
Until certificates for the common stock are available and delivered to
purchasers, purchasers may not be able to sell the shares of stock which they
ordered. Subscribers are at their own rick if they sell shares before receiving
the certificates or determining whether their subscription has been accepted.
Plan of Distribution and Selling Commissions
Offering materials for the Offering initially have been distributed to
certain persons by mail, with additional copies made available at the Bank's
offices and by Trident Securities. All prospective purchasers are to send
payment directly to the Bank, where such funds will be held in a segregated
special escrow account and not released until the Offering is completed or
terminated.
To assist in the marketing of the common stock, the Bank has retained
Trident Securities, a broker-dealer registered with the NASD. Trident Securities
will assist the Bank in the Offering as follows: (i) in training and educating
the Bank's employees regarding the mechanics and regulatory requirements of the
Offering; (ii) in conducting informational meetings for employees, customers and
the general public; (iii) in coordinating the selling efforts in the Bank's
local communities; and (iv) in soliciting orders for common stock. For these
services, Trident Securities will receive an advisory and a management fee of 2%
of the dollar amount of the common stock sold in the Offering, excluding shares
sold to the Bank's directors, officers, employees and employee benefit plans.
The Bank also will reimburse Trident Securities for its reasonable out-of-
pocket expenses (including legal fees and expenses up to a maximum of $27,500)
associated with its marketing effort. The Bank has made an advance payment to
Trident Securities in the amount of $7,500. The Bank will indemnify Trident
Securities against liabilities and expenses (including legal fees) incurred in
connection with certain claims or litigation arising out of or based upon untrue
statements or omissions contained in the offering material for the common stock,
including liabilities under the Securities Act of 1933.
Directors and executive officers of the Bank may participate in the
solicitation of offers to purchase common stock. Other trained employees of the
Bank may participate in the Offering in ministerial capacities, providing
clerical work in effecting a sales transaction or answering questions of a
ministerial nature. Other questions of prospective purchasers will be directed
to executive officers or registered representatives. The Bank will rely on Rule
3a4-1 of the Exchange Act, so as to permit officers, directors, and employees to
participate in the sale of the common stock. No officer, director, or employee
of the Bank will be compensated for his participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the common stock.
A Stock Information Center will be established at the Bank's main
office, in an area separated from the Bank's banking operations. Employees will
inform prospective purchasers to direct their questions to the Stock Information
Center and will provide such persons with the telephone number of the Center.
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Other Restrictions. Notwithstanding any other provision of the Plan, no
person is entitled to purchase any common stock to the extent such purchase
would be illegal under any federal or state law or regulation (including state
"blue-sky" laws and regulations), or would violate regulations or policies of
the NASD, particularly those regarding free riding and withholding. The Bank
and/or its agents may ask for an acceptable legal opinion from any purchaser as
to the legality of such purchase and may refuse to honor any such purchase order
if such opinion is not timely furnished. The Plan prohibits the Bank from
lending funds or extending credit to any persons to purchase common stock in the
Offering.
Limitations Upon Purchases of Common Stock
The following additional limitations have been imposed upon purchases of
shares of common stock. Defined terms used in this section and not otherwise
defined in this Prospectus shall have the meaning set forth in the Plan. In all
cases, the Bank shall have the right, in its sole discretion, to determine
whether prospective purchasers are "Associates," or "Acting in Concert" as
defined by the Plan and in interpreting any and all other provisions of the
Plan. All such determinations are in the sole discretion of the Bank, and may be
based on whatever evidence the Bank chooses to use in making any such
determination.
1. The aggregate amount of outstanding common stock of the Company owned
or controlled by persons other than Mutual Holding Company at the
close of the Offering shall not exceed 47% of the Company's total
outstanding common stock.
2. No Person or group of persons Acting in Concert, may purchase more
than $250,000 of common stock issued in the Offering to Persons other
than the Mutual Holding Company, except that: (i) the Company may, in
its sole discretion and without further notice to or solicitation of
subscribers or other prospective purchasers, increase such maximum
purchase limitation to up to 5% or decrease it to .5% of the number of
shares issued in the Offering; (ii) Tax-Qualified Employee Plans may
purchase up to 10% of the shares issued in the Offering; and (iii) for
purposes of this paragraph shares to be held by any Tax-Qualified
Employee Plan and attributable to a person shall not be aggregated
with other shares purchased directly by or otherwise attributable to
such person.
3. The aggregate amount of common stock acquired in the Offering by all
Management Persons and their Associates, exclusive of any stock
acquired by such persons in the secondary market, shall not exceed 25%
of the outstanding shares of common stock of the Company held by
persons other than the Mutual Holding Company at the close of the
Offering. In calculating the number of shares held by Management
Persons and their Associates under this paragraph or under the
provisions of paragraph D below, shares held by any Tax-Qualified
Employee Benefit Plan or any Non-Tax-Qualified Employee Benefit Plan
of the Bank that are attributable to such persons shall not be
counted.
4. The aggregate amount of common stock acquired in the Offering by all
Management Persons and their Associates, exclusive of any common stock
acquired by such persons in the secondary market, shall not exceed 25%
of the stockholders' equity of the Bank. In calculating the number of
shares held by Management Persons and their Associates under this
paragraph or under the provisions of paragraph C of this section,
shares held by any Tax-Qualified Employee Benefit Plan or any Non-Tax-
Qualified Employee Benefit Plan of the Bank that are attributable to
such persons shall not be counted.
5. The Boards of Directors of the Bank and the Company may, in their sole
discretion, increase the maximum purchase limitation to up to 9.9%,
provided that orders for common stock in excess of 5% of the number of
shares of common stock issued in the Offering shall not in the
aggregate exceed 10% of the total shares of common stock issued in the
Offering (except that this limitation
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shall not apply to purchases by Tax-Qualified Employee Plans). If such
5% limitation is increased, subscribers for the maximum amount will
be, and certain other large subscribers in the sole discretion of the
Company and the Bank may be, given the opportunity to increase their
subscriptions up to the then applicable limit. Requests to purchase
additional shares of common stock under this provision will be
determined by the Board of Directors of the Company, in its sole
discretion.
6. In the event of an increase in the total number of shares offered in
the Subscription Offering due to an increase in the maximum of the
Estimated Valuation Range of up to 15% (the "Adjusted Maximum"), the
additional shares will be issued in the following order of priority:
(i) to fill the Employee Plans' subscription to the Adjusted Maximum;
(ii) in the event that there is an oversubscription at the Eligible
Account Holder, Supplemental Eligible Account Holder, or employee,
officer and director categories, to fill unfulfilled subscriptions of
such subscribers according to their respective priorities set forth in
the Plan.
7. Notwithstanding any other provision of the Plan, no person shall be
entitled to purchase any common stock to the extent such purchase
would be illegal under any federal law or state law or regulation or
would violate regulations or policies of the National Association of
Securities Dealers, Inc., particularly those regarding free riding and
withholding. The Company and/or its agents may ask for an acceptable
legal opinion from any purchaser as to the legality of such purchase
and may refuse to honor any purchase order if such opinion is not
timely furnished.
8. The Board of Directors of the Company has the right in its sole
discretion to reject any order submitted by a person whose
representations the Board of Directors believes to be false or who it
otherwise believes, either alone or acting in concert with others, is
violating, circumventing, or intends to violate, evade or circumvent
the terms and conditions of the Plan.
The Company, in its sole discretion, may make reasonable efforts to comply
with the securities laws of any state in the United States in which its
depositors reside, and will only offer and sell the common stock in states in
which the offers and sales comply with such states' securities laws. However,
no person will be offered or allowed to purchase any common stock under the Plan
if they resides in a foreign country or in a state of the United States with
respect to which any of the following apply: (i) a small number of persons
otherwise eligible to purchase shares under the Plan reside in such state or
foreign county; (ii) the offer or sale of shares of common stock to such persons
would require the Bank or its employees to register, under the securities laws
of such state or foreign country, as a broker or dealer or to register or
otherwise qualify its securities for sale in such state or foreign country; or
(iii) such registration or qualification would be impracticable for reasons of
cost or otherwise.
OTS regulations define "acting in concert" as (i) knowing participation in
a joint activity or interdependent conscious parallel action towards a common
goal whether or not pursuant to an express agreement, or (ii) a combination or
pooling of voting or other interests in the securities of an issuer for a common
purpose pursuant to any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. The Bank will presume that
certain persons are acting in concert based upon various facts, including the
fact that persons have joint account relationships or the fact that such persons
have filed joint Schedules 13D with the SEC with respect to other companies.
Directors are not treated as Associates of one another solely because of
their board membership. Compliance with the foregoing limitations does not
necessarily constitute compliance with other regulatory restrictions on
acquisitions of the common stock. For a further discussion of limitations on
purchases of the common stock during and subsequent to Reorganization, see "--
Restrictions on Sale of Stock by Directors and Officers," "--Restrictions on
Purchase of Stock by Directors and Officers Following Reorganization," and
"Restrictions on Acquisition of the Company."
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Restrictions on Repurchase of Stock by the Company
OTS regulations and policy currently prohibit the Company from repurchasing
any of its shares within three years following the Reorganization unless the
repurchase is (i) part of a general repurchase made on a pro rata basis pursuant
to an offer approved by the OTS and made to all stockholders (except the Mutual
Holding Company may be excluded from the repurchase with OTS approval), (ii)
limited to the repurchase of qualifying shares of a director, or (iii) in open
market transaction by a tax-qualified or non-tax qualified employee benefit plan
in an amount reasonable and appropriate to fund such plan.
Restrictions on Sale of Stock by Directors and Officers
All shares of the common stock purchased by directors and offices of the
Bank or the Company in the Offering will be subject to the restriction that such
shares may not be sold or otherwise disposed of for value for a period of one
year following the date of purchase, except for any disposition of such shares
(i) following the death of the original purchaser or (ii) by reason of an
exchange of securities in connection with a merger or acquisition approved by
the applicable regulatory authorities. Sales of shares of the common stock by
the Company's directors and officers will also be subject to certain insider
trading and other transfer restrictions under the federal securities laws. See
"Regulation--Federal Securities Laws" and "Description of Capital Stock."
Each certificate for such restricted shares will bear a legend prominently
stamped on its face giving notice of the restrictions on transfer, and
instructions will be issued to the Company's 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 pursuant to a stock dividend, stock split or
otherwise with respect to restricted shares will be subject to the same
restrictions on sale.
Restrictions on Purchase of Stock by Directors and Officers in the
Reorganization and Offering
OTS regulations provide that for a period of three years following the
Reorganization, without prior written approval of the OTS, neither directors nor
officers of the Bank or the Company nor their associates may purchase shares of
the common stock of the Company, except from a dealer registered with the SEC.
This restriction does not, however, apply to negotiated transactions involving
more than 1% of the Company's outstanding common stock, to shares purchased
pursuant to stock option or other incentive stock plans approved by the
Company's shareholders, or to shares purchased by employee benefit plans
maintained by the Company which may be attributable to individual officers or
directors.
Restrictions on Transfer of Subscription Rights and Common Stock
Prior to the completion of the Reorganization, OTS regulations and the Plan
prohibit any person with subscription rights from transferring or entering into
any agreement or understanding to transfer the legal or beneficial ownership of
the subscription rights issued under the Plan or the shares of common stock to
be issued upon their exercise. Such rights may be exercised only by the person
to whom they are granted and 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 prior to the completion of the Reorganization and
Offering. The Bank intends to pursue any and all legal and equitable remedies
in the event it becomes aware of the transfer of subscription rights and will
not honor orders known to involve the transfer of such rights. In addition,
persons who violate the purchase limitations may be subject to sanctions and
penalties imposed by the OTS.
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Federal and State Tax Consequences of the Reorganization
The Bank intends to proceed with the Reorganization on the basis of an
opinion from its special counsel, Luse Lehman Gorman Pomerenk & Schick, P.C.,
Washington, D.C., as to certain tax matters that are material to the
Reorganization. The opinion is based, among other things, on certain
representations made by the Bank, including the representation that the exercise
price of the subscription rights to purchase the common stock will be
approximately equal to the fair market value of the stock at the time of the
completion of the Reorganization. With respect to the subscription rights, the
Bank has received an opinion of Feldman Financial which, based on certain
assumptions, concludes that the subscription rights to be received by Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members do not
have any economic value at the time of distribution or the time the subscription
rights are exercised, whether or not a Community Offering takes place, and Luse
Lehman Gorman Pomerenk & Schick, P.C.'s opinion is given in reliance thereon.
The Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C., provides
substantially as follows:
1. The change in form from a mutual savings Bank ("Mutual Bank") to a
stock savings Bank (the "Stock Bank") will qualify as a reorganization
under Section 368(a)(1)(F) of the Internal Revenue Code, as amended
("Code"), and no gain or loss will be recognized to the Bank in either
its mutual form or stock form by reason of the Reorganization.
2. No gain or loss will be recognized by the Mutual Bank upon the
transfer of the Mutual Bank's assets to the Stock Bank solely in
exchange for shares of Stock Bank stock and the assumption by the
Stock Bank of the liabilities of the Mutual Bank.
3. No gain or loss will be recognized by Stock Bank upon the receipt of
the assets of the Mutual Bank in exchange for shares of Stock Bank
common stock.
4. Stock Bank's holding period in the assets received from the Mutual
Bank will include the period during which such assets were held by the
Mutual Bank.
5. Stock Bank's basis in the assets of the Mutual Bank will be the same
as the basis of such assets in the hands of the Mutual Bank
immediately prior to the proposed transaction.
6. The Mutual Bank members will recognize no gain or loss upon the
constructive receipt of Stock Bank common stock solely in exchange for
their membership interests in the Mutual Bank.
7. The Stock Bank will succeed to and take into account the Mutual Bank
earnings and profits or deficit in earnings and profits, as of the
date of the Reorganization.
8. The exchange of stock by the Stock Bank stockholders (formerly, the
Mutual Bank's members) in exchange for membership interests in the
Mutual Holding Company will constitute a tax-free exchange of property
solely for voting "stock" pursuant to Section 351 of the Internal
Revenue Code.
9. The Stock Bank's stockholders will recognize no gain or loss upon the
transfer of the Stock Bank stock they constructively received to the
Mutual Holding Company solely in exchange for membership interests in
the Mutual Holding Company.
10. The Mutual Holding Company will recognize no gain or loss upon the
receipt of property from the Stock Bank stockholders in exchange for
membership interests in the Mutual Holding Company.
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11. The Mutual Holding Company's basis in the property received from the
Stock Bank stockholders will be the same as the basis of such property
in the hands of Stock Bank stockholders immediately prior to the
transaction.
12. The Mutual Holding Company's holding period for the property received
from Stock Bank's stockholders will include the period during which
such property was held by Stock Bank stockholders.
13. The Stock Bank depositors will recognize no gain or loss solely by
reason of the transaction.
14. The Mutual Holding Company and the Minority Stockholders will
recognize no gain or loss upon the transfer of Stock Bank stock and
cash, respectively, to the Company in exchange for Common Stock of the
Company.
15. The Company will recognize no gain or loss upon its receipt of
property from the Mutual Holding Company and Minority Stockholders in
exchange for Common Stock of the Company.
16. The basis of the Company common stock to the Minority Stockholders
will be the actual purchase price ($10.00) thereof, and a shareholders
holding period for Common Stock acquired through the exercise of
subscription rights will begin on the date the rights are exercised.
The opinions of Luse Lehman Gorman Pomerenk & Schick, P.C., unlike a letter
ruling issued by the Internal Revenue Service, are not binding on the Service
and the conclusions expressed herein may be challenged at a future date. The
Service has issued favorable rulings for transactions substantially similar to
the proposed Reorganization, but any such ruling may not be cited as precedent
by any taxpayer other than the taxpayer to whom the ruling is addressed. The
Bank does not plan to apply for a letter ruling concerning the transactions
described herein.
The Bank has also received an opinion from Cherry, Bekaert & Holland,
L.L.P. that implementation of the Plan will not result in any North Carolina
income tax liability to the Bank, its account holders, borrowers the Company or
the Mutual Holding Company.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
General
The following discussion is a general summary of certain regulatory
restrictions on the acquisition of the common stock. In addition, the following
discussion generally summarizes certain provisions of the charter and bylaws of
the Company and the Bank and certain regulatory provisions that may be deemed to
have an "anti-takeover" effect.
The Mutual Holding Company Structure
Under OTS regulations, the Plan of Reorganization, and our governing
corporate instruments, at least a majority of the Company's voting shares must
be owned by the Mutual Holding Company. The Mutual Holding Company will be
controlled by its Board of Directors, which will initially consist of persons
who are members of the Board of Directors of the Company. The Mutual Holding
Company will be able to elect all members of the Board of Directors of the
Company, and as a general matter, will be able to control the outcome of all
matters presented to the stockholders of the Company for resolution by vote,
except for matters that require a vote greater than a majority. The Mutual
Holding Company, acting through its Board of Directors, will be able to control
the business, and operations of the Company and the Bank, and will be able to
prevent any challenge to the ownership or control of the Company by Minority
Stockholders. Accordingly, a change in control of the Company and the Bank
cannot occur
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unless the Mutual Holding Company first converts to the stock form of
organization. Although OTS regulations and policy and the Plan of Reorganization
permit the Mutual Holding Company to convert from the mutual to the capital
stock form of organization, it is not anticipated that a conversion of the
Mutual Holding Company will occur in the foreseeable future.
Provisions of the Company's Charter and Bylaws
In addition to the anti-takeover aspects of the mutual holding company
structure, the following discussion is a general summary of certain provisions
of the Company's charter and bylaws and certain other regulatory provisions
which will restrict the ability of stockholders to influence management
policies, and which may be deemed to have an "anti-takeover" effect. The
following description of certain of these provisions is necessarily general and,
with respect to provisions contained in the Company's and the Bank's proposed
charter and bylaws and the Bank's proposed stock charter and bylaws, reference
should be made in each case to the document in question, each of which is part
of the Bank's application to the OTS and the Company's Registration Statement
filed with the SEC. See "Additional Information."
Classified Board of Directors and Related Provisions. The Company's Charter
provides that the Board of Directors is to be divided into three classes which
shall be as nearly equal in number as possible. The directors in each class hold
office for terms of three years and until their successors are elected and
qualified. One class is elected annually. Management of the Company believes
that the staggered election of directors tends to promote continuity and
stability of management but makes it more difficult for stockholders to change a
majority of the directors because it generally takes at least two annual
elections of directors for this to occur.
Absence of Cumulative Voting. The Company's Charter provides that there
shall be no cumulative voting rights in the election of directors.
Authorization of Preferred Stock. The Company's Charter authorizes shares
of serial preferred stock, without par value. The Company is authorized to issue
preferred stock from time to time in one or more series subject to applicable
provisions of law; and the Board of Directors is authorized to fix the
designations, and relative preferences, limitations, voting rights, if any,
including without limitation, conversion rights of such shares (which could be
multiple or as a separate class). In the event of a proposed merger, tender
offer or other attempt to gain control of the Company that the Board of
Directors does not approve, it might be possible for the Board of Directors to
authorize the issuance of a series of preferred stock with rights and
preferences that would impede the completion of such a transaction. An effect of
the possible issuance of preferred stock, therefore, may be to deter a future
takeover attempt. The Board of Directors has no present plans or understandings
for the issuance of any preferred stock but it may issue any preferred stock on
terms which the Board deems to be in the best interests of the Company and its
stockholders.
Change in Bank Control Act and Savings and Loan Holding Company Provisions of
the HOLA
The Change in Bank Control Act provides that no person, acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control of a savings and loan holding company unless the OTS has been given 60
days' prior written notice. The Home Owners' Loan Act provides that no company
may acquire "control" of a savings and loan holding company without the prior
approval of the OTS. Any company that acquires such control becomes a "savings
and loan holding company" subject to registration, examination, and regulation
by the OTS. Pursuant to federal regulations, control of a savings and loan
holding company is conclusively deemed to have been acquired by, among other
things, the acquisition of more than 25.0% of any class of voting stock of the
institution or the ability to control the election of a majority of the
directors of the institution. Moreover, control is presumed to have been
acquired, subject to rebuttal, upon the acquisition of more than 10.0% of any
class of voting stock, or of more than 25.0% of any class of stock, of a savings
and loan holding company, where certain enumerated "control factors" are also
present in the acquisition. The OTS may prohibit an acquisition of control if
(i) it would
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result in a monopoly or substantially lessen competition, (ii) the financial
condition of the acquiring person might jeopardize the financial stability of
the institution, or (iii) the competence, experience, or integrity of the
acquiring person indicates that it would not be in the interest of the
depositors or of the public to permit the acquisition of control by such person.
The foregoing restrictions do not apply to the acquisition of the Company's
capital stock by one or more tax-qualified employee stock benefit plans,
provided that the plan or plans do not have beneficial ownership in the
aggregate of more than 25.0% of any class of equity security of the Company.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
Company Capital Stock
The 25,000,000 shares of capital stock authorized by the Company's Charter
are divided into two classes, consisting of 20,000,000 shares of common stock
($1.00 par value) and 5,000,000 shares of serial preferred stock. The aggregate
stated value of the issued shares will constitute the capital account of the
Company on a consolidated basis. The balance of the Subscription Price of common
stock, less expenses of Reorganization and Offering, will be reflected as paid-
in capital on a consolidated basis. See "Capitalization." Upon payment of the
Subscription Price for the common stock, in accordance with the Plan, all such
stock will be duly authorized, fully paid, validly issued and nonassessable.
Common Stock. Each share of the Common Stock will have the same relative
rights and will be identical in all respects with each other share of the Common
Stock. The Common Stock of the Company will represent non-withdrawable capital,
will not be of an insurable type and will not be insured by the FDIC. The
holders of the Common Stock will possess exclusive voting power in the Company.
Each stockholder will be entitled to one vote for each share held on all matters
voted upon by stockholders, subject to the limitation discussed under
"Restrictions on Acquisitions of the Company--Provisions of the Company's
Charter and Bylaws." If the Company issues preferred stock subsequent to the
Reorganization, holders of the preferred stock may also possess voting powers.
No Preemptive Rights. Holders of the 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 call for redemption, and, upon receipt by the
Company of the full purchase price therefor, each share of the common stock will
be fully paid and nonassessable.
Preferred Stock. After the Reorganization, the Board of Directors of the
Company will be authorized to issue preferred stock in series and to fix and
state the voting powers, designations, preferences and relative, participating,
optional or other special rights of the shares of each such series and the
qualifications, limitations and restrictions thereof. Preferred stock may rank
prior to the common stock as to dividend rights, liquidation preferences, or
both, and may have full or limited voting rights. The holders of preferred stock
will be entitled to vote as a separate class or series under certain
circumstances, regardless of any other voting rights which such holders may
have.
Except as discussed herein, the Company has no present plans for the
issuance of the additional authorized shares of common stock or for the issuance
of any shares of preferred stock. In the future, the authorized but unissued and
unreserved shares of common stock will be available for general corporate
purposes including but not limited to possible issuance as stock dividends or
stock splits, in future mergers or acquisitions, under a cash dividend
reinvestment and stock purchase plan, in a future underwritten or other public
offering or under an employee stock ownership plan, stock option or restricted
stock plan. The authorized but unissued shares of preferred stock will similarly
be available for issuance in future mergers or acquisitions, in a future
underwritten public offering or private placement or for other general corporate
purposes. Except as described above or as otherwise required to approve the
transaction in which the additional authorized shares of common stock or
authorized shares of preferred stock would be issued, no stockholder approval
will be required for the issuance of these shares. Accordingly, the Board of
Directors of the Company, without stockholder approval, can issue preferred
stock with voting and conversion rights which could adversely affect the voting
power of the holders of common stock.
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Dividends. Upon consummation of the formation of the Company, the
Company's only asset will be the Bank's common stock and $100,000. Although it
is anticipated that the Company will retain up to 50% of the net proceeds of the
Offering, dividends from the Bank will be an important source of income for the
Company. Should the Bank elect to retain its income, the ability of the Company
to pay dividends to its own shareholders may be adversely affected. Furthermore,
if at any time in the future the Company owns less than 100% of the outstanding
stock of the Bank, certain tax benefits under the Code as to inter-company
distributions will not be fully available to the Company and it will be required
to pay federal income tax on a portion of the dividends received from the Bank,
thereby reducing the amount of income available for distribution to the
shareholders of the Company.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services will act as the transfer agent and
registrar for the common stock.
LEGAL AND TAX MATTERS
The legality of the common stock and the federal income tax consequences of
the Offering will be passed upon for the Bank and the Company by the firm of
Luse Lehman Gorman Pomerenk & Schick, P.C., Washington, D.C. Luse Lehman
Gorman Pomerenk & Schick, P.C . has consented to the references herein to their
opinions. Certain legal matters relating to the Offering may be passed upon for
Trident Securities by Womble Carlyle Sandbridge & Rice PLC., Atlanta, Georgia.
EXPERTS
The financial statements as of September 30, 1997 and 1996 and for the
years then ended included in this Prospectus have been audited by Cherry,
Bekaert & Holland, L.L.P., independent auditors, as stated in their report
appearing herein, and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
Feldman Financial has consented to the publication herein of the summary of
its report to the Bank and the Company setting forth its opinion as to the
estimated pro forma market value of the common stock upon Reorganization and its
valuation with respect to Subscription Rights.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act, with respect to the common stock offered hereby. As permitted
by the rules and regulations of the SEC, this Prospectus does not contain all
the information set forth in the registration statement. Such information can
be examined without charge at the public reference facilities of the SEC located
at 450 Fifth Street, NW, Washington, D.C. 20549, and copies of such material
can be obtained from the SEC at prescribed rates. The SEC maintains a web site
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. The address of this web
site is http://www.sec.gov. The statements contained herein 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 but do contain all material information regarding such documents; each
such statement is qualified by reference to such contract or document.
In connection with the Offering, the Company will register the common stock
with the SEC under Section 12(g) of the Exchange Act; and, upon such
registration, the Company and the holders of its common stock will become
subject to the proxy solicitation rules, reporting requirements and restrictions
on stock purchases and sales by directors, officers and greater than 10%
stockholders, the annual and periodic reporting and certain other
82
<PAGE>
requirements of the Exchange Act. Under the Plan, the Company has undertaken
that it will not terminate such registration for a period of at least three
years following the Reorganization.
A copy of the certificate of incorporation and bylaws of the Company are
available without charge from the Bank.
83
<PAGE>
GLOSSARY
1933 Act Securities Act of 1933, as amended
1934 Act Securities Exchange Act of 1934, as amended
Associate The term "Associate" of a person is defined to mean
the following: (i) any corporation or organization
(other than the Bank or its subsidiaries or the
Company) of which such person is a director,
officer, partner or 10% shareholder; (ii) any trust
or other estate in which such person has a
substantial beneficial interest or serves as
trustee or in a similar fiduciary capacity;
provided, however that such term shall not include
any employee stock benefit plan of the Company or
the Bank in which such a person has a substantial
beneficial interest or as a trustee or in a similar
fiduciary capacity; and (iii) any relative or
spouse of such person, or relative of such spouse,
who either has the same home as such person or who
is a director or officer of the Bank or its
subsidiaries or the Company
Bank Gaston Federal Savings and Loan Association prior
to completion of the Reorganization, or Gaston
Federal Bank after the conclusion of the
Reorganization, as indicated by the context.
BIF Bank Insurance Fund of the FDIC
Code The Internal Revenue Code of 1986, as amended
Community Offering Offering for sale to members of the general public
of shares of common stock not subscribed for in the
Subscription Offering, with preference given to
natural persons residing in Gaston County, North
Carolina.
Common Stock Common Stock, par value of $1.00 per share, of
Gaston Federal Bancorp, Inc.
Company Gaston Federal Bancorp, Inc., the parent holding
company for Gaston Federal Bank, and the issuer of
the shares of Common Stock in the Offering
Eligible Account Holders Holders of deposit accounts with the Bank with
account balances of at least $50 as of the close of
business on March 31, 1996
ERISA Employee Retirement Income Security Act of 1974, as
amended
ESOP The Gaston Federal Bancorp, Inc. Employee Stock
Ownership Plan and Trust
Estimated Valuation Range Estimated pro forma market value of the Company's
Common Stock to be issued in the Reorganization, or
$28,900,000 to $39,100,000. The maximum of the
Estimated Valuation Range may be increased to
$44,965,000 without a resolicitation of subscribers
Expiration Date 12:00 noon, local time, on March ___, 1998
FASB Financial Accounting Standards Board
G-1
<PAGE>
FDIC Federal Deposit Insurance Corporation
FDICIA Federal Deposit Insurance Corporation Improvement
Act of 1991, as amended
FNMA Federal National Mortgage Association
Independent Valuation The appraisal of the pro forma market value of the
Company's Common Stock to be issued in the
Reorganization, as determined by Feldman Financial
Advisors, Inc. Washington, D.C.
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
Minority Shares The shares of Common Stock sold to the depositors
and the public in the Offering pursuant to the
Prospectus, which will represent, in the aggregate,
a minority ownership position in the Company
MMDA Money Market Demand Account
Mutual Holding Company Gaston Federal Holdings, MHC, a federal mutual
holding company, which will own, and which by law
must own, a majority of the shares of Common Stock
of the Company
NASD National Association of Securities Dealers, Inc.
NOW account Negotiable Order of Withdrawal Account
NPV Net portfolio value
Offering The offer and sale of Common Stock to depositors
and the public pursuant to the Prospectus
Offering Range The offer and sale by the Company of between
1,358,300 and 2,113,355 shares (subject to
adjustment to 4,496,500 shares) of Common Stock
pursuant to the Prospectus
Order Form Form for ordering stock accompanied by a
certification concerning certain matters
Plan Reorganization Gaston Federal Savings and Loan Association Plan of
Reorganization from a Mutual Savings Association to
a Mutual Holding Company and Stock Issuance Plan
Reorganization The reorganization of the Bank from the mutual to
the stock form of organization, the organization of
the Company, the issuance of all of the Bank's
common stock to the Company, the issuance of a
majority of the Company's Common Stock to the
Mutual Holding Company, and the offer and sale of
the Minority Shares to depositors and the public
pursuant to the Prospectus
REO Real Estate Owned
G-2
<PAGE>
Recognition and
Retention Plan The Recognition and Retention Plan to be submitted
for approval at a meeting of the Company's
shareholders to be held no earlier than six months
after the completion of the Reorganization
SAIF Savings Association Insurance Fund of the FDIC
SEC Securities and Exchange Commission
Special Meeting Special Meeting of members of the Bank called for
the purpose of approving the Plan of Reorganization
Stock Option Plan The Stock Option Plan for directors and officers to
be submitted for approval at a meeting of the
Company' shareholders to be held no earlier than
six months after the completion of the conversion
Subscription Offering Offering of non-transferable rights to subscribe
for the common stock, in order of priority, to
Eligible Account Holders, the ESOP, Supplemental
Eligible Account Holders and Other Members.
Supplemental Eligible
Account Holders Depositors of the Bank, who are not eligible
account holders, with account balances of at least
$50 on December 31, 1997
Voting Record Date The close of business on __________, 1998, the date
for determining depositors entitled to vote at the
Special Meeting
G-3
<PAGE>
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION
AND SUBSIDIARY
Contents
Page
Report of Independent Auditors 1
Consolidated Statements of Condition 2
Consolidation Statements of Operations 3
Consolidation Statements of Changes in Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Gaston Federal Savings & Loan Association
We have audited the accompanying consolidated statements of condition of Gaston
Federal Savings & Loan Association and subsidiary as of September 30, 1997 and
1996 and the related consolidated statements of operations, changes in equity
and cash flows for the years then ended. These financial statements are the
responsibility of 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 audit 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 consolidated financial position of Gaston Federal
Savings & Loan Association and subsidiary as of September 30, 1997 and 1996 and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
/s/ Cherry, Bekaert & Holland, L.L.P.
Gastonia, North Carolina
October 24, 1997
<PAGE>
2
-
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Consolidated Statements of Condition
<TABLE>
<CAPTION>
September 30
1997 1996
------------ ------------
<S> <C> <C>
Assets
Cash and due from banks $ 2,422,301 $ 1,655,234
Interest-earning bank balances 2,203,314 508,340
------------ ------------
Cash and cash equivalents 4,625,615 2,163,574
Investment securities
Available-for-sale 8,248,173 5,514,971
Held-to-maturity (fair value $10,425,353 in 1997
and $14,663,381 in 1996) 10,407,029 14,751,246
Mortgage-backed securities held-to-maturity (fair value
$10,193,711 in 1997 and $12,845,548 in 1996) 10,087,081 12,917,935
Loans, net 134,491,057 130,862,457
Premises and equipment 2,139,497 2,327,160
Accrued interest receivable 981,313 995,402
Federal Home Loan Bank stock 1,276,000 1,261,100
Other assets 1,214,683 1,158,975
------------ ------------
Total assets $173,470,448 $171,952,820
============ ============
Liabilities and Equity
Deposits $145,443,500 $145,975,092
Advances from borrowers for taxes and insurance 1,042,360 791,223
Accrued interest payable 412,234 407,567
Advances from Federal Home Loan Bank 3,500,000 3,750,000
Deferred income taxes 424,000 182,850
Other liabilities 1,780,358 1,762,409
------------ ------------
Total liabilities 152,602,452 152,869,141
Commitments and contingencies
Retained earnings
Unappropriated 19,769,045 18,337,197
Unrealized gain on securities available-for-sale,
net of tax 1,098,951 746,482
------------ ------------
Total equity 20,867,996 19,083,679
------------ ------------
Total liabilities and equity $173,470,448 $171,952,820
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
3
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended September 30
1997 1996
------------ ------------
<S> <C> <C>
Interest income
Loans $10,825,661 $10,217,731
Investment securities 1,321,451 1,361,343
Mortgage-backed and related securities 788,872 939,300
---------- ----------
Total interest income 12,935,984 12,518,374
Interest expense
Deposits 6,804,918 7,293,580
Borrowed funds 146,956 87,838
---------- ----------
Total interest expense 6,951,874 7,381,418
---------- ----------
Net interest income 5,984,110 5,136,956
Provision for loan losses 292,652 47,198
---------- ----------
Net interest income after provision for loan losses 5,691,458 5,089,758
Noninterest income
Service charges on deposit accounts 208,566 188,901
Gain on sale of securities 52,261 -
Other income 255,521 228,095
---------- ----------
Total noninterest income 516,348 416,996
Noninterest expense
Salaries and benefits 2,228,466 1,976,451
Occupancy expense 465,300 499,765
Deposit insurance 138,631 1,197,283
Computer expense 139,455 164,185
Advertising 219,695 144,047
Professional services 183,847 174,558
Other 581,564 489,017
---------- ----------
Total noninterest expense 3,956,958 4,645,306
---------- ----------
Income before income taxes 2,250,848 861,448
Provision for income taxes 819,000 351,200
---------- ----------
Net income $ 1,431,848 $ 510,248
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
4
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Consolidated Statements of Changes in Equity
<TABLE>
<CAPTION>
Unrealized Gain
(Loss) on Securities
Retained Available for Total
Earnings Sale, net Equity
----------- -------------------- -----------
<S> <C> <C> <C>
Balance September 30, 1995 $17,836,949 $ 568,776 $18,395,725
Net income 510,248 510,248
Unrealized gain on securities
available-for-sale, net of tax 177,706 177,706
----------- ---------- -----------
Balance September 30, 1996 18,337,197 746,482 19,083,679
Net income 1,431,848 1,431,848
Unrealized gain on securities
available-for-sale, net of tax 352,469 352,469
----------- ---------- -----------
Balance September 30, 1997 $19,769,045 $1,098,951 $20,867,996
=========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
5
-
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended September 30
1997 1996
----------- ------------
<S> <C> <C>
Operating Activities
Net income $ 1,431,848 $ 510,248
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses 292,652 47,198
Depreciation 280,879 314,157
Deferred income tax expense (benefit) 12,000 (316,500)
Gain on sale of investments available-for-sale (52,261) -
Gain on sale of equipment (4,059) (22,062)
Gain on sale of real estate owned (90,604) (8,263)
Deferred loan origination fees (5,754) 104,627
(Increase) decrease in interest receivable 14,089 (19,937)
Increase in prepaid expenses (256,326) (121,282)
Increase (decrease) in accounts payable (325,772) 900,769
Increase (decrease) in accrued interest payable 4,667 (40,268)
Increase (decrease) in accrued income taxes 575,107 (197,387)
----------- ------------
Net cash provided by operating activities 1,876,466 1,151,300
Investing Activities
Net increase in loans made to customers (3,915,498) (11,624,419)
Sales of investments available-for-sale 601,210 -
Maturities and prepayments of investments held-to-maturity 9,100,000 8,750,000
Maturities and prepayments of mortgage-backed securities 2,830,854 3,199,342
Purchases of investments available-for-sale (2,742,786) (242,002)
Purchases of investments held-to-maturity (4,755,783) (5,348,750)
Purchases of mortgage-backed securities - (4,127,458)
Purchase of FHLB stock (14,900) -
Purchases of premises and equipment (103,157) (203,745)
Proceeds from sales of premises and equipment 14,900 29,025
Proceeds from sales of real estate owned 102,090 164,690
----------- ------------
Net cash provided by (used for) investing activities 1,116,030 (9,403,317)
Financing Activities
Net increase (decrease) in deposits (531,592) 4,543,449
Advances from FHLB 8,000,000 8,900,000
Repayment of advances from FHLB (8,250,000) (7,150,000)
Increase (decrease) in advances from borrowers
for insurance and taxes 251,137 (109,178)
----------- ------------
Net cash provided by (used for) financing activities (530,455) 6,184,271
----------- ------------
Net increase (decrease in cash and cash equivalents 2,462,041 (2,067,746)
Cash and cash equivalents at beginning of year 2,163,574 4,231,320
----------- ------------
Cash and cash equivalents at end of year $ 4,625,615 $ 2,163,574
=========== ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
The accounting and reporting policies of Gaston Federal Savings & Loan
Association and its subsidiary follow generally accepted accounting principles
and policies within the financial services industry. The following is a summary
of the more significant policies.
Principles of Consolidation - The consolidated financial statements include the
accounts of Gaston Federal Savings & Loan Association (Gaston Federal) and its
wholly-owned subsidiary, Gaston Financial Services, Inc. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates - The financial statements are prepared in accordance with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents - Gaston Federal considers cash on hand, cash due from
banks, which are maintained in financial institutions, and interest-earning
deposits, which are maintained with the Federal Home Loan Bank, as cash and cash
equivalents.
Securities - Management determines the appropriate classification of securities
at the time of purchase. Securities are classified as held-to-maturity when
Gaston Federal has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost.
Securities classified as available-for-sale are carried at fair value. Such
securities are used to execute asset/liability management and to manage
liquidity. Adjustments for unrealized gains or losses, net of related income tax
effect, are reported as a separate component of equity.
Gaston Federal has no trading portfolio.
Amortization of premiums and accretion of discounts are included in interest
income over the life of the related security, or in the case of mortgage-backed
securities, the estimated life of the security. Gains or losses on the sale of
securities are recognized on a specific identification, trade date basis.
Loans and Allowance for Loan Losses - Loans are carried at their principal
amount outstanding. Income on loans is accrued based upon the outstanding
principal balance. Generally, loans are classified as nonaccrual, and the
accrual of interest is discontinued, when the contractual payment of principal
and interest has become 90 days past due or when, in management's judgment,
principal or interest is not collectible in accordance with the terms of the
obligation. Cash receipts on nonaccrual loans are applied to principal. The
accrual of interest resumes when the loan returns to performing status.
The allowance for loan losses is maintained at a level believed by management to
be adequate to absorb potential losses in the portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current economic conditions, volume,
growth, and composition of the loan portfolio, and other risks inherent in the
portfolio. Loans are charged to the allowance at the time they are determined to
be losses. Subsequent recoveries are credited to the allowance.
Concentrations of Credit Risk - Gaston Federal makes loans to individuals and
small businesses primarily in Gaston County, North Carolina and surrounding
counties. Gaston Federal has a diversified loan portfolio, and the borrowers'
ability to repay their loans is not dependent upon any specific economic
segment.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed over the estimated useful lives of the assets primarily by the
straight-line method. Leasehold improvements are amortized on a straight-line
basis over the shorter of the estimated useful life of the improvement or the
lease term.
<PAGE>
7
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
Note 1 - Summary of Significant Accounting Policies (continued)
Other Real Estate Owned - Other real estate owned, included in other assets, is
comprised of real estate properties acquired in partial or total satisfaction of
problem loans. The properties are recorded at the lower of cost or fair value at
the date acquired. Losses arising at the time of acquisition of such properties
are charged against the allowance for loan losses. Subsequent write-downs that
may be required to the carrying value of these properties are charged to
noninterest expenses. Gains and losses realized from the sale of other real
estate owned are included in noninterest income.
Loan Origination Fees - Origination fees received and direct costs incurred are
amortized to interest income over the contractual lives of the loans, using the
level yield method.
Income Taxes - Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Amounts
provided for deferred income taxes relate primarily to differences between tax
and financial reporting for unrealized gains and losses on securities available-
for-sale, allowances for loan losses, depreciation, and deferred compensation.
Advertising - Advertising costs are expensed as incurred.
Reclassifications - Certain of the prior year amounts have been reclassified or
restated to conform to current year presentation; such reclassifications and
restatements are immaterial to the financial statements.
Note 2 - Investment Securities
The aggregate book and fair values, as well as gross unrealized gains and
losses, of investment securities as of September 30 were as follows:
<TABLE>
<CAPTION>
September 30, 1997
-------------------------------------------------------
Book Unrealized Unrealized Fair
Value Gains Losses Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-Sale
Federated Government Trust $ 3,036,073 $ 227,513 $ - $ 3,263,586
US League Asset Mgmt Fund 1,375,086 14,490 - 1,389,576
FHLMC Stock 43,967 1,541,533 - 1,585,500
US Treasury and other agencies 1,987,935 21,576 - 2,009,511
----------- ---------- -------- -----------
Total Available-for-sale $ 6,443,061 $1,805,112 $ - $ 8,248,173
=========== ========== ======== ===========
Held-to-Maturity
US Treasury and other agencies $10,407,029 $ 24,100 $ (5,776) $10,425,353
=========== ========== ======== ===========
Mortgage-backed securities Held-to-Maturity
FHLMC $ 5,238,150 $ 112,845 $(18,967) $ 5,332,028
FNMA 3,588,454 4,131 (22,176) 3,570,409
GNMA 1,260,477 33,322 (2,525) 1,291,274
----------- ---------- -------- -----------
Total mortgage-backed securities $10,087,081 $ 150,298 $(43,668) $10,193,711
=========== ========== ======== ===========
</TABLE>
<PAGE>
8
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
Note 2 - Investment Securities (continued)
<TABLE>
<CAPTION>
September 30, 1996
-----------------------------------------------------------
Book Unrealized Unrealized Fair
Value Gains Losses Value
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-Sale
- ------------------
Federated Government Trust $ 2,861,317 $ 182,335 $ - $ 3,043,652
US League Asset Mgmt Fund 1,294,464 9,868 - 1,304,332
FHLMC Stock 43,969 1,073,018 - 1,116,987
Other 50,000 - - 50,000
------------ ------------ ------------ ------------
Total Available-for-sale $ 4,249,750 $ 1,265,221 $ - $ 5,514,971
============ ============ ============ ============
Held-to-Maturity
- ----------------
US Treasury and other agencies $ 14,751,246 $ 4,554 $ (92,419) $ 14,663,381
============ ============ ============ ============
Mortgage-backed securities Held-to-Maturity
- -------------------------------------------
FHLMC $ 6,812,992 $ 48,019 $ (32,544) $ 6,828,467
FNMA 4,662,651 16,493 (111,303) 4,567,841
GNMA 1,442,292 21,641 (14,693) 1,449,240
------------ ------------ ------------ ------------
Total mortgage-backed securities $ 12,917,935 $ 86,153 $ (158,540) $ 12,845,548
============ ============ ============ ============
</TABLE>
The book value and estimated fair value of debt securities at September 30,
1997, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
September 30, 1997
----------------------------
Book Fair
Value Value
----------------------------
<S> <C> <C>
Available-for-Sale
- ------------------
Due after one year through five years $ 1,987,935 $ 2,009,511
------------- -------------
Mutual funds 4,411,159 4,653,162
Equity securities 43,967 1,585,500
------------- -------------
$ 6,443,061 $ 8,248,173
============= =============
Held-to-maturity
- ----------------
Due in one year or less $ 2,048,362 $ 2,050,574
Due after one year through five years 8,110,396 8,126,302
Due after five years through ten years - -
Due after ten years 248,271 248,477
------------- -------------
$ 10,407,029 $ 10,425,353
============= =============
Mortgage-backed securities $ 10,087,081 $ 10,193,711
============= =============
</TABLE>
<PAGE>
9
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
Note 3 - Loans and Allowance for Loan Losses
The following is a summary of loans outstanding by category at September 30:
<TABLE>
<CAPTION>
1997 1996
------------------------------
<S> <C> <C>
Real estate:
Residential mortgage $ 112,936,243 $ 111,206,477
Commercial mortgage 7,318,055 6,458,000
Construction 5,868,907 6,826,964
Commercial 5,558,332 5,160,086
Consumer 7,429,841 6,378,866
-------------- --------------
Gross loans 139,111,378 136,030,393
Less:
Loans in process 2,989,750 3,811,611
Deferred loan fees, net 520,571 526,325
Allowance for loan losses 1,110,000 830,000
-------------- --------------
Net loans $ 134,491,057 $ 130,862,457
============== ==============
</TABLE>
Gaston Federal evaluates impairment of its residential mortgage and consumer
loans on a collective basis. Commercial loans individually evaluated and
considered impaired under SFAS No. 114 at September 30, 1997 and 1996 were
immaterial. The following information relates to all loans which had been placed
on nonaccrual at September 30:
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
Nonaccrual loans $ 1,059,000 $ 1,194,000
Interest income that would have been
recognized if loans had been current 41,649 46,101
Interest income recognized on cash basis 0 0
</TABLE>
Changes in the allowance for loan losses for the two years ended September 30,
1997 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
Balance at beginning of year $ 830,000 $ 786,000
Provision for loan losses 292,652 47,198
Recoveries on loans previously charged off - -
Loans charged off (12,652) (3,198)
------------ ---------
Balance at end of year $ 1,110,000 $ 830,000
============ =========
</TABLE>
Directors, executive officers, and associates of such persons were customers of
and had transactions with Gaston Federal in the ordinary course of business.
Included in such transactions are outstanding loans and commitments, all of
which were made under normal credit terms and did not involve more than normal
risk of collection. The aggregate amount of these loans was $760,128 and
$831,130 at September 30, 1997 and 1996, respectively. During 1997, new loans of
$71,632 were made and payments totaled $142,634.
<PAGE>
10
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
Note 4 - Premises and Equipment
Premises and equipment at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
Land $ 604,704 $ 604,704
Buildings 1,650,767 1,652,429
Land improvements 99,738 103,226
Furniture and equipment 1,681,655 2,302,442
----------- -----------
4,036,864 4,662,801
Less accumulated depreciation 1,897,367 2,335,641
----------- -----------
$ 2,139,497 $ 2,327,160
=========== ===========
</TABLE>
Note 5 - Deposits
Deposit balances as of September 30 and average rates paid for the years then
ended are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------
Amount Rate Amount Rate
------------- ---- ------------- -----
<S> <C> <C> <C> <C>
Noninterest-bearing demand $ 3,022,611 - $ 2,087,904 -
Interest-bearing demand 25,906,245 2.8% 23,715,813 2.9%
Passbook savings 14,196,836 2.8% 14,082,235 2.9%
Savings certificates 102,317,808 5.5% 106,089,140 5.8%
------------- -------------
$ 145,443,500 4.6% $ 145,975,092 5.0%
============= =============
</TABLE>
Contractual maturities of savings certificates as of September 30, 1997 are as
follows:
<TABLE>
<S> <C>
Under 1 year $ 87,758,157
1 to 2 years 10,680,176
2 to 3 years 3,879,475
-------------
$ 102,317,808
=============
</TABLE>
Certificates of deposit in excess of $100,000 totaled $17,611,000 and
$17,465,000 at September 30, 1997 and 1996, respectively. Interest paid on
deposits and other borrowings was $6,947,207 and $7,397,775 for the years ended
September 30, 1997 and 1996, respectively.
Note 6 - Advances from the Federal Home Loan Bank
Advances from the Federal Home Loan Bank of Atlanta are pursuant to lines of
credit and are collateralized by a lien on qualifying first mortgage loans in an
amount necessary to satisfy outstanding indebtedness plus accrued interest.
Advances had interest rates ranging from 5.66% to 6.69% at September 30, 1997
and 6.05% to 6.69% at September 30, 1996. The unused portion of the line of
credit available to Gaston Federal at September 30, 1997 was $18,500,000.
<PAGE>
11
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
Note 6 - Advances from the Federal Home Loan Bank (continued)
Maturities of advances at September 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
Advances from FHLB due:
Less than 1 year $ 1,500,000 $ 2,250,000
1 to 2 years - 1,500,000
2 to 3 years - -
3 to 4 years - -
4 to 5 years 2,000,000 -
----------- -----------
$ 3,500,000 $ 3,750,000
=========== ===========
</TABLE>
Note 7 - Income Taxes
The provision for income taxes is summarized below:
<TABLE>
<CAPTION>
1997 1996
-----------------------
<S> <C> <C>
Currently payable
Federal $ 728,000 $ 567,900
State 79,000 99,800
---------- -----------
807,000 667,700
Deferred
Federal 10,000 (241,500)
State 2,000 (75,000)
---------- -----------
12,000 (316,500)
---------- -----------
Total income taxes $ 819,000 $ 351,200
========== ===========
</TABLE>
The reasons for the difference between consolidated income tax expense and the
amount computed by applying the statutory federal income tax rate of 34% to
income before income taxes were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------
<S> <C> <C>
Federal income taxes at statutory rate $ 765,000 $ 292,900
State income taxes, net of federal benefit 53,000 16,400
Other 1,000 41,900
---------- ----------
$ 819,000 $ 351,200
========== ==========
</TABLE>
Income taxes recoverable (payable) are included in other assets (liabilities)
and were $(385,975) and $182,850, at September 30, 1997 and 1996, respectively.
Income taxes paid for the years ended September 30, 1997 and 1996 were $296,753
and $747,554, respectively.
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at September 30 are as follows:
<PAGE>
12
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
Note 7 - Income Taxes (continued)
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
Deferred tax assets
Deferred compensation $ 188,000 $ 151,000
Deferred loan fees 207,000 206,000
SAIF premium - 339,000
Other 91,000 20,000
------------ ------------
Gross deferred tax assets 486,000 716,000
Deferred tax liabilities
Allowance for loan losses 25,000 227,100
Unrealized gain on securities
available-for-sale 706,000 518,739
Depreciation 47,000 63,200
Other 132,000 89,811
------------ ------------
Gross deferred tax liabilities 910,000 898,850
------------ ------------
Net deferred tax liability $ (424,000) $ (182,850)
============ ============
</TABLE>
Management believes that Gaston Federal will fully realize deferred tax assets
based on future taxable temporary differences, refundable income taxes from
carryback years, and current levels of operating income.
Note 8 - Commitments to Extend Credit
Commitments to extend credit are agreements to lend as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Commitments to extend credit as of September 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------
<S> <C> <C>
Loan commitments $ 5,047,000 $ 1,369,000
Unused lines of credit
Commercial 2,418,000 2,476,000
Consumer 7,131,000 6,429,000
</TABLE>
Note 9 - Regulatory Capital Requirements
Gaston Federal is subject to various regulatory capital requirements
administered by the federal banking agencies. Under the capital adequacy
guidelines and the regulatory framework for prompt corrective action, Gaston
Federal must meet specific capital guidelines that involve quantitative measures
of assets, liabilities, and certain commitments as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly discretionary, actions by regulators that, if
undertaken, could have a direct material effect on Gaston Federal's financial
statements.
<PAGE>
13
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
Note 9 - Regulatory Capital Requirements (continued)
Gaston Federal is required to maintain: tangible capital of at least 1.5% of
adjusted total assets; core capital of at least 3.0% of adjusted total assets;
and total capital of at least 8.0% of risk weighted assets. At September 30,
1997, Gaston Federal's tangible capital and core capital were both $19,890,045,
or 11.5% of tangible assets, and total capital was $20,800,000, or 21.4% of
risk-weighted assets. Regulators informed Gaston Federal that it was in the
well-capitalized category as of the most recent regulatory examinations, and
management is not aware of any events that have occurred since that would have
changed its classification.
The following is a reconciliation of equity as reported in accordance with
generally accepted accounting principles to federal regulatory capital:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------
Retained Net Retained Net
Earnings Income Earnings Income
--------------------------------------------------------
<S> <C> <C> <C> <C>
Amount per financial statements $ 19,769,045 $ 1,431,848 $ 18,337,197 $ 510,248
Adjustments
Income taxes - 280,818 (280,818) (280,818)
Other 121,000 159,334 (38,379) (30,430)
------------- ------------ ------------- -----------
Amount per regulatory reports $ 19,890,045 $ 1,872,000 $ 18,018,000 $ 199,000
============= ============ ============= ===========
</TABLE>
The deposits of Gaston Federal are insured by the Savings Association Insurance
Fund (SAIF), one of two funds administered by the FDIC. Gaston Federal
previously paid annual premiums of approximately $.23 per $100 of deposits. On
September 30, 1996, the Deposit Insurance Funds Act of 1996 was signed, which
authorized the FDIC to impose a special assessment on certain deposits held by
thrift institutions. This special assessment, which was based on $.657 per $100
of outstanding deposits at March 31, 1995, was intended to recapitalize the
SAIF. Accordingly, Gaston Federal recorded a one time pre-tax charge of
approximately $867,000 at September 30, 1996, which was paid prior to December
31, 1996. Gaston Federal's annual SAIF premium rates were reduced to $.0648 per
$100 of deposits beginning January 1, 1997.
Note 10 - Employee Benefit Plans
Gaston Federal contributes to the Financial Institutions Retirement Fund, a
multiemployer, qualified, noncontributory defined benefit pension plan that
covers substantially all employees. The plan provides pension benefits based on
the employee's length of credited service and final average compensation as
defined in the plan. The plan requires employers to fund amounts necessary to
meet ERISA minimum funding requirements. Total expense relating to this plan was
$75,693 in 1997 and $66,233 in 1996.
Gaston Federal also provides supplemental benefits to substantially all
employees through a 401(k) savings plan. Eligible participants may contribute up
to 15% of base salary, with Gaston Federal providing matching contributions of
25% of employee contributions. The plan also provides for discretionary employer
contributions. Total expense relating to this plan was $123,443 in 1997 and
$99,876 in 1996.
Gaston Federal also maintains nonqualified deferred compensation and
supplemental retirement plans for its directors. Total expense for the plans
were $64,260 in 1997 and $60,888 in 1996. The accrued liabilities for the plans
were $480,000 and $441,900 at September 30, 1997 and 1996, respectively.
<PAGE>
14
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
Note 11 - Fair Value of Financial Instruments
The following methods and assumptions were used by Gaston Federal 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
present value or other valuation techniques. The estimates are significantly
affected by the assumptions used, including discount rates and estimates of
future cash flows. These estimates may differ substantially from amounts that
could be realized in an immediate sale or settlement of the instrument.
Fair value approximates book value for the following financial instruments due
to their short-term nature: cash and due from banks, interest-earning bank
balances, and advances from customers for taxes and insurance.
Fair values for investment securities and mortgage-backed securities are based
on quoted market prices. If a quoted market price is not available, fair value
is estimated using market prices for similar securities.
Fair value for variable rate loans that reprice frequently is based on the
carrying value reduced by an estimate of credit losses inherent in the
portfolio. Fair value for all other loans is estimated by discounting their
future cash flows using interest rates currently being offered for loans of
comparable terms and credit quality.
Fair value for demand deposit accounts and interest-bearing accounts with no
fixed maturity is equal to the carrying value. Certificate of deposit fair
values are estimated by discounting cash flows from expected maturities using
interest rates currently being offered for similar instruments.
Fair values for the advances from the Federal Home Loan Bank Board is based on
discounted cash flows using current interest rates.
At September 30, 1997 and 1996, Gaston Federal had outstanding unfunded
commitments to extend credit offered in the normal course of business. Fair
values of these commitments are based on fees currently charged for similar
instruments. At September 30, 1997 and 1996, the carrying amounts and fair
values of these off-balance sheet financial instruments were immaterial.
Gaston Federal has used management's best estimates of fair values of financial
instruments based on the above assumptions. This presentation does not include
certain financial instruments, nonfinancial instruments or certain intangible
assets such as customer relationships, deposit base intangibles, or goodwill.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of Gaston Federal. The estimated fair values of financial
instruments as of September 30 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 2,422,301 $ 2,422,301 $ 1,655,234 $ 1,655,234
Interest-earning bank balances 2,203,314 2,203,314 508,340 508,340
Investment and mortgage-
backed securities 28,742,283 28,867,237 33,184,152 33,023,900
Loans 134,491,057 135,227,000 130,862,457 130,455,000
Financial liabilities
Deposits 145,443,500 145,287,000 145,975,092 145,931,000
Advances from FHLB 3,500,000 3,421,000 3,750,000 3,748,000
</TABLE>
<PAGE>
15
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
Note 12 - Adoption of Plan of Conversion
On July 14, 1997, the Board of Directors of Gaston Federal adopted the Plan of
Reorganization From Mutual Savings Association to Mutual Holding Company and
Stock Issuance Plan (the Plan), pursuant to which Gaston Federal will convert
from a federally chartered mutual savings and loan association to a federally
chartered stock savings bank, all of the outstanding common stock of which will
be acquired by a holding company formed expressly for such purpose, in exchange
for a portion of the net conversion proceeds (Conversion). All of the common
stock of the Company to be issued in the Conversion is being offered initially
to certain eligible account holders, members and to certain of Gaston Federal's
tax-qualified employee benefit plans. A mutual holding company will be formed
and will own approximately 51% of the stock holding company.
Gaston Federal plans to establish an Employee Stock Ownership Plan (ESOP) for
the benefit of eligible employees, to become effective upon consummation of the
Conversion. The ESOP intends to purchase up to 8% of the Company's common stock
issued in the Conversion utilizing the proceeds of a loan from the Company. The
loan will be repaid over a period of 10 years and the collateral for the loan
will be the common stock purchased by the ESOP.
<PAGE>
===============================================================================
No person has been authorized to give any information or to make any
representation other than as contained in this prospectus and, if given or made,
such information or representation must not be relied upon as having been
authorized by the Gaston Federal Bancorp, Inc. or Gaston Federal Savings and
Loan Association. This prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any security other than the shares of common
stock offered hereby to any person in any jurisdiction in which such offer or
solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this prospectus nor
any sale hereunder shall, under any circumstances, create any implication that
information herein is correct as of any time subsequent to the date hereof.
Gaston Federal Bancorp, Inc.
(Proposed Holding Company for
Gaston Federal Savings Bank)
Up to 2,113,355 Shares
Common Stock
($1.00 par value per share)
SUBSCRIPTION AND
COMMUNITY OFFERING
PROSPECTUS
TRIDENT SECURITIES, INC.
February ___, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED
Until March ___, 1998 or 25 days after the commencement of the offerings of
common stock, all dealers effecting transactions in the registered securities,
whether or not participating in this distribution, may be required to deliver a
prospectus. This is in addition to the obligation of dealers 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
<TABLE>
<CAPTION>
Amount
------
<C> <S> <C>
* Legal Fees........................................ $125,000
* Printing and Mailing.............................. 150,000
* Accounting Fees and Expenses...................... 120,000
** Marketing Fees and Expenses....................... 360,000
* Filing Fees (SEC, OTS and Blue Sky)............... 25,400
* Conversion Agent Fees and Expenses................ 20,000
* Other Expenses.................................... 72,600
--------
** Total............................................. $873,000
========
</TABLE>
- ------------
* Estimated
** The Association and the Company have retained Trident Securities, Inc.
("Trident") to assist in the sale of common stock on a best efforts basis
in the Subscription and Community Offerings. For purposes of computing
estimated expenses, it has been assumed that Trident will receive fees of
approximately $360,000.
Item 14. Indemnification of Directors and Officers
Proposed federal regulations define areas for indemnity coverage for
federal MHC subsidiary holding companies, as follows:
(a) Any person against whom any action is brought by reason of the
fact that such person is or was a director or officer of the savings association
shall be indemnified by the savings association for:
(i) Reasonable costs and expenses, including reasonable
attorneys' fees, actually paid or incurred by such person in
connection with proceedings related to the defense or settlement of
such action ;
(ii) Any amount for which such person becomes liable by reason
of any judgment in such action;
(iii) Reasonable costs and expenses, including reasonable
attorneys' fees, actually paid or incurred in any action to enforce
his rights under this section, if the person attains a final judgment
in favor of such person in such enforcement action.
(b) Indemnification provided for in subparagraph (a) shall be made to
such officer or director only if the requirements of this subsection
are met:
(i) The savings association shall make the indemnification
provided by subparagraph (a) in connection with any such action which
results in a final judgment on the merits in favor of such officer or
director.
(ii) The savings association shall make the indemnification
provided by subparagraph (a) in case of settlement of such action, final
judgment against such director or officer or final judgment in favor of
such director or officer other than on the merits except in relation to
matters as to which he shall be adjudged to be liable for negligence or
misconduct in the performance of duty, only if a majority of the directors
of the savings association determines that such a director or officer was
acting in good faith within what he was reasonably entitled to believe
under the circumstances was the scope of his employment or authority and
for a purpose which he was reasonably entitled to believe under the
circumstances was in the best interest of the savings association or its
members.
II-1
<PAGE>
(c) As used in this paragraph:
(i) "Action" means any action, suit or other judicial or
administrative proceeding, or threatened proceeding, whether civil,
criminal, or otherwise, including any appeal or other proceeding for
review;
(ii) "Court" includes, without limitation, any court to which
or in which any appeal or any proceeding for review is brought;
(iii) "Final Judgment" means a judgment, decree, or order
which is appealable and as to which the period for appeal has
expired and no appeal has been taken;
(iv) "Settlement" includes the entry of a judgment by consent
or by confession or upon a plea of guilty or of nolo contendere.
Item 15. Recent Sales of Unregistered Securities.
Not Applicable.
Item 16. Exhibits and Financial Statement Schedules:
The exhibits and financial statement schedules filed as part of this
registration statement are as follows:
(a) List of Exhibits
1.1 Engagement Letter between Gaston Federal Savings and Loan Association and
Trident Securities, Inc.
1.2* Form of Agency Agreement among Gaston Federal Bancorp, Inc., Gaston
Federal Savings and Loan Association, and Trident Securities, Inc..
2 Plan of Reorganization
3.1 Proposed Federal Holding Company Charter of Gaston Federal Bancorp, Inc.
(Incorporated herein by reference to Exhibit B of the Plan of
Reorganization)
3.2 Proposed Bylaws of Gaston Federal Bancorp, Inc. (Incorporated herein by
reference to Exhibit B of the Plan of Reorganization)
4 Form of Common Stock Certificate of Gaston Federal Bancorp, Inc.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality
of securities
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.
8.2 Form of State Tax Opinion*
8.3 Letter from Feldman Financial Advisors, Inc. with respect to Subscription
Rights
10.1 Form of Employment Agreement
10.2 Deferred Compensation and Income Continuation Agreement
10.3 Employee Stock Ownership Plan
II-2
<PAGE>
10.4 Supplemental Retirement Plan
21 Subsidiaries of the Registrant
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
opinion filed as Exhibit 5)
23.2 Consent of Cherry, Bekaert & Holland LLP.
23.3 Consent of Feldman Financial Advisors, Inc.
24 Power of Attorney (set forth on Signature Page)
27 EDGAR Financial Data Schedule
99.1 Appraisal Agreement between Gaston Federal Savings and Loan Association
and Feldman Financial Advisors, Inc.
99.2 Appraisal Report of Feldman Financial Advisors, Inc.
99.3 Proxy Statement
99.4 Marketing Materials*
99.5 Order and Acknowledgment Form*
- ----------------------------------
*To be filed supplementally or by amendment.
(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;
(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 post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
II-3
<PAGE>
(4) 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.
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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Gastonia, North Carolina on December
19, 1997.
GASTON FEDERAL BANCORP, INC.
By: /s/ Kim S. Price
------------------------------------------
Kim S. Price
President and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of Gaston Federal Bancorp, Inc.
(the "Company") hereby severally constitute and appoint Kim S. Price as our true
and lawful attorney and agent, to do any and all things in our names in the
capacities indicated below which said Kim S. Price may deem necessary or
advisable to enable the Company to comply with the Securities Act of 1933, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the registration statement on Form SB-2 relating
to the offering of the Company's Common Stock, including specifically, but not
limited to, power and authority to sign for us in our names in the capacities
indicated below the registration statement and any and all amendments (including
post-effective amendments) thereto; and we hereby approve, ratify and confirm
all that said Kim S. Price shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Kim S. Price President and Chief December 19, 1997
- ----------------------------- Executive Officer
Kim S. Price (Principal Executive
Officer)
/s/ Gary F. Hoskins Vice President, Treasurer December 19, 1997
- ----------------------------- and Chief Financial Officer
Gary F. Hoskins (Principal Financial and
Accounting Officer)
/s/ B. Frank Matthews, II Director December 19, 1997
- -----------------------------
B. Frank Matthews, II
/s/ David W. Hoyle Director December 19, 1997
- -----------------------------
David W. Hoyle
/s/ Robert W. Williams, Sr. Director December 19, 1997
- -----------------------------
Robert W. Williams, Sr.
/s/ Martha B. Beal Director December 19, 1997
- -----------------------------
Martha B. Beal
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ James J. Fuller Director December 19, 1997
- -----------------------------
James J. Fuller
/s/ William Harvey Keith Director December 19, 1997
- -----------------------------
William Harvey Keith
/s/ Charles D. Massey Director December 19, 1997
- -----------------------------
Charles D. Massey
/s/ Ben R. Rudisill, II Director December 19, 1997
- -----------------------------
Ben R. Rudisill, II
</TABLE>
II-6
<PAGE>
As filed with the Securities and Exchange Commission on December 22, 1997
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
EXHIBITS
TO
REGISTRATION STATEMENT
ON
FORM SB-2
-----------------------
GASTON FEDERAL BANCORP, INC.
================================================================================
<PAGE>
EXHIBIT INDEX
1.1 Engagement Letter between Gaston Federal Savings and Loan Association and
Trident Securities, Inc.
1.2* Form of Agency Agreement among Gaston Federal Bancorp, Inc., Gaston
Federal Savings and Loan Association, and Trident Securities, Inc.
2 Plan of Reorganization
3.1 Proposed Federal Holding Company Charter of Gaston Federal Bancorp, Inc.
(Incorporated herein by reference to Exhibit B of the Plan of
Reorganization)
3.2 Proposed Bylaws of Gaston Federal Bancorp, Inc. (Incorporated herein by
reference to Exhibit B of the Plan of Reorganization)
4 Form of Common Stock Certificate of Gaston Federal Bancorp, Inc.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality
of securities
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.
8.2 Form of State Tax Opinion*
8.3 Letter from Feldman Financial Advisors, Inc. with respect to Subscription
Rights
10.1 Form of Employment Agreement*
10.2 Deferred Compensation and Income Continuation Agreement
10.3 Employee Stock Ownership Plan
10.4 Supplemental Retirement Plan
21 Subsidiaries of the Registrant
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
opinion filed as Exhibit 5)
23.2 Consent of Cherry, Bekaert & Holland LLP
23.3 Consent of Feldman Financial Advisors, Inc.
24 Power of Attorney (set forth on Signature Page)
27 EDGAR Financial Data Schedule
99.1 Appraisal Agreement between Gaston Federal Savings and Loan Association
and Feldman Financial Advisors, Inc.
99.2 Appraisal Report of Feldman Financial Advisors, Inc.*
99.3 Proxy Statement
99.4 Marketing Materials*
99.5 Order and Acknowledgment Form*
- ----------------------------------
* To be filed supplementally or by amendment.
<PAGE>
Exhibit 1.1
[LETTERHEAD OF TRIDENT SECURITIES, INC. APPEARS HERE]
July 1, 1997
Board of Directors
Gaston Federal Savings and Loan Association
245 West Main Avenue
Gastonia, North Carolina 28052
RE: Mutual Holding Company Marketing Services
-----------------------------------------
Gentlemen:
This letter sets forth the terms of the proposed engagement between Trident
Securities, Inc. ("Trident") and Gaston Federal Savings and Loan Association
(the "Association") concerning Trident's investment banking services in
connection with the reorganization ("Reorganization") of the Association into a
mutual holding company ("MHC") and the issuance of shares of the stock savings
bank subsidiary of the MHC in a community offering (the "Offering").
Trident is prepared to assist the Association in connection with the offering of
shares of common stock of the MHC's stock savings bank subsidiary during the
Offering as such term is defined in the Association's Plan of Mutual Holding
Company Reorganization and Stock Issuance Plan (the "Plan"). It is expected that
Trident will assist the Association in the Offering as follows: (1) as financial
advisor to Management, (2) targeting sales efforts in the Association's local
communities, (3) conducting information meetings for prospective investors (as
desired), (4) training and educating the Association's management and employees
regarding the mechanics and regulatory requirements of the process, (5)
providing support for the administration and processing of orders and
establishing a Stock Information Center on site in Gastonia, and (6) listing
stock of the Association on the NASDAQ System and acting as a market maker for
the shares. The specific terms of the services contemplated hereunder shall be
set forth in a definitive Sales Agency Agreement (the "Agreement") between
Trident and the Association to be executed on the date the Offering Circular is
declared effective by the appropriate regulatory authorities. The price of the
shares during the Offering will be the price established by the Association's
Board of Directors, based upon an independent appraisal as approved by the
appropriate regulatory authorities, provided such price is mutually acceptable
to Trident and the Association.
At the appropriate time, Trident, in conjunction with its counsel will conduct
an examination of the relevant documents and records of the Association as
Trident and its counsel deem necessary and appropriate. The Association will
make all documents, records and other information deemed necessary by Trident or
its counsel available to them upon request.
For its services, Trident will receive the following compensation and
reimbursement from the Association:
<PAGE>
TRIDENT SECURITIES, INC.
Board of Directors
July 1, 1997
Page 2
1. A commission equal to two percent (2.0%) of the aggregate dollar
amount of capital stock sold in the subscription and community
offerings, excluding any shares of stock sold to the
Association's directors, officers, employees and the employee
benefit plans. Additionally, commissions will be excluded on
those shares sold to "Associates" of the Association's
directors and executive officers. The term "Associates" as used
herein shall have the same meaning as that found in the
Association's Plan of Reorganization.
2. For stock sold 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 Association to reflect market
requirements at the time of the stock allocation in a Syndicated
Community Offering.
3. The foregoing fees and commissions are to be payable to Trident
at closing as defined in the Agreement to be entered into between
the Association and Trident.
4. Trident shall be reimbursed for out-of-pocket expenses incurred
by them and their counsel, whether or not the Agreement is
consummated. Trident's out-of-pocket expenses will not exceed
$7,500 and its legal fees will not exceed $27,500. The
Association will forward to Trident a check in the amount of
$7,500 as an advance payment to defray the expenses of Trident.
It further is understood that the Association will pay all other expenses of the
offering including but not limited to its attorneys' fees, National Association
of Securities Dealers ("NASD") filing fees, and fees of either Trident's
attorneys or other attorneys relating to any required state securities laws
filings, transfer agent charges, telephone charges, air freight, rental
equipment, supplies, fees relating to auditing and accounting and costs of
printing all documents necessary in connection with the foregoing. These
expenses are to be in addition to those enumerated in Paragraph (4) above.
For purposes of Trident's obligation to file certain documents and to make
certain representations to the NASD in connection with the reorganization, the
Association warrants that: (a) the Association has not privately placed any
securities within the last 18 months; (b) there have been no material dealings
within the last 12 months between the Association and any NASD member or any
person related to or associated with any such member; (c) none of the officers
or directors of the Association has any affiliation with the NASD; (d) except as
contemplated by this engagement letter with Trident, the Association has no
financial or management consulting contracts outstanding with any NASD member or
any person related to or associated with any such member; (e) the Association
has not granted Trident a right of first refusal with respect to the
underwriting of any future offering of the Association's stock; and, (f) there
has been no intermediary between Trident and the Association in connection with
the public offering of the Association's shares, and no NASD member or any
person related to or associated with any such member is being compensated if any
manner for providing such service.
The Association agrees to indemnify and hold harmless Trident and each person,
if any, who controls the firm against all losses, claims, damages or
liabilities, joint or several and all legal or
<PAGE>
TRIDENT SECURITIES, INC.
Board of Directors
July 1, 1997
Page 3
other expenses reasonably incurred by them in connection with the investigation
or defense thereof (collectively, "Losses"), to which they may become subject
under the securities laws or under the common law, that arise out of or are
based upon the reorganization or the engagement hereunder of Trident. If the
foregoing indemnification is unavailable for any reason, the Association agrees
to contribute to such Losses in the proportion that its financial interest in
the reorganization bears to that of the indemnified parties. If the agreement is
entered into with respect the common stock to be issued in the reorganization,
the Agreement will provide for indemnification, which will be in addition to any
rights that Trident or any other indemnified party may have at common law or
otherwise. The indemnification provision of this paragraph will be superseded by
the indemnification provisions of the Agreement entered into by the Association
and Trident.
This letter is merely a statement of intent and is not a binding legal agreement
except as to paragraph (4) above with regard to the obligation to reimburse
Trident for allocable expenses to be incurred prior to the execution of the
Agreement and the indemnity described in the preceding paragraph. While Trident
and the Association agree in principle to the contents hereof and propose to
proceed promptly, and in good faith, to work out the arrangements with respect
to the proposed offering, any legal obligations between Trident and the
Association shall be only as set forth in the duly executed Agreement. Such
Agreement shall be in form and content satisfactory to Trident and among other
things, there being in Trident's opinion no material adverse change in the
condition or obligations of the Association or no market conditions which might
render the sale of the shares by the Association hereby contemplated
inadvisable.
Please acknowledge your agreement to the foregoing by signing below and
returning to Trident one copy of this letter along with the advance payment of
$7,500. This proposal is open for your acceptance for a period of thirty (30)
days from the date hereof.
Yours very truly,
TRIDENT SECURITIES, INC.
By: --------------------------
R. Lee Burrows, Jr.
Managing Director
RLB:cs
Agreed and accepted this
_____ day of ___________, 1997
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
By: -------------------------
David W. Hoyle
Director
<PAGE>
Exhibit 2
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
PLAN OF REORGANIZATION
FROM MUTUAL SAVINGS ASSOCIATION
TO MUTUAL HOLDING COMPANY
AND STOCK ISSUANCE PLAN
<PAGE>
TABLE OF CONTENTS
Page
----
<TABLE>
<CAPTION>
<S> <C> <C>
1. Introduction........................................................... 1
2. Definitions............................................................ 1
3. The Reorganization..................................................... 6
4. Conditions to Implementation of the Reorganization..................... 8
5. Special Meeting of Members............................................. 9
6. Rights of Members of the MHC........................................... 9
7. Conversion of MHC to Stock Form........................................ 9
8. Timing of the Reorganization and Sale of Capital Stock................. 10
9. Number of Shares to be Offered......................................... 11
10. Independent Valuation and Purchase Price of Shares..................... 11
11. Method of Offering Shares and Rights to Purchase Stock................. 12
12. Additional Limitations on Purchases of Common Stock.................... 15
13. Payment for Stock...................................................... 16
14. Manner of Exercising Subscription Rights Through Order Forms........... 17
15. Undelivered, Defective or Late Order Form; Insufficient Payment........ 18
16. Completion of the Stock Offering....................................... 18
17. Market for Common Stock................................................ 18
18. Stock Purchases by Management Persons After the Offering............... 18
19. Resales of Stock by Management Persons................................. 19
20. Stock Certificates..................................................... 19
21. Restriction on Financing Stock Purchases............................... 19
22. Stock Benefit Plans.................................................... 19
23. Post-Reorganization Filing and Market Making........................... 20
24. Payment of Dividends and Repurchase of Stock........................... 20
25. Reorganization and Stock Offering Expenses............................. 20
26. Employment and Other Severance Agreements.............................. 20
27. Interpretation......................................................... 21
28. Amendment or Termination of the Plan................................... 21
</TABLE>
Exhibits
- --------
Exhibit A Charter and Bylaws of the Bank
Exhibit B Charter and Bylaws of the Holding Company
Exhibit C Charter and Bylaws of the Mutual Holding Company
<PAGE>
1. Introduction
The Board of Directors of Gaston Federal Savings and Loan Association (the
"Bank") has adopted this Plan of Reorganization from Mutual Savings Association
to Mutual Holding Company and Stock Issuance Plan (the "Plan") pursuant to which
the Bank proposes to reorganize from a federally-chartered mutual savings
association into the mutual holding company structure (the "Reorganization")
under the laws of the United States of America and the regulations of the Office
of Thrift Supervision ("OTS"). The mutual holding company (the "MHC") will be a
mutually-owned federal corporation, and all of the current ownership and voting
rights of the Members of the Bank will be transferred to the MHC. As part of
the Reorganization and the Plan, the Bank will convert to a federal stock
savings bank (the "Stock Bank") and will establish a stock holding company (the
"Holding Company") which will be a majority-owned subsidiary of the MHC at all
times so long as the MHC remains in existence. Concurrently with the
Reorganization, the Holding Company intends to offer for sale up to 49.9% of its
Common Stock in the Stock Offering. The Common Stock will be offered on a
priority basis to depositors and Tax-Qualified Employee Plans of the Bank, with
any remaining shares offered to the public in a Direct Community Offering.
The primary purpose of the Reorganization is to establish a holding company
and to convert the Bank to the stock form of ownership, which will enable the
Bank to compete and expand more effectively in the financial services
marketplace. The Reorganization will permit the Holding Company to issue
Capital Stock, which is a source of capital not available to mutual savings
associations. Since the Holding Company will not be offering all of its to-be
outstanding Common Stock for sale to depositors and the public in the Stock
Offering, the Reorganization will result in less capital raised in comparison to
a standard mutual-to-stock conversion. The Reorganization will offer the Bank
the opportunity to raise additional capital since a majority of the Holding
Company's outstanding shares of common stock will be available for sale in the
future. It will also provide the Bank with greater flexibility to structure and
finance the expansion of its operations, including the potential acquisition of
other financial institutions. The Reorganization will enable the Bank to better
manage its capital by providing broader investment opportunities through the
holding company structure, and by enabling the Company to pay dividends and
repurchase common stock. As a result of the Reorganization, the Bank's mutual
form of ownership and its ability to remain an independent savings bank and to
provide community-oriented financial services will be preserved. The
Reorganization is subject to the approval of the OTS, and must be adopted by the
affirmative vote of a majority of the total votes eligible to be cast by
Members.
2. Definitions
As used in this Plan, the terms set forth below have the following
meanings:
Acting in Concert: The term "acting in concert" shall have the
definition given in 12 C.F.R. (S)574.2(c). The determination of whether a group
is acting in concert shall be made solely by the Board of Directors of the Bank
or officers delegated by such Board and may be based on any evidence upon which
the Board or such delegatee chooses to rely.
Affiliate: Any Person that controls, is controlled by, or is under
common control with another person.
Associate: The term "Associate," when used to indicate a relationship
with any Person, means: (i) any corporation or organization (other than the
Bank, the Holding Company, the MHC or a majority-owned subsidiary of any
thereof) of which such Person is a director, officer or partner or is, directly
or indirectly, the beneficial owner of 10% or more of any class of equity
securities; (ii) any trust
<PAGE>
or other estate in which such Person has a substantial beneficial interest or as
to which such Person serves as trustee or in a similar fiduciary capacity; (iii)
any relative or spouse of such Person or any relative of such spouse, who has
the same home as such Person or who is a director or officer of the Bank, the
MHC, the Stock Holding Company or any subsidiary of the MHC or the Holding
Company or any affiliate thereof; and (iv) any person acting in concert with any
of the persons or entities specified in clauses (i) through (iii) above;
provided, however, that any Tax-Qualified or Non-Tax-Qualified Employee Plan
shall not be deemed to be an associate of any director or officer of the MHC,
the Holding Company or the Bank. When used to refer to a Person other than an
officer or director of the Bank, the Bank in its sole discretion may determine
the Persons that are Associates of other Persons.
Bank: Gaston Federal Savings and Loan Association in its pre-
Reorganization mutual form, and Gaston Federal Bank, the stock savings bank that
will be formed in the Reorganization, as indicated by the context.
Capital Stock: Any and all authorized stock of the Bank or the
Holding Company.
Common Stock: Common stock issuable by the Holding Company in
connection with the Reorganization, including securities convertible into Common
Stock, pursuant to its stock charter.
Community: The counties in which the Bank maintains an office.
Deposit Account(s): Any withdrawable deposit(s) in the Bank,
including certificates of deposit, in excess of $50.
Direct Community Offering: The offering to certain members of the
general public of any unsubscribed shares in the Subscription Offering which may
be effected pursuant to Section 11 of this Plan. The Direct Community Offering
may include a syndicated community offering or public offering.
Effective Date: The date upon which all necessary approvals have been
obtained to consummate the Reorganization, and the transfer of assets and
liabilities of the Bank to the Bank in its stock form is completed.
Eligible Account Holder: Any person holding a Qualifying Deposit on
the Eligibility Record Date.
Eligibility Record Date: March 30, 1996, the date for determining who
qualifies as an Eligible Account Holder.
ESOP: The Bank's employee stock ownership plan.
Estimated Valuation Range: The Independent Valuation, expressed as a
range, the maximum and minimum of which shall be 15% above and below,
respectively, the midpoint of such range.
Exchange Act: The Securities Exchange Act of 1934, as amended.
FDIC: The Federal Deposit Insurance Corporation.
HOLA: The Home Owners' Loan Act, as amended.
2
<PAGE>
Holding Company: The Delaware or federal corporation formed in
connection with the Reorganization that will own 100% of the common stock of the
Bank.
Holding Company Application: The Holding Company Application on Form
H(e)-1 to be submitted to the OTS by the Bank, the Company and the MHC, as
applicable, in connection with the Reorganization.
Independent Appraiser: The appraiser retained by the Bank to prepare
an appraisal of the pro forma market value of the Bank and the Holding Company.
Independent Valuation: The appraisal of the pro forma market value of
the Common Stock as determined by the Independent Appraiser.
Management Person: Any Officer or director of the Bank or any
Affiliate of the Bank, and any person acting in concert with any such Officer or
director.
Marketing Agent: The broker-dealer responsible for organizing and
managing the Stock Offering and sale of the Common Stock.
Market Maker: A dealer (i.e., any person who engages directly or
indirectly as agent, broker, or principal in the business of offering, buying,
selling or otherwise dealing or trading in securities issued by another person)
who, with respect to a particular security, (1) regularly publishes bona fide
competitive bid and offer quotations on request, and (2) is ready, willing and
able to effect transactions in reasonable quantities at the dealer's quoted
prices with other brokers or dealers.
Members: Any person or entity who qualifies as a member of the Bank
pursuant to its charter and bylaws.
MHC: The mutual holding company formed in connection with the
Reorganization.
Minority Stock Offering: One or more offerings of less than 50% in
the aggregate of the outstanding Common Stock of the Holding Company to persons
other than the MHC.
Minority Stockholder: Any owner of the Holding Company's Common
Stock, other than the MHC.
Non-Voting Stock: Any Capital Stock other than Voting Stock.
Notice: The Notice of Mutual Holding Company Reorganization to be
submitted by the Bank to the OTS to notify the OTS of the Reorganization and the
Stock Offering.
Offering Range: The range of shares of Common Stock offered in the
Stock Offering, having a value, based on the Independent Valuation, equal to a
fixed percentage of less than 50% of the Estimated Valuation Range.
Officer: An executive officer of the Holding Company or the Bank,
including the Chief Executive Officer, President, Senior Vice Presidents in
charge of principal business functions, Secretary, Treasurer and any other
person performing similar functions.
3
<PAGE>
Other Member: Any person who is a Member of the Bank at the close of
business on the Voting Record Date who is not an Eligible Account Holder or
Supplemental Eligible Account Holder, or Tax-Qualified Employee Plan.
OTS: The Office of Thrift Supervision, and any successor thereto.
Parent: A company that controls another company, either directly or
indirectly through one or more subsidiaries.
Person: An individual, corporation, partnership, association, joint-
stock company, trust (including Individual Retirement Accounts and KEOGH
Accounts), unincorporated organization, government entity or political
subdivision thereof or any other entity.
Plan: This Plan of Reorganization from Mutual Savings Association to
Mutual Holding Company and Stock Issuance Plan.
Qualifying Deposit: The aggregate balance of each Deposit Account of
an Eligible Account Holder as of the close of business on the Eligibility Record
Date or of a Supplemental Eligible Account Holder as of the close of business on
the Supplemental Eligibility Record Date, as the case may be, provided such
aggregate balance is not less than $50.
Regulations: The regulations of the OTS regarding mutual holding
companies.
Reorganization: The reorganization of the Bank into the mutual
holding company structure including the organization of the MHC, the Holding
Company and the Bank in stock form pursuant to this Plan.
Residence: The terms "residence," "reside," "resided" or "residing"
as used herein with respect to any person shall mean any person who occupied a
dwelling within the Bank's Community, has an intent to remain with the Community
for a period of time, and manifests the genuineness of that intent by
establishing an ongoing physical presence within the Community together with an
indication that such presence within the Community is something other than
merely transitory in nature. To the extent the Person is a corporation or other
business entity, the principal place of business or headquarters shall be in the
Community. To the extent a person is a personal benefit plan, the circumstances
of the beneficiary shall apply with respect to this definition. In the case of
all other benefit plans, the circumstances of the trustee shall be examined for
purposes of this definition. The Bank may utilize deposit or loan records or
such other evidence provided to it to make a determination as to whether a
person is a resident. In all cases, however, such a determination shall be in
the sole discretion of the Bank.
SAIF: The Savings Association Insurance Fund, which is a division of
the FDIC.
SEC: The Securities and Exchange Commission.
Special Meeting: The Special Meeting of Members called for the
purpose of voting on the Plan.
Stock Bank: The federally chartered stock savings association
resulting from the Reorganization in accordance with the Plan.
4
<PAGE>
Stock Offering: The offering of Common Stock of the Holding Company
to persons other than the MHC, in a Subscription Offering and, to the extent
shares remain available, in a Direct Community Offering.
Subscription Offering: The offering of Common Stock of the Holding
Company for subscription and purchase pursuant to Section 11 of this Plan.
Subscription Price: The fixed price at which each share Common Stock
shall be offered for sale and sold in the Stock Offering.
Subsidiary: A company that is controlled by another company, either
directly or indirectly through one or more subsidiaries.
Supplemental Eligible Account Holder: Any Person holding a Qualifying
Deposit on the Supplemental Eligibility Record Date, who is not an Eligible
Account Holder, a Tax-Qualified Employee Plan or an Officer or director of the
Bank.
Supplemental Eligibility Record Date: The last day of the calendar
quarter preceding approval of the Plan by the OTS.
Syndicated Community Offering: The offering of Common Stock following
or contemporaneously with the Direct Community Offering through a syndicate of
broker-dealers.
Tax-Qualified Employee Plan: Any defined benefit plan or defined
contribution plan (including any employee stock ownership plan, stock bonus
plan, profit-sharing plan, or other plan) of the Bank, the Holding Company, the
MHC or any of their affiliates, which, with its related trusts, meets the
requirements to be qualified under Section 401 of the Internal Revenue Code.
The term Non-Tax-Qualified Employee Stock Benefit Plan means any defined benefit
plan or defined contribution plan which is not so qualified.
Voting Members: Those Members of the Bank as of the Voting Record
Date.
Voting Record Date: The date established by the Bank for determining
which Members are entitled to vote on the Plan.
Voting Stock:
(1) Voting Stock means common stock or preferred stock, or similar
interests if the shares by statute, charter or in any manner, entitle the
holder:
(i) To vote for or to select directors of the Bank or the
Holding Company; and
(ii) To vote on or to direct the conduct of the operations or
other significant policies of the Bank or the Holding
Company.
(2) Notwithstanding anything in paragraph (1) above, preferred stock
is not "Voting Stock" if:
5
<PAGE>
(i) Voting rights associated with the preferred stock are
limited solely to the type customarily provided by statute
with regard to matters that would significantly and
adversely affect the rights or preferences of the
preferred stock, such as the issuance of additional
amounts or classes of senior securities, the modification
of the terms of the preferred stock, the dissolution of
the Bank, or the payment of dividends by the Bank when
preferred dividends are in arrears;
(ii) The preferred stock represents an essentially passive
investment or financing device and does not otherwise
provide the holder with control over the issuer; and
(iii) The preferred stock does not at the time entitle the
holder, by statute, charter, or otherwise, to select or to
vote for the selection of directors of the Bank or the
Holding Company.
(3) Notwithstanding anything in paragraphs (1) and (2) above,
"Voting Stock" shall be deemed to include preferred stock and other securities
that, upon transfer or otherwise, are convertible into Voting Stock or
exercisable to acquire Voting Stock where the holder of the stock, convertible
security or right to acquire Voting Stock has the preponderant economic risk in
the underlying Voting Stock. Securities immediately convertible into Voting
Stock at the option of the holder without payment of additional consideration
shall be deemed to constitute the Voting Stock into which they are convertible;
other convertible securities and rights to acquire Voting Stock shall not be
deemed to vest the holder with the preponderant economic risk in the underlying
Voting Stock if the holder has paid less than 50% of the consideration required
to directly acquire the Voting Stock and has no other economic interest in the
underlying Voting Stock.
3. The Reorganization
A. Organization of the Holding Companies and the Bank
As part of the Reorganization the Bank will convert to a federal stock
savings bank, and will establish the Holding Company and the MHC as federal
corporations. The Reorganization will be effected as follows, or in any manner
approved by the OTS that is consistent with the purposes of this Plan and
applicable laws and regulations.
As part of the Reorganization: (i) the Bank will organize an interim stock
savings bank as a wholly-owned subsidiary ("Interim One"); (ii) Interim One will
organize an interim stock savings bank as a wholly-owned subsidiary ("Interim
Two"); (iii) Interim One will organize the Holding Company as a wholly-owned
subsidiary; (iv) the Bank will exchange its charter for a federal stock savings
bank charter to become the Stock Bank and Interim One will exchange its charter
for a federal mutual holding company charter to become the MHC; (v)
simultaneously with step (iv), Interim Two will merge with and into the Stock
Bank with the Stock Bank as the resulting institution; (vi) all of the initially
issued stock of the Stock Bank will be transferred to the MHC in exchange for
membership interests in the MHC; and (vii) the MHC will contribute the capital
stock of the Stock Bank to the Holding Company, and the Stock Bank will become a
wholly-owned subsidiary of the Holding Company. Contemporaneously with the
Reorganization, the Holding Company will offer for sale in the Stock Offering
shares of Common Stock representing up to 49.9% the pro forma market value of
the Holding Company and the Bank. Upon consummation of the
6
<PAGE>
Reorganization, the legal existence of the Bank will not terminate, but the
Stock Bank will be a continuation of the Bank, and all property of the Bank,
including its right, title, and interest in and to all property of whatsoever
kind and nature, interest and asset of every conceivable value or benefit then
existing or pertaining to the Bank, or which would inure to the Bank immediately
by operation of law and without the necessity of any conveyance or transfer and
without any further act or deed, will vest in the Stock Bank. The Stock Bank
will have, hold, and enjoy the same in its right and fully and to the same
extent as the same was possessed, held, and enjoyed by the Bank. The Stock Bank
will continue to have, succeed to, and be responsible for all the rights,
liabilities and obligations of the Bank and will maintain its headquarters and
operations at the Bank's present locations.
Upon consummation of the Reorganization, substantially all of the assets
and liabilities (including the savings accounts, demand accounts, tax and loan
accounts, United States Treasury general accounts, or United States Treasury
Time Deposit Accounts, as defined in the OTS regulations) of the Bank shall be
become the assets and liabilities of the Stock Bank, which will thereupon become
an operating savings bank subsidiary of the Holding Company and of the MHC. The
Bank will apply to the OTS to have the Holding Company receive or retain (as the
case may be) up to 50% of the net proceeds of the Stock Offering, or such other
amount as may be determined by the Board of Directors. The Stock Bank may
distribute additional capital to the Holding Company following the
Reorganization, subject to the OTS regulations governing capital distributions.
B. Effect on Deposit Accounts and Borrowings
Each deposit account in the Bank on the Effective Date will remain a
deposit account in the Stock Bank in the same amount and upon the same terms and
conditions, and will continue to be federally insured up to the legal maximum by
the FDIC in the same manner as the deposit account existed in the Bank
immediately prior to the Reorganization. Upon consummation of the
Reorganization, all loans and other borrowings from the Bank shall retain the
same status with the Stock Bank after the Reorganization as they had with the
Bank immediately prior to the Reorganization.
C. The Bank
Upon completion of the Reorganization the Stock Bank will be authorized to
exercise any and all powers, rights and privileges of, and will be subject to
all limitations applicable to, capital stock savings banks under federal law. A
copy of the proposed Charter and Bylaws of the Stock Bank is attached hereto as
Exhibit A and made a part of this Plan. The Reorganization will not result in
any reduction of the amount of retained earnings (other than the assets of the
Bank retained by or distributed to the Holding Company or the MHC), undivided
profits, and general loss reserves that the Bank had prior to the
Reorganization. Such retained earnings and general loss reserves will be
accounted for by the MHC, the Holding Company and the Stock Bank on a
consolidated basis in accordance with generally accepted accounting principles.
The initial members of the Board of Directors of the Stock Bank will be the
members of the existing Board of Directors of the Bank. The Stock Bank will be
wholly-owned by the Holding Company. The Holding Company will be wholly-owned by
its stockholders who will consist of the MHC and, initially, the persons who
purchase Common Stock in the Stock Offering. Upon the Effective Date of the
Reorganization, the voting and membership rights of Members will be transferred
to the MHC, subject to the conditions specified below.
7
<PAGE>
D. The Holding Company
The Holding Company will be authorized to exercise any and all powers,
rights and privileges, and will be subject to all limitations applicable to
savings and loan holding companies and mutual holding companies under federal
law and regulations. The initial members of the Board of Directors of the
Holding Company will be appointed by the Bank. Thereafter, the voting
stockholders of the Holding Company will elect approximately one-third of the
Holding Company's directors annually. A copy of the proposed Charter and Bylaws
of the Holding Company is attached as Exhibit B and are made part of this Plan.
The Holding Company will have the power to issue shares of Capital Stock to
persons other than the MHC. However, so long as the MHC is in existence, the
MHC will be required to own at least a majority of the Voting Stock of the
Holding Company. The Holding Company may issue any amount of Non-Voting Stock
to persons other than the MHC. The Holding Company will be authorized to
undertake one or more Minority Stock Offerings of less than 50% in the aggregate
of the total outstanding Common Stock of the Holding Company, and the Holding
Company intends to offer for sale up to 49.9% of its Common Stock in the Stock
Offering.
E. The Mutual Holding Company
As a mutual corporation, the MHC will have no stockholders. The members of
the MHC will have exclusive voting authority as to all matters requiring a vote
of members under the Charter of the MHC. Persons who have membership rights with
respect to the Bank under its existing Charter immediately prior to the
Reorganization shall continue to have such rights solely with respect to the
MHC after the Reorganization so long as such persons remain depositors or
borrowers, as the case may be, of the Bank after the Reorganization. In
addition, all persons who become depositors of the Stock Bank following the
Reorganization will have membership rights with respect to the MHC. The rights
and powers of the MHC will be defined by the MHC's Charter and Bylaws (a copy of
which is attached to this Plan as Exhibit C and made a part hereof) and by the
statutory and regulatory provisions applicable to savings and loan holding
companies and mutual holding companies. In particular, the MHC shall be subject
to the limitations and restrictions imposed on savings and loan holding
companies by Section 10(o)(5) of the HOLA.
The initial members of the Board of Directors of the MHC will be the
existing Board of Directors of the Bank and any additional persons as may be
appointed by the Bank. Thereafter, approximately one-third of the directors of
the MHC will be elected annually by the members of the MHC who will consist of
the former Members of the Bank and all persons who become depositors of the Bank
after the Reorganization.
4. Conditions to Implementation of the Reorganization
Consummation of the Reorganization is expressly conditioned upon the
following:
A. Approval of the Plan by a majority of the Board of Directors of the
Bank.
B. The filing of a Reorganization Notice, including the Plan, with the
OTS and either:
(i) The OTS has given written notice of its intent not to disapprove
the Reorganization; or
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(ii) Sixty days have passed since the OTS received the
Reorganization Notice and deemed it sufficient under (S)
516.2(c) of the OTS regulations, and the OTS has not given
written notice that the Reorganization is disapproved or
extended for an additional 30 days the period during which
disapproval may be issued.
C. The filing of a holding company application with and approval by the
OTS pursuant to the HOLA for the Holding Company and MHC to become
savings and loan holding companies by owning or acquiring 100% of the
common stock of the Stock Bank and the Holding Company, respectively,
to be issued in connection with the Reorganization.
D. Submission of the Plan to the Members for approval pursuant to a Proxy
Statement and form of proxy cleared in advance by the OTS, and
approval of such Plan by a majority of the total votes of the Members
eligible to be cast at a meeting held at the call of the directors in
accordance with the procedures prescribed by the Bank's Charter and
Bylaws.
E. Receipt of all necessary approvals from the OTS in connection with the
adoption of the charter and bylaws of the MHC, the Holding Company and
the Bank, the conversion of the Bank to a stock charter, and any
transfer of assets and liabilities of the Bank to the Stock Bank
pursuant to the Plan; and satisfaction of all conditions specified or
otherwise imposed by the OTS in connection with the issuance of a
notice of intent not to disapprove the Notice.
5. Special Meeting of Members
Subsequent to the approval of the Plan by the OTS, the Special Meeting
shall be scheduled in accordance with the Bank's Bylaws. Promptly after receipt
of approval and at least 20 days but not more than 45 days prior to the Special
Meeting, the Bank shall distribute proxy solicitation materials to all Voting
Members. The proxy solicitation materials shall include a proxy statement, and
other documents authorized for use by the regulatory authorities. A copy of the
Plan will be made available to Voting Members upon request. Pursuant to the
Regulations, an affirmative vote of not less than a majority of the total
outstanding votes of Voting Members is required for approval of the Plan.
Voting may be in person or by proxy. The OTS shall be notified promptly of the
actions of Voting Members.
6. Rights of Members of the MHC
Following the Reorganization, all persons who had membership rights with
respect to the Bank as of the date of the Reorganization will continue to have
such rights solely with respect to the MHC. All existing proxies granted by
members of the Bank to the Board of Directors of the Bank shall automatically
become proxies granted to the Board of Directors of the MHC. In addition, all
persons who become depositors of the Stock Bank subsequent to the Reorganization
also will have membership rights with respect to the MHC. In each case, no
person who ceases to be the holder of a deposit account with the Stock Bank
after the Reorganization shall have any membership or rights with respect to the
MHC. Borrowers of the Stock Bank who were borrower members of the Bank at the
time of Reorganization will have the same membership rights in the MHC as they
had in the Bank immediately prior to the Reorganization for so long as their
pre-Reorganization borrowings remain outstanding. Borrowers will not receive
membership rights in connection with any new borrowings made after the
Reorganization.
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7. Conversion of MHC to Stock Form
Following the completion of the Reorganization, the MHC may elect to
convert to stock form in accordance with applicable law (a "Conversion
Transaction"). There can be no assurance when, if ever, a Conversion
Transaction will occur. If the Conversion Transaction does not occur, the MHC
will always own a majority of the Common Stock of the Holding Company.
In a Conversion Transaction, the MHC would merge with and into the Bank or
the Holding Company, with the Bank or the Holding Company as the resulting
entity, and the depositors of the Bank would receive the right to subscribe for
a number of shares of common stock of the new stock holding company (the "New
Stock Holding Company") formed in connection with the Conversion transaction, as
determined by the formula set forth in the following paragraphs. The additional
shares of Common stock of the New Stock Holding Company issued in the Conversion
Transaction would be sold at their aggregate pro forma market value as
determined by an independent appraisal.
In any Conversion Transaction, Minority Stockholders, if any, will be
entitled without additional consideration to maintain the same percentage
ownership interest in the New Stock Holding Company after the Conversion
Transaction as their percentage ownership interest in the Holding Company
immediately prior to the Conversion Transaction (i.e., the "Minority Ownership
Interest"), subject only to the following adjustments (if required by federal or
state law, regulation, or regulatory policy) to reflect (i) the cumulative
effect of the aggregate amount of dividends waived by the MHC, and (ii) the
market value of assets of the MHC (other than common stock of the Holding
Company).
The adjustment referred to in clause (i) of the preceding paragraph above
would require that the Minority Ownership Interest be adjusted by multiplying
the Minority Ownership Interest by the following fraction:
(Holding Company stockholders' equity immediately prior to Conversion
---------------------------------------------------------------------
Transaction) - (aggregate amount of dividends waived by MHC)
------------------------------------------------------------
Holding Company stockholders' equity immediately prior to Conversion Transaction
The adjustment referred to in clause (ii) above would further adjust the
Minority Ownership Interest by multiplying the adjusted Minority Ownership
Interest by the following fraction:
(pro forma market value of New Stock Holding Company) - (market value of assets
- -------------------------------------------------------------------------------
of MHC other than Holding Company common stock)
-----------------------------------------------
pro forma market value of New Stock Holding Company
At the sole discretion of the Board of Directors of the MHC and the Holding
Company, a Conversion Transaction may be effected in any other manner necessary
to qualify the Conversion Transaction as a tax-free reorganization under
applicable federal and state tax laws, provided such Conversion Transaction does
not diminish the rights and ownership interest of Minority Stockholders as set
forth in the preceding paragraphs. If a Conversion Transaction does not occur,
the MHC will always own a majority of the voting stock of the Holding Company.
Management of the Bank has no current intention to conduct a Conversion
Transaction.
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A Conversion Transaction would require the approval of applicable federal
regulators, and would be presented to a vote of the members of the MHC. Federal
regulatory policy requires that in any Conversion Transaction the members of the
MHC will be accorded the same stock purchase priorities as if the MHC were a
mutual savings bank converting to stock form.
8. Timing of the Reorganization and Sale of Capital Stock
The Bank intends to consummate the Reorganization as soon as feasible
following the receipt of all approvals referred to in Section 4 of the Plan.
Subject to the approval of the OTS, the Holding Company intends to commence the
Stock Offering concurrently with the proxy solicitation of Members. The Holding
Company may close the Stock Offering before the Special Meeting, provided that
the offer and sale of the Common Stock shall be conditioned upon approval of the
Plan by the Members at the Special Meeting. The Bank's proxy solicitation
materials may permit certain Members to return to the Bank by a reasonable date
certain a postage paid card or other written communication requesting receipt of
the prospectus if the prospectus is not mailed concurrently with the proxy
solicitation materials. The Stock Offering shall be conducted in compliance
with the securities offering regulations of the SEC. The Bank will not finance
or loan funds to any person to purchase Common Stock.
9. Number of Shares to be Offered
The total number of shares (or range thereof) of Common Stock to be issued
and offered for sale pursuant to the Plan shall be determined initially by the
Board of Directors of the Bank and the Holding Company in conjunction with the
determination of the Independent Appraiser. The number of shares to be offered
may be adjusted prior to completion of the Stock Offering. The total number of
shares of Common Stock that may be held by persons other than the MHC at the
close of the Stock Offering must be less than 50% of the issued and outstanding
shares of Common Stock of the Holding Company.
10. Independent Valuation and Purchase Price of Shares
The aggregate number of shares that shall be issued in the Reorganization
and Stock Offering shall be determined by the Board of Directors based on the
Independent Valuation prepared by the Independent Appraiser. The Independent
Valuation shall be expressed as the Estimated Valuation Range, the maximum and
minimum of which shall be 15% above and below, respectively, the midpoint of
such range. The aggregate number of shares offered in the Reorganization and
Stock Offering shall be equal to the Estimated Valuation Range divided by the
Subscription Price. The Offering Range of the shares of Common Stock offered in
the Stock Offering shall have a value, based on the Independent Valuation, equal
to a fixed percentage of less than 50% of the Estimated Valuation Range. Shares
not sold in the Stock Offering shall be issued to the MHC.
The Independent Valuation must be updated at the time of the completion of
the period during which shares of Common Stock are offered in the Stock
Offering. At such time, the maximum of the Estimated Valuation Range may be
increased by up to 15%, which will result in a corresponding increase in the
maximum of the Offering Range of up to 15%.
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, the Independent Appraiser confirms to the Holding Company, the
Bank and the OTS that, to the best knowledge of the Independent Appraiser,
nothing of a material nature has occurred that, taking into account all relevant
factors, would cause the independent Appraiser to conclude that the Independent
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<PAGE>
Valuation is incompatible with its estimate of the pro forma market value of the
Common Stock of the Holding Company at the conclusion of the Stock Offering. Any
change that would result in an aggregate purchase price that is below the
minimum or above the maximum of the Estimated Valuation Range would be subject
to OTS approval. If such confirmation is not received, the Holding Company may
cancel the Stock Offering, extend the Stock Offering, reopen or commence a new
Stock Offering, establish a new Estimated Valuation Range and commence a
resolicitation of all purchasers with the approval of the OTS or take such other
actions as permitted by the OTS in order to complete the Offering.
The aggregate amount of outstanding Common Stock that may be owned or
controlled by persons other than the MHC at the close of the Reorganization and
Stock Offering shall be less than 50% of the Holding Company's total outstanding
Common Stock.
11. Method of Offering Shares and Rights to Purchase Stock
In descending order of priority, the opportunity to purchase Common Stock
shall be given in the Subscription Offering to: (1) Eligible Account Holders;
(2) Tax-Qualified Employee Plans; (3) Supplemental Eligible Account Holders; (4)
Other Members; and at the discretion of the Board of Directors, (5) directors,
officers and employees of the Bank. Any shares of Common Stock that are not
subscribed for in the Subscription Offering may be offered for sale in a Direct
Community Offering. The minimum purchase by any Person shall be 25 shares. The
Holding Company may use its discretion in determining whether prospective
purchasers are "residents," "associates," or "acting in concert" as defined in
the Plan, and in interpreting any and all other provisions of the Plan. All such
determinations are in the sole discretion of the Holding Company, and may be
based on whatever evidence the Holding Company chooses to use in making any such
determination.
In addition to the priorities set forth below, the Board of Directors may
establish other priorities for the purchase of Common Stock, subject to the
approval of the OTS. The priorities for the purchase of shares in the Stock
Offering are as follows:
A. Subscription Offering
Priority 1: Eligible Account Holders. Each Eligible Account Holder shall
be given the opportunity to purchase up to $250,000 of Common Stock offered in
the Stock Offering; provided that the Holding Company may, in its sole
discretion and without further notice to or solicitation of subscribers or other
prospective purchasers, increase such maximum purchase limitation to 5% of the
maximum number of shares offered in the Stock Offering or decrease such maximum
purchase limitation to .5% of the maximum number of shares offered in the Stock
Offering, subject to the overall purchase limitation set forth in Section 12. If
there are insufficient shares available to satisfy all subscriptions of Eligible
Account Holders, shares will be allocated to Eligible Account Holders so as to
permit each such subscribing Eligible Account Holder to purchase a number of
shares sufficient to make his total allocation equal to the lesser of 100 shares
or the number of shares subscribed for. Thereafter, unallocated shares will be
allocated pro rata to remaining subscribing Eligible Account Holders whose
subscriptions remain unfilled in the same proportion that each such subscriber's
Qualifying Deposit bears to the total amount of Qualifying Deposits of all
subscribing Eligible Account Holders whose subscriptions remain unfilled. To
ensure proper allocation of stock, each Eligible Account Holder must list on his
subscription order form all accounts in which he had an ownership interest as of
the Eligibility Record Date.
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<PAGE>
In the event that the number of shares offered is increased as a result of
an increase in the Independent Valuation, the ESOP will have a priority right to
fill its subscription in whole or in part prior to all other subscriptions of
Eligible Account Holders.
Priority 2: Tax-Qualified Employee Plans. The Tax-Qualified Employee
Plans shall be given the opportunity to purchase in the aggregate up to 10% of
the Common Stock issued in the Stock Offering. In the event of an
oversubscription in the Stock Offering, subscriptions for shares by the Tax-
Qualified Employee Plans may be satisfied, in whole or in part, out of
authorized but unissued shares of the Holding Company subject to the maximum
purchase limitations applicable to such plans and set forth in Section 12, or
may be satisfied, in whole or in part, through open market purchases by the Tax-
Qualified Employee Plans subsequent to the closing of the Stock Offering.
Priority 3: Supplemental Eligible Account Holders. To the extent there
are sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders, and the Tax-Qualified Employee Plans, each Supplemental
Eligible Account Holder shall have the opportunity to purchase up to $250,000 of
Common Stock offered in the Stock Offering, provided that the Bank may, in its
sole discretion and without further notice to or solicitation of subscribers or
other prospective purchasers, increase such maximum purchase limitation to 5% of
the maximum number of shares offered in the Stock Offering or decrease such
maximum purchase limitation to 0.5% of the maximum number of shares offered in
the Stock Offering subject to the overall purchase limitations set forth in
Section 12. In the event Supplemental Eligible Account Holders subscribe for a
number of shares which, when added to the shares subscribed for by Eligible
Account Holders, and the Tax-Qualified Employee Plans, the shares of Common
Stock will be allocated among subscribing Supplemental Eligible Account Holders
so as to permit each subscribing Supplemental Eligible Account Holder to
purchase a number of shares sufficient to make his total allocation equal to the
lesser of 100 shares or the number of shares subscribed for. Thereafter,
unallocated shares will be allocated to each subscribing Supplemental Eligible
Account Holder whose subscription remains unfilled in the same proportion that
such subscriber's Qualifying Deposits on the Supplemental Eligibility Record
Date bear to the total amount of Qualifying Deposits of all subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled.
Priority 4: Other Members. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by Eligible Account Holders, the
Tax-Qualified Employee Plans and Supplemental Eligible Account Holders, each
Other Member shall have the opportunity to purchase up to $250,000 of Common
Stock offered in the Stock Offering, provided that the Bank may, in its sole
discretion and without further notice to or solicitation of subscribers or other
prospective purchasers, increase such maximum purchase limitation to 5% of the
maximum number of shares offered in the Stock Offering or decrease such maximum
purchase limitation to .5% of the maximum number of shares offered in the Stock
Offering, subject to the overall purchase limitations set forth in Section 12.
In the event Other Members subscribe for a number of shares which, when added to
the shares subscribed for by the Eligible Account Holders, Tax-Qualified
Employee Plans and Supplemental Eligible Account Holders is in excess of the
total number of shares offered in the Stock Offering, the subscriptions of such
Other Members will be allocated among subscribing Other Members on a pro rata
basis based on the size of such Other Members' orders.
Priority 5: Directors, Officers and Employees. To the extent that shares
remain available for purchase after satisfaction of all subscriptions of the
Eligible Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible
Account Holders, and Other Members, the Board of Directors may determine to
offer shares of Common Stock to employees, officers and directors of the Bank,
who in such event
13
<PAGE>
would have the opportunity to purchase up to $250,000 of the Common Stock
offered in the Stock Offering; provided that the Bank may, in its sole
discretion, and without further notice to or solicitation of subscribers or
other prospective purchasers, increase such maximum purchase limitation to 5% of
the maximum number of shares offered in the Stock Offering or decrease such
maximum purchase limitation to .5% of the maximum number of shares offered in
the Stock Offering, subject to the overall purchase limitations set forth in
Section 12. In the event that directors, officers and employees subscribe for a
number of shares, which, when added to the shares subscribed for by Eligible
Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account
Holders, and Other Members is in excess of the total shares offered in the Stock
Offering, the subscriptions of such Persons will be allocated among directors,
officers and employees on a pro rata basis based on the size of each Person's
orders.
B. Direct Community Offering/Public Offering
Any shares of Common Stock not subscribed for in the Subscription Offering
may be offered for sale in a Direct Community Offering. This will involve an
offering of all unsubscribed shares directly to the general public with a
preference to those natural persons residing in the counties in which the Bank
maintains its offices. The Direct Community Offering, if any, may be for a
period of not more than 45 days unless extended by the Holding Company and the
Bank, and shall commence concurrently with, during or promptly after the
Subscription Offering. The Holding Company and the Bank may use an investment
banking firm or firms on a best efforts basis to sell the unsubscribed shares in
the Subscription and Direct Community Offering. The Holding Company and the Bank
may pay a commission or other fee to such investment banking firm or firms as to
the shares sold by such firm or firms in the Subscription and Direct Community
Offering and may also reimburse such firm or firms for expenses incurred in
connection with the sale. The Direct Community Offering may include a syndicated
community offering managed by such investment banking firm or firms. The Common
Stock will be offered and sold in the Direct Community Offering, in accordance
with OTS regulations, so as to achieve the widest distribution of the Common
Stock. No person, by himself or herself, or with an Associate or group of
Persons acting in concert, may subscribe for or purchase more than $250,000 of
Common Stock offered in the Direct Community Offering. Further, the Bank may
limit total subscriptions under this Section 11(B) so as to assure that the
number of shares available for the public offering may be up to a specified
percentage of the number of shares of Common Stock. Finally, the Bank may
reserve shares offered in the Direct Community Offering for sales to
institutional investors.
In the event of an oversubscription for shares in the Direct Community
Offering, shares may, at the sole discretion of the Bank, be allocated (to the
extent shares remain available) first to cover any reservation of shares for a
public offering or institutional orders, next to cover orders of natural persons
residing in the counties in which the Bank maintains its offices, then to cover
the orders of any other person subscribing for shares in the Direct Community
Offering so that each such person may receive 1,000 shares, and thereafter, on a
pro rata basis to such persons based on the amount of their respective
subscriptions.
The Bank and the Holding Company, in their sole discretion, may reject
subscriptions, in whole or in part, received from any Person under this Section
11(B).
C. Syndicated Community Offering
Any shares of Common Stock not sold in the Subscription Offering or in the
Direct Community Offering, if any, may be offered for sale to the general public
by a selling group of broker-dealers in a
14
<PAGE>
Syndicated Community Offering, subject to terms, conditions and procedures,
including the timing of the offering, as may be determined by the Bank and the
Holding Company in a manner that is intended to achieve the widest distribution
of the Common Stock subject to the rights of the Holding Company to accept or
reject in whole or in part all order in the Syndicated Community Offering. It is
expected that the Syndicated Community Offering would commence as soon as
practicable after termination of the Subscription Offering and the Direct
Community Offering, if any. The Syndicated Community Offering shall be completed
within 45 days after the termination of the Subscription Offering, unless such
period is extended as provided herein. The Syndicated Community Offering price
and the underwriting discount in the Syndicated Community Offering shall be
determined by an underwriting agreement between the Holding Company, the Bank
and the underwriters. Such underwriting agreement shall be filed with the OTS
and the SEC.
If for any reason a Syndicated Community Offering of unsubscribed shares of
Common Stock cannot be effected and any shares remain unsold after the
Subscription Offering and the Direct Community Offering, if any, the Boards of
Directors of the Holding Company and the Bank will seek to make other
arrangements for the sale of the remaining shares. Such other arrangements will
be subject to the approval of the OTS and to compliance with applicable
securities laws.
12. Additional Limitations on Purchases of Common Stock
Purchases of Common Stock in the Stock Offering will be subject to the
following purchase limitations:
A. The aggregate amount of outstanding Common Stock of the Holding Company
owned or controlled by persons other than MHC at the close of the Stock
Offering shall be less than 50% of the Holding Company's total
outstanding Common Stock.
B. No Person, Associate thereof, or group of persons acting in concert,
may purchase more than $250,000 of Common Stock offered in the Stock
Offering to persons other than the MHC, except that: (i) the Holding
Company may, in its sole discretion and without further notice to or
solicitation of subscribers or other prospective purchasers, increase
such maximum purchase limitation to 5% of the number of shares offered
in the Stock Offering; (ii) Tax-Qualified Employee Plans may purchase
up to 10% of the shares offered in the Stock Offering; and (iii) for
purposes of this subsection 12(B) shares to be held by any Tax-
Qualified Employee Plan and attributable to a person shall not be
aggregated with other shares purchased directly by or otherwise
attributable to such person.
C. The aggregate amount of Common Stock acquired in the Stock Offering by
all Management Persons and their Associates, exclusive of any stock
acquired by such persons in the secondary market, shall not exceed
32.3% of the outstanding shares of Common Stock of the Holding Company
held by persons other than the MHC at the close of the Stock Offering.
In calculating the number of shares held by Management Persons and
their Associates under this paragraph or under the provisions of
paragraph D of this section, shares held by any Tax-Qualified Employee
Benefit Plans of the Bank that are attributable to such persons shall
not be counted.
D. The aggregate amount of Common Stock acquired in the Stock Offering by
all Management Persons and their Associates, exclusive of any Common
Stock acquired by
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<PAGE>
such plans or persons in the secondary market, shall not exceed 34% of
the stockholders' equity of the Holding Company other than the MHC at
the close of the Stock Offering.
E. The Boards of Directors of the Bank and the Holding Company may, in
their sole discretion, increase the maximum purchase limitation set
forth in paragraph 12(B) hereof to up to 9.9%, provided that orders for
Common Stock in excess of 5% of the number of shares of Common Stock
offered in the Stock Offering shall not in the aggregate exceed 10% of
the total shares of Common Stock offered in the Stock Offering (except
that this limitation shall not apply to purchases by Tax-Qualified
Employee Plans). If such 5% limitation is increased, subscribers for
the maximum amount will be, and certain other large subscribers in the
sole discretion of the Holding Company and the Bank may be, given the
opportunity to increase their subscriptions up to the then applicable
limit. Requests to purchase additional shares of Common Stock under
this provision will be determined by the Board of Directors of the
Holding Company, in its sole discretion.
F. Notwithstanding any other provision of this Plan, no person shall be
entitled to purchase any Common Stock to the extent such purchase would
be illegal under any federal law or state law or regulation or would
violate regulations or policies of the National Association of
Securities Dealers, Inc., particularly those regarding free riding and
withholding. The Holding Company and/or its agents may ask for an
acceptable legal opinion from any purchaser as to the legality of such
purchase and may refuse to honor any purchase order if such opinion is
not timely furnished.
G. The Board of Directors of the Holding Company has the right in its sole
discretion to reject any order submitted by a person whose
representations the Board of Directors believes to be false or who it
otherwise believes, either alone or acting in concert with others, is
violating, circumventing, or intends to violate, evade or circumvent
the terms and conditions of this Plan.
Prior to the consummation of the Stock Offering, no person shall offer to
transfer, or enter into any agreement or understanding to transfer the legal or
beneficial ownership of any subscription rights or shares of Common Stock,
except pursuant to this Plan. Each person purchasing Common Stock shall be
deemed to confirm that such purchase does not conflict with the above purchase
limitations contained in this Plan.
EACH PERSON PURCHASING COMMON STOCK IN THE STOCK OFFERING WILL BE DEEMED TO
CONFIRM THAT SUCH PURCHASE DOES NOT CONFLICT WITH THE PURCHASE LIMITATIONS IN
THIS PLAN. ALL QUESTIONS CONCERNING WHETHER ANY PERSONS ARE ASSOCIATES OR A
GROUP ACTING IN CONCERT OR WHETHER ANY PURCHASE CONFLICTS WITH THE PURCHASE
LIMITATIONS IN THIS PLAN OR OTHERWISE VIOLATES ANY PROVISION OF THIS PLAN SHALL
BE DETERMINED BY THE BANK IN ITS SOLE DISCRETION. SUCH DETERMINATION SHALL BE
CONCLUSIVE, FINAL AND BINDING ON ALL PERSONS AND THE BANK MAY TAKE ANY REMEDIAL
ACTION, INCLUDING WITHOUT LIMITATION REJECTING THE PURCHASE OR REFERRING THE
MATTER TO THE OTS FOR ACTION, AS IN ITS SOLE DISCRETION THE BANK MAY DEEM
APPROPRIATE.
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<PAGE>
13. Payment for Stock
All payments for Common Stock subscribed for or ordered in the Stock
Offering must be delivered in full to the Bank, together with a properly
completed and executed order form, or purchase order in the case of the
Syndicated Community Offering, on or prior to the expiration date specified on
the order form or purchase order, as the case may be, unless such date is
extended by the Bank; provided, that if the Employee Plans subscribe for shares
during the Subscription Offering, such plans will not be required to pay for the
shares at the time they subscribe but rather may pay for such shares of Common
Stock subscribed for by such plans at the Subscription Price upon consummation
of the Stock Offering, provided that, in the case of the ESOP there is in force
from the time of its subscription until the consummation of the Stock Offering,
a loan commitment to lend to the ESOP, at such time, the aggregated Subscription
Price of the shares for which it subscribed. The Holding Company or the Bank may
make scheduled discretionary contributions to an Employee Plan provided such
contributions from the Bank, if any, do not cause the Bank to fail to meet its
regulatory capital requirement.
Payment for Common Stock shall be made either by check or money order, or
if a purchaser has a Deposit Account in the Bank, such purchaser may pay for the
shares subscribed for by authorizing the Bank to make a withdrawal from the
purchaser's passbook, money market or certificate account at the Bank in an
amount equal to the purchase price of such shares. Such authorized withdrawal,
whether from a savings, passbook or certificate account, shall be without
penalty as to premature withdrawal. If the authorized withdrawal is from a
certificate account, and the remaining balance does not meet the applicable
minimum balance requirements, the certificate may, at the Bank's discretion, be
canceled at the time of withdrawal, without penalty, and the remaining balance
will earn interest at the passbook rate or be returned to the depositor. Funds
for which a withdrawal is authorized will remain in the purchaser's Deposit
Account but may not be used by the purchaser until the Common Stock has been
sold or the 45-day period (or such longer period as may be approved by the
applicable regulatory authorities) following the Stock Offering has expired,
whichever occurs first. Thereafter, the withdrawal will be given effect only to
the extent necessary to satisfy the subscription (to the extent it can be
filled) at the purchase price per share. Interest will continue to be earned on
any amounts authorized for withdrawal until such withdrawal is given effect. If
for any reason the Stock Offering is not consummated, all payments made by
subscribers in the Stock Offering will be refunded to them with interest. In
case of amounts authorized for withdrawal from Deposit Accounts, refunds will be
made by canceling the authorization for withdrawal.
14. Manner of Exercising Subscription Rights Through Order Forms
As soon as practicable after the prospectus prepared by the Holding Company
and the Bank has been declared effective by the OTS and the SEC, copies of the
prospectus and order forms will be distributed to all Eligible Account Holders,
Supplemental Eligible Account Holders, the Employee Plans and employees,
officers and directors at their last known addresses appearing on the records of
the Bank for the purpose of subscribing for shares of Common Stock in the
Subscription Offering and will be made available for use by those persons
entitled to purchase in the Direct Community Offering.
Each order form will be preceded or accompanied by the prospectus
describing the Holding Company, the Bank, the Common Stock and the Subscription
and Direct Community Offerings. Each order form will contain, among other
things, the following:
A. A specified date by which all order forms must be received by the
Bank, which date shall be not less than 20, nor more than 45 days,
following the date on which the order forms
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<PAGE>
are mailed by the Bank, and which date will constitute the termination
of the Subscription Offering;
B. The purchase price per share for shares of Common Stock to be sold in
the Subscription and Direct Community Offerings;
C. A description of the minimum and maximum number of shares of Common
Stock that may be subscribed for pursuant to the exercise of
Subscription Rights or otherwise purchased in the Direct Community
Offering;
D. Instructions as to how the recipient of the order form is to indicate
thereon the number of shares of Common Stock for which such Person
elects to subscribe and the available alternative methods of payment
therefor;
E. An acknowledgment that the recipient of the order form has received a
final copy of the prospectus prior to execution of the order form;
F. A statement indicating the consequences of failing to properly
complete and return the order form, including a statement to the
effect that all subscription rights are nontransferable, will be void
at the end of the Subscription Offering, and can only be exercised by
delivering to the Bank within the subscription period such properly
completed and executed order form, together with cash (if delivered in
person), check or money order in the full amount of the purchase price
as specified in the order form for the shares of Common Stock for
which the recipient elects to subscribe in the Subscription Offering
(or by authorizing on the order form that the Bank withdraw said
amount from the subscriber's Deposit Account at the Bank); and
G. A statement to the effect that the executed order form, once received
by the Bank, may not be modified or amended by the subscriber without
the consent of the Bank.
Notwithstanding the above, the Bank and the Holding Company reserve the
right in their sole discretion to accept or reject orders received on
photocopied or facsimilied order forms.
15. Undelivered, Defective or Late Order Form; Insufficient Payment
In the event order forms (a) are not delivered and are returned to the Bank
by the United States Postal Service or the Bank is unable to locate the
addressee, (b) are not received back by the Bank or are received by the Bank
after the expiration date specified thereon, (c) are defectively filled out or
executed, (d) are not accompanied by the full required payment for the shares of
Common Stock subscribed for (including cases in which Deposit Accounts from
which withdrawals are authorized are insufficient to cover the amount of the
required payment), or (e) are not mailed pursuant to a "no mail" order placed in
effect by the account holder, the subscription rights of the Person to whom such
rights have been granted will lapse as though such Person failed to return the
contemplated order form within the time period specified thereon; provided, that
the Bank may, but will not be required to, waive any immaterial irregularity on
any order form or require the submission of corrected order forms or the
remittance of full payment for subscribed shares by such date as the Bank may
specify. The interpretation by the Bank of terms and conditions of this Plan and
of the order forms will be final, subject to the authority of the OTS.
18
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16. Completion of the Stock Offering
The Stock Offering will be terminated if not completed within 90 days from
the date of approval by the OTS, unless an extension is approved by the OTS.
17. Market for Common Stock
If at the close of the Stock Offering the Holding Company has more than 100
shareholders of any class of stock, the Holding Company shall use its best
efforts to:
(i) encourage and assist a market maker to establish and maintain a
market for that class of stock; and
(ii) list that class of stock on a national or regional securities
exchange, or on the Nasdaq system.
18. Stock Purchases by Management Persons After the Offering
For a period of three years after the proposed Stock Offering, no
Management Person or his or her Associates may purchase, without the prior
written approval of the OTS, any Common Stock of the Holding Company, except
from a broker-dealer registered with the SEC, except that the foregoing shall
not apply to:
A. Negotiated transactions involving more than 1% of the outstanding
stock in the class of stock; or
B. Purchases of stock made by and held by any Tax-Qualified or Non-Tax
Qualified Employee Plan of the Stock Bank or the Holding Company even
if such stock is attributable to Management Persons or their
Associates.
19. Resales of Stock by Management Persons
Common Stock purchased by Management Persons and their Associates in the
Stock Offering may not be resold for a period of at least one year following the
date of purchase, except in the case of death of the Management Person or
Associate.
20. Stock Certificates
Each stock certificate shall bear a legend giving appropriate notice of the
restrictions set forth in Section 19 above. Appropriate instructions shall be
issued to the Holding Company's transfer agent with respect to applicable
restrictions on transfers of such stock. Any shares of stock issued as a stock
dividend, stock split or otherwise with respect to such restricted stock, shall
be subject to the same restrictions as apply to the restricted stock.
21. Restriction on Financing Stock Purchases
19
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The Holding Company will not offer or sell any of the Common Stock proposed
to be issued to any person whose purchase would be financed by funds loaned to
the person by the Holding Company, the Bank or any of their Affiliates.
22. Stock Benefit Plans
The Board of Directors of the Bank and/or the Holding Company intend to
adopt one or more stock benefit plans for its employees, officers and directors,
including an ESOP, stock award plans and stock option plans, which will be
authorized to purchase Common Stock and grant options for Common Stock. However,
only the Tax-Qualified Employee Plans will be permitted to purchase Common Stock
in the Stock Offering subject to the purchase priorities set forth in this Plan.
The Board of Directors of the Bank intends to establish the ESOP and authorize
the ESOP and any other Tax-Qualified Employee Plans to purchase in the aggregate
up to 10% of the Common Stock issued in the Stock Offering. The Stock Bank or
the Holding Company may make scheduled discretionary contributions to one or
more Tax-Qualified Employee Plans to purchase Common Stock issued in the Stock
Offering or to purchase issued and outstanding shares of Common Stock or
authorized but unissued shares of Common Stock subsequent to the completion of
the Stock Offering, provided such contributions do not cause the Stock Bank to
fail to meet any of its regulatory capital requirements. This Plan specifically
authorizes the grant and issuance by the Holding Company of the following: (i)
awards of Common Stock after the Stock Offering pursuant to one or more stock
recognition and award plans (the "Recognition Plans") in an amount equal to up
to 4% of the number of shares of Common Stock issued in the Stock Offering (and
in an amount equal to up to 5% of the Common Stock issued in the Offering if the
Recognition Plans are adopted more than one year after the completion of the
Stock Offering); (ii) options to purchase a number of shares of the Holding
Company's Common Stock in an amount equal to up to 10% of the number of shares
of Common Stock issued in the Stock Offering, provided that any forfeited option
may be reissued, (iii) shares of Common Stock issued upon exercise of such
options, and (iv) Common Stock to one or more Tax Qualified Employee Plans,
including the ESOP, at the closing of the Stock Offering or at any time
thereafter, in an amount equal to up to 8% of the number of shares of Common
Stock issued in the Stock Offering (or 10% in the event that awards of shares of
Common Stock pursuant to the Recognition Plan are not made within one year of
the completion of the Reorganization and Stock Offering). Shares awarded to the
Tax Qualified Employee Plans or pursuant to the Recognition Plans, and shares
issued upon exercise of options may be authorized but unissued shares of Common
Stock, or shares of Common Stock purchased by the Holding Company or such plans
on the open market. Any awards of Common Stock under the Recognition Plans and
the stock option plans will be subject to prior stockholder approval.
23. Post-Reorganization Filing and Market Making
It is likely that there will be a limited market for the Common Stock sold
in the Stock Offering, and purchasers must be prepared to hold the Common Stock
for an indefinite period of time. If the Holding Company has more than 35
stockholders of any class of stock, the Holding Company shall register its
Common Stock with the SEC pursuant to the Exchange Act, and shall undertake not
to deregister such Common Stock for a period of three years thereafter.
24. Payment of Dividends and Repurchase of Stock
The Holding Company may not declare or pay a cash dividend on, or
repurchase any of, its Common Stock if the effect thereof would cause the
regulatory capital of the Bank to be reduced below the amount required under
(S)567.2 of the OTS rules and regulations. Otherwise, the Holding Company
20
<PAGE>
may declare dividends or make other capital distributions in accordance with
applicable laws and regulations. The MHC may from time to time purchase shares
of Common Stock on the open market. Subject to the approval of the OTS, the MHC
may waive its right to receive dividends declared by the Holding Company.
25. Reorganization and Stock Offering Expenses
The Regulations require that the expenses of any Stock Offering must be
reasonable. The Bank will use its best efforts to assure that the expenses
incurred by the Bank and the Holding Company in effecting the Reorganization and
the Stock Offering will be reasonable.
26. Employment and Other Severance Agreements
Following or contemporaneously with the Reorganization, the Bank and/or the
Holding Company may enter into employment and/or severance arrangements with one
or more executive officers of the Bank and/or the Holding Company. It is
anticipated that any employment contracts entered into by the Bank and/or the
Holding Company will be for terms not exceeding three years and that such
contracts will provide for annual renewals of the term of the contracts, subject
to approval by the Board of Directors. The Bank and/or the Holding Company also
may enter into severance arrangements with one or more executive officers which
provide for the payment of severance compensation in the event of a change in
control of the Bank and/or the Holding Company. The terms of such employment and
severance arrangements have not been determined as of this time, but will be
described in any prospectus circulated in connection with the Stock Offering and
will be subject to and comply with all regulations of the OTS.
27. Interpretation
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Directors of the Bank
shall be final, subject to the authority of the OTS.
28. Amendment or Termination of the Plan
If necessary or desirable, the terms of the Plan may be substantially
amended by a majority vote of the Bank's Board of Directors as a result of
comments from regulatory authorities or otherwise, at any time prior to
submission of the Plan and proxy materials to the Members. At any time after
submission of the Plan and proxy materials to the Members, the terms of the Plan
that relate to the Reorganization may be amended by a majority vote of the Board
of Directors only with the concurrence of the OTS. Any and all terms of the Plan
relating to the Stock Offering may be amended by a majority vote of the Bank's
Board of Directors as a result of comments from regulatory authorities or
otherwise at any time prior to the approval of the Plan by the OTS and at any
time thereafter with the concurrence of the OTS. The Plan may be terminated by a
majority vote of the Board of Directors at any time prior to the earlier of
approval of the Plan by the OTS and the date of the Special Meeting, and may be
terminated by a majority vote of the Board of Directors at any time thereafter
with the concurrence of the OTS. In its discretion, the Board of Directors may
modify or terminate the Plan upon the order of the regulatory authorities
without a resolicitation of proxies or another meeting of the Members; however,
any material amendment of the terms of the Plan that relate to the
Reorganization which occur after the Special Meeting shall require a
resolicitation of Members.
21
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The Plan shall be terminated if the Reorganization is not completed within
24 months from the date upon which the Members of the Bank approve the Plan, and
may not be extended by the Bank or the OTS.
Dated: July 14, 1997.
22
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GASTON FEDERAL BANK
FEDERAL STOCK CHARTER
Section 1. Corporate Title. The full corporate title of the savings bank
is Gaston Federal Bank (the "Bank").
Section 2. Office. The home office shall be located in the City of
Gastonia, County of Gaston, State of North Carolina.
Section 3. Duration. The duration of the Bank is perpetual.
Section 4. Purpose and Powers. The purpose of the Bank is to pursue any
or all of the lawful objectives of a Federal savings bank chartered under 10(o)
of the Home Owners' Loan Act, 12 U.S.C. 1467(o) and to exercise all of the
express, implied, and incidental powers conferred thereby and by all acts
amendatory thereof and supplemental thereto, subject to the Constitution and
laws of the United States as they are now in effect, or as they may hereafter be
amended, and subject to all lawful and applicable rules, regulations, and orders
of the Office of Thrift Supervision (the "Office").
Section 5. Capital Stock. The total number of shares of all classes of
the capital stock which the Bank has authority to issue is 30,000,000 of which
20,000,000 shares shall be common stock, par value $1.00 per share, and of which
10,000,000 shares shall be serial preferred stock. The shares may be issued
from time to time as authorized by the board of directors without the approval
of its stockholders except as otherwise provided in this Section 5 or to the
extent that such approval is required by governing law, rule, or regulation.
The consideration for the issuance of the shares shall be paid in full before
their issuance and shall not be less than the par value. Neither promissory
notes nor future services shall constitute payment or part payment for the
issuance of shares of the Bank. The consideration for the shares shall be cash,
tangible or intangible property (to the extent direct investment in such
property would be permitted to the Bank), labor or services actually performed
for the Bank, or any combination of the foregoing. In the absence of actual
fraud in the transaction, the value of such property, labor, or services, as
determined by the board of directors of the Bank, shall be conclusive. Upon
payment of such consideration, such shares shall be deemed to be fully paid and
nonassessable. In the case of a stock dividend, that part of the surplus of the
Bank which is transferred to stated capital upon the issuance of shares as a
share dividend shall be deemed to be the consideration for their issuance.
Except for shares issuable in connection with the conversion of the Bank
from the mutual to the stock form of capitalization, no shares of capital stock
(including shares issuable upon conversion, exchange, or exercise of other
securities) shall be issued, directly or indirectly, to officers, directors, or
controlling persons of the Bank other than as part of a general public offering
or as qualifying shares to a director, unless their issuance or the plan under
which they would be issued has been approved by a majority of the total votes
eligible to be cast at a legal meeting.
Nothing contained in this Section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class or series of capital stock to
vote as a separate class or series or to more than one vote per share, except as
to the cumulation of votes for the election of directors. Provided, that this
restriction on voting separately by class or series shall not apply:
(i) To any provision which would authorize the holders of preferred
stock, voting as a class or series, to elect some members of
the board of directors, less than a
<PAGE>
majority thereof, in the event of default in the payment of
dividends on any class or series of preferred stock;
(ii) To any provision which would require the holders of preferred
stock, voting as a class or series, to approve the merger or
consolidation of the Bank with another corporation or the sale,
lease, or conveyance (other than by mortgage or pledge) of
properties or business in exchange for securities of a
corporation other than the Bank if the preferred stock is
exchanged for securities of such other corporation: Provided,
that no provision may require such approval for transactions
undertaken with the assistance or pursuant to the direction of
the Office, the Federal Deposit Insurance Corporation, or the
Resolution Trust Corporation;
(iii) To any amendment which would adversely change the specific
terms of any class or series of capital stock as set forth in
this Section 5 (or in any supplementary sections hereto),
including any amendment which would create or enlarge any class
or series ranking prior thereto in rights and preferences. An
amendment which increases the number of authorized shares of
any class or series of capital stock, or substitutes the
surviving Bank in a merger or consolidation for the Bank, shall
not be considered to be such an adverse change.
A description of the different classes and series of the Bank's capital
stock and a statement of the designations, and the relative rights, preferences
and limitations of the shares of each class of and series of capital stock are
as follows:
A. Common Stock. Except as provided in this Section 5 (or in any
supplementary sections thereto) the holders of common stock shall exclusively
possess all voting power. Each holder of shares of common stock shall be
entitled to one vote for each share held by such holder.
Whenever there shall have been paid, or declared and set aside for payment,
to the holders of the outstanding shares of any class of stock having preference
over the common stock as to payment of dividends, the full amount of dividends
and of sinking fund, retirement fund or other retirement payments, if any, to
which such holders are respectively entitled in preference to the common stock,
then dividends may be paid on the common stock and on any class or series of
stock entitled to participate therewith as to dividends out of any assets
legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the Bank,
the holders of the common stock (and the holders of any class or series of stock
entitled to participate with the common stock in the distribution of assets)
shall be entitled to receive, in cash or in kind, the assets of the Bank
available for distribution remaining after: (i) payment or provision for
payment of the Bank's debts and liabilities; (ii) distributions or provision for
distributions in settlement of its liquidation account; and (iii) distributions
or provisions for distributions to holders of any class or series of stock
having preference over the common stock in the liquidation, dissolution, or
winding up of the Bank. Each share of common stock shall have the same rights
as and be identical in all respects with all the other shares of common stock.
B. Preferred Stock. The Bank may provide in supplementary sections to
its charter for one or more classes of preferred stock, which shall be
separately identified. The shares of any class may be divided into and issued
in series, with each series separately designated so as to distinguish the
shares thereof from the shares of all other series and classes. The terms of
each series shall be set forth in a
2
<PAGE>
supplementary section to the charter. All shares of the same class shall be
identical, except as to the following relative rights and preferences, as to
which there may be variations between different series:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the shares
of such series, whether dividends shall be cumulative and, if so, from
which date(s), the payment date(s) for dividends, and the
participating or other special rights, if any, with respect to
dividends;
(c) The voting powers, full or limited, if any, of shares of such series;
(d) Whether the shares of such series shall be redeemable and, if so, the
price(s) at which, and the terms and conditions of which, such shares
may be redeemed;
(e) The amount(s) payable upon the shares of such series in the event of
voluntary or involuntary liquidation, dissolution, or winding up of
the Bank;
(f) Whether the shares of such series shall be entitled to the benefit of
a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such fund
and the manner of its application, including the price(s) at which
such shares may be redeemed or purchased through the application of
such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes of stock of the
Bank and, if so, the conversion price(s) or the rate(s) of exchange,
and the adjustments thereof, if any, at which such conversion or
exchange may be made, and any other terms and conditions of such
conversion or exchange;
(h) The price or other consideration for which the shares of such series
shall be issued; and
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial
preferred stock and whether such shares may be reissued as shares of
the same or any other series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
The board of directors shall have authority to divide, by the adoption of
supplementary charter sections, any authorized class of preferred stock into
series and, within the limitations set forth in this section and the remainder
of this charter, fix and determine the relative rights and preferences of the
shares of any series so established.
Prior to the issuance of any preferred shares of a series established by a
supplementary charter section adopted by the board of directors, the Bank shall
file with the Secretary to the Office a dated copy of that supplementary section
of this charter establishing and designating the series and fixing and
determining the relative rights and preferences thereof.
3
<PAGE>
Section 6. Preemptive Rights. Holders of the capital stock of the Bank
shall not be entitled to preemptive rights with respect to any shares of the
Bank which may be issued.
Section 7. Directors. The Bank shall be under the direction of a board of
directors. The authorized number of directors, as stated in the Bank's bylaws,
shall not be fewer than five nor more than fifteen except when a greater number
is approved by the Director of the Office.
Section 8. Certain Provisions Applicable for Five Years. Notwithstanding
anything contained in the Bank's charter or bylaws to the contrary, for a period
of five years from the effective date of this Charter, the following provisions
shall apply:
A. Beneficial Ownership Limitation. No person, other than Gaston Federal
Bancorp, Inc. shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10 percent of the common stock of the Bank.
In the event shares are acquired in violation of this Section 8, all shares
beneficially owned by any person in excess of 10% shall be considered excess
shares and 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 the stockholders for a vote.
For purposes of this Section 8, the following definitions apply:
(1) The term "person" includes an individual, a group acting in concert, a
corporation, a partnership, an association, a joint stock company, a trust, an
unincorporated organization or similar company, a syndicate or any other group
formed for the purpose of acquiring, holding or disposing of the common stock of
the Bank.
(2) The term "offer" includes every offer to buy or otherwise acquire,
solicitation of an offer to sell, tender offer for, or request or invitation for
tenders of, a security or interest in a security for value.
(3) The term "acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise.
(4) The term "acting in concert" means (a) knowing participation in a
joint activity or conscious parallel action towards a common goal whether or not
pursuant to an express agreement, or (b) a combination or pooling of voting or
other interests in the securities of an issuer for a common purpose pursuant to
any contract, understanding, relationship, agreement or other arrangements,
whether written or otherwise.
B. Call for Special Meetings. Special meetings of stockholders relating
to changes in control of the Bank or amendments to its charter shall be called
only upon direction of the board of directors.
Section 9. Amendment of Charter. Except as provided in Section 5, no
amendment, addition, alteration, change, or repeal of this charter shall be
made, unless such is first proposed by the board of directors of the Bank, then
preliminarily approved by the Office, which preliminary approval may be granted
by the Office pursuant to regulations specifying preapproved charter amendments,
and thereafter approved by the shareholders of a majority of the total votes
eligible to be cast at a legal meeting. Any amendment, addition, alteration,
change, or repeal so acted upon shall be effective upon filing with the
4
<PAGE>
Office in accordance with regulatory procedures on or such other date as the
Office may specify in its preliminary approval.
Dated: This ___________ day of __________, 1998.
Attest: By:
------------------------------------ ----------------------------
Paul L. Teem, Jr., Secretary Kim S. Price, President
Gaston Federal Bank Gaston Federal Bank
Declared effective this _______ day of _______________, 1998.
Office of Thrift Supervision
Attest: By:
------------------------------------ ---------------------------
Executive Secretary Director
Office of Thrift Supervision Office of Thrift Supervision
5
<PAGE>
GASTON FEDERAL BANK
BYLAWS
ARTICLE I - Home Office
The home office of Gaston Federal Bank (the "Bank") shall be located in the
City of Gastonia in the State of North Carolina.
ARTICLE II - Shareholders
Section 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the Bank or at such other place
in the State in which the principal place of business of the Bank is located as
the board of directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the Bank for
the election of directors and for the transaction of any other business of the
Bank shall be held annually within 150 days after the end of the Bank's fiscal
year, on the _____ __________ in _____, if not a legal holiday, and if a legal
holiday, then on the next day following which is not a legal holiday, at 2:00
p.m., or at such other date and time within such 150-day period as the board of
directors may determine.
Section 3. Special Meetings. Subject to the limitations set forth in
Section 8 of the Bank's Charter, special meetings of the shareholders for any
purpose or purposes, unless otherwise prescribed by the regulations of the
Office of Thrift Supervision (the "Office"), may be called at any time by the
chairman of the board, the president, or a majority of the board of directors,
and shall be called by the chairman of the board, the president, or the
secretary upon the written request of the holders of not less than one-tenth of
all of the outstanding capital stock of the Bank entitled to vote at the
meeting. Such written request shall state the purpose or purposes of the meeting
and shall be delivered to the home office of the Bank addressed to the chairman
of the board, the president, or the secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with rules established by the Board of Directors and
made available for inspection by stockholders at the annual or special meeting
unless otherwise prescribed by the Office or these bylaws. The board of
directors shall designate, when present, either the chairman of the board or
president to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, date,
and hour of the meeting and the purpose(s) for which the meeting is called shall
be delivered not fewer than 10 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the direction of the chairman of
the board, the president, or the secretary, or the directors calling the
meeting, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the mail,
addressed to the shareholder at the address as it appears on the stock transfer
books or records of the Bank as of the record date prescribed in Section 6 of
this Article II with postage prepaid. When any shareholders meeting, either
annual or special, is adjourned for 30 days or more, notice of the adjourned
meeting shall be given as in the case of an original meeting. It shall not be
necessary to give any notice of the time and place of any meeting adjourned for
less than 30 days or of the business to be transacted at the meeting, other than
an announcement at the meeting at which such adjournment is taken.
<PAGE>
Section 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the board of directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more
than 60 days and, in case of a meeting of shareholders, not fewer than 10 days
prior to the date on which the particular action, requiring such determination
of shareholders, is to be taken. When a determination of shareholders entitled
to vote at any meeting of shareholders has been made as provided in this
section, such determination shall apply to any adjournment.
Section 7. Voting List. At least 20 days before each meeting of the
shareholders, the officer or agent having charge of the stock transfer books for
shares of the Bank shall make a complete list of the shareholders entitled to
vote at such meeting, or any adjournment, arranged in alphabetical order, with
the address and the number of shares held by each. This list of shareholders
shall be kept on file at the home office of the Bank and shall be subject to
inspection by any shareholder at any time during usual business hours for a
period of 20 days prior to such meeting. Such list also shall be produced and
kept open at the time and place of the meeting and shall be subject to
inspection by any shareholder during the entire time of the meeting. The
original stock transfer book shall constitute prima facie evidence of the
shareholders entitled to examine such list or transfer books or to vote at any
meeting of shareholders.
In lieu of making the shareholder list available for inspection by
shareholders as provided in the preceding paragraph, the board of directors may
elect to follow the procedures described in (S) 552.6(d) of the Office's
regulations as now or hereafter in effect.
Section 8. Quorum. A majority of the outstanding shares of the Bank
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. If less than a majority of the outstanding shares
is represented at a meeting, a majority of the shares so represented may adjourn
the meeting from time to time without further notice. At such adjourned meeting
at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to constitute less than a quorum.
Section 9. Proxies. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his duly authorized
attorney in fact. Proxies solicited on behalf of the management shall be voted
as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
more than eleven months from the date of its execution except for a proxy
coupled with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons. When
ownership stands in the name of two or more persons, at any meeting of the
shareholders of the Bank, any one or more of such shareholders may cast, in
person or by proxy, all votes to which such ownership is entitled in the absence
of written directions to the Bank to the contrary. In the event an attempt is
made to cast conflicting votes, in person or by proxy, by the several persons in
whose names shares of stock stand, the vote or votes to which those persons are
entitled shall be cast as directed by a majority of those holding such and
present in person or by proxy at such meeting, but no votes shall be cast for
such stock if a majority cannot agree.
Section 11. Voting of Shares of Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe,
Page 2
<PAGE>
or, in the absence of such provision, as the board of directors of such
corporation may determine. Shares held by an administrator, executor, guardian,
or conservator may be voted by him, either in person or by proxy, without a
transfer of such shares into his name. Shares standing in the name of a trustee
may be voted by him, either in person or by proxy, but no trustee shall be
entitled to vote shares held by him without a transfer of such shares into his
name. Shares standing in the name of a receiver may be voted by such receiver,
and shares held by or under the control of a receiver may be voted by such
receiver without the transfer into his name if authority to do so is contained
in an appropriate order of the court or other public authority by which such
receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Bank nor shares held
by another corporation, if a majority of the shares entitled to vote for the
election of directors of such other corporation are held by the Bank, shall be
voted at any meeting or counted in determining the total number of outstanding
shares at any given time for purposes of any meeting.
Section 12. Cumulative Voting. Stockholders may not cumulate their votes
for election of directors.
Section 13. Inspectors of Election. In advance of any meeting of
shareholders, the board of directors may appoint any person other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the chairman of the board or the president may or at the request of
not fewer than 10 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails
or refuses to act, the vacancy may be filled by appointment by the board of
directors in advance of the meeting or at the meeting by the chairman of the
board or the president.
Unless otherwise prescribed by regulations of the Office, the duties of
such inspectors shall include: determining the number of shares and the voting
power of each share, the shares represented at the meeting, the existence of a
quorum, and the authenticity, validity and effect of proxies; receiving votes,
ballots, or consents; hearing and determining all challenges and questions in
any way arising in connection with the rights to vote; counting and tabulating
all votes or consents; determining the result; and such acts as may be proper to
conduct the election or vote with fairness to all shareholders.
Section 14. Nominating Committee. The board of directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least 20 days prior to the date
of the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the Bank. No nominations for directors
except those made by the nominating committee shall be voted upon at the annual
meeting unless other nominations by shareholders are made in writing and
delivered to the secretary of the Bank at least five days prior to the date of
the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the Bank. Ballots bearing the names of all
persons nominated by the
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nominating committee and by shareholders shall be provided for use at the annual
meeting. However, if the nominating committee shall fail or refuse to act at
least 20 days prior to the annual meeting, nominations for directors may be made
at the annual meeting by any shareholder entitled to vote and shall be voted
upon.
Section 15. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the secretary of the Bank at
least five days prior to the date of the annual meeting, and all business so
stated, proposed, and filed shall be considered at the annual meeting; but no
other proposal shall be acted upon at the annual meeting. Any shareholder may
make any other proposal at the annual meeting and the same may be discussed and
considered, but unless stated in writing and filed with the secretary at least
five days before the meeting, such proposal shall be laid over for action at an
adjourned, special or annual meeting of the shareholders taking place 30 days or
more thereafter. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors,
and committees; but in connection with such reports, no new business shall be
acted upon at such annual meeting unless stated and filed as herein provided.
Section 16. Informal Action by Shareholders. Any action required to be
taken at a meeting of the shareholders, or any other action which may be taken
at a meeting of shareholders, may be taken without a meeting if consent in
writing, setting forth the action to be taken, shall be given by all of the
shareholders entitled to vote with respect to the subject matter.
ARTICLE III - Board of Directors
Section 1. General Powers. The business and affairs of the Bank shall be
under the direction of its board of directors. The board of directors shall
annually elect a chairman of the board and a president from among its members
and shall designate, when present, either the chairman of the board or the
president to preside at its meetings.
Section 2. Number and Term. The board of directors shall consist of 8
members and shall be divided into three classes as nearly equal in number as
possible. The members of each class shall be elected for a term of three years
and until their successors are elected and qualified. One class shall be
elected annually by ballot.
Section 3. Regular Meetings. A regular meeting of the board of directors
shall be held without notice other than this bylaw immediately after, and at the
same place as, the annual meeting of shareholders. The board of directors may
provide, by resolution, the time and place, within the Bank's normal lending
territory, for the holding of additional regular meetings without notice other
than such resolution.
Section 4. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chairman of the board, the president,
or one-third of the directors. The persons authorized to call special meetings
of the board of directors may fix any place, within the Bank's normal lending
territory, as the place for holding any special meeting of the board of
directors called by such persons.
Members of the board of directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other. Such participation
shall constitute presence in person but shall not constitute attendance for the
purpose of compensation pursuant to Section 11 of this Article.
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Section 5. Notice. Written notice of any special meeting shall be given
to each director at least two days prior thereto when delivered personally or by
telegram or at least five days prior thereto when delivered by mail at the
address at which the director is most likely to be reached. Such notice shall
be deemed to be delivered when deposited in the mail so addressed, with postage
prepaid if sent by mail or when delivered to the telegraph company if sent by
telegram. Any director may waive notice of any meeting by a writing filed with
the secretary. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the board of directors need be
specified in the notice of waiver of notice of such meeting.
Section 6. Quorum. A majority of the number of directors fixed by Section
2 of this Article III shall constitute a quorum for the transaction of business
at any meeting of the board of directors; but if less than such majority is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time. Notice of any adjourned meeting shall be given in
the same manner as prescribed by Section 5 of this Article III.
Section 7. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by regulation of the Office
or by these bylaws.
Section 8. Action Without a Meeting. Any action required or permitted to
be taken by the board of directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
Section 9. Resignation. Any director may resign at any time by sending a
written notice of such resignation to the home office of the Bank addressed to
the chairman of the board or the president. Unless otherwise specified, such
resignation shall take effect upon receipt by the chairman of the board or the
president. More than three consecutive absences from regular meetings of the
board of directors, unless excused by resolution of the board of directors,
shall automatically constitute a resignation, effective when such resignation is
accepted by the board of directors.
Section 10. Vacancies. Any vacancy occurring on the board of directors
may be filled by the affirmative vote of a majority of the remaining directors
although less than a quorum of the board of directors. A director elected to
fill a vacancy shall be elected to serve until the next election of directors by
the shareholders. Any directorship to be filled by reason of an increase in the
number of directors may be filled by election by the board of directors for a
term of office continuing only until the next election of directors by the
shareholders.
Section 11. Compensation. Directors, as such, may receive a stated salary
for their services. By resolution of the board of directors, a reasonable fixed
sum, and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the board of directors.
Members of either standing or special committees may be allowed such
compensation for actual attendance at committee meetings as the board of
directors may determine.
Section 12. Presumption of Assent. A director of the Bank who is present
at a meeting of the board of directors at which action on any Bank matter is
taken shall be presumed to have assented to the
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action taken unless his dissent or abstention shall be entered in the minutes of
the meeting or unless he shall file a written dissent to such action with the
person acting as the secretary of the meeting before the adjournment thereof or
shall forward such dissent by registered mail to the secretary of the Bank
within five days after the date a copy of the minutes of the meeting is
received. Such right to dissent shall not apply to a director who voted in favor
of such action.
Section 13. Removal of Directors. At a meeting of shareholders called
expressly for that purpose, any director may be removed for cause by a vote of
the holders of a majority of the shares then entitled to vote at an election of
directors. If less than the entire board is to be removed, no one of the
directors may be removed if the votes cast against the removal would be
sufficient to elect a director if then cumulatively voted at an election of the
class of directors of which such director is a part. Whenever the holders of
the shares of any class are entitled to elect one or more directors by the
provisions of the charter or supplemental sections thereto, the provisions of
this section shall apply, in respect to the removal of a director or directors
so elected, to the vote of the holders of the outstanding shares of that class
and not to the vote of the outstanding shares as a whole.
ARTICLE IV - Executive And Other Committees
Section 1. Appointment. The board of directors, by resolution adopted by
a majority of the full board, may designate the chief executive officer and two
or more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority shall not operate to relieve the board of directors, or any director,
of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of
directors is not in session, shall have and may exercise all of the authority of
the board of directors except to the extent, if any, that such authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the board of
directors with reference to: the declaration of dividends; the amendment of the
charter or bylaws of the Bank; recommending to the shareholders a plan of
merger, consolidation, or conversion; the sale, lease, or other disposition of
all or substantially all of the property and assets of the Bank otherwise than
in the usual and regular course of its business; a voluntary dissolution of the
Bank; a revocation of any of the foregoing; or the approval of a transaction in
which any member of the executive committee, directly or indirectly, has any
material beneficial interest.
Section 3. Tenure. Subject to the provisions of Section 8 of this Article
IV, each member of the executive committee shall hold office until the next
regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
Section 4. Meetings. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee
may be called by any member thereof upon not less than one days notice stating
the place, date, and hour of the meeting, which notice may be written or oral.
Any member of the executive committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof who attends in person.
The notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
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Section 5. Quorum. A majority of the members of the executive committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted to
be taken by the executive committee at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full board of directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the president or secretary of the Bank. Unless otherwise specified,
such resignation shall take effect upon its receipt; the acceptance of such
resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a presiding
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceedings and report the same to the board of directors for its information at
the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by resolution
establish an audit, loan, or other committee composed of directors as they may
determine to be necessary or appropriate for the conduct of the business of the
Bank and may prescribe the duties, constitution, and procedures thereof.
ARTICLE V - Officers
Section 1. Positions. The officers of the Bank shall be a president, one
or more vice presidents, a secretary, and a treasurer, each of whom shall be
elected by the board of directors. The board of directors also may designate
the chairman of the board and/or a vice chairman as an officer. The president
shall be the chief executive officer, unless the board of directors designates
the chairman of the board as chief executive officer. The president shall be a
director of the Bank. The offices of the secretary and treasurer may be held by
the same person and a vice president also may be either the secretary or the
treasurer. The board of directors may designate one or more vice presidents as
executive vice president or senior vice president. The board of directors also
may elect or authorize the appointment of such other officers as the business of
the Bank may require. The officers shall have such authority and perform such
duties as the board of directors may from time to time authorize or determine.
In the absence of action by the board of directors, the officers shall have such
powers and duties as generally pertain to their respective offices.
Section 2. Election and Term of Office. The officers of the Bank shall be
elected annually at the first meeting of the board of directors held after each
annual meeting of the shareholders. If the election of officers is not held at
such meeting, such election shall be held as soon thereafter as possible. Each
officer shall hold office until a successor has been duly elected and qualified
or until the officers death, resignation, or removal in the manner hereinafter
provided. Election or appointment of an officer, employee, or agent shall not
of itself create contractual rights. The board of directors may authorize the
Bank to enter into an
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employment contract with any officer in accordance with regulations of the
Office; but no such contract shall impair the right of the board of directors to
remove any officer at any time in accordance with Section 3 of this Article V.
Section 3. Removal. Any officer may be removed by the board of directors
whenever in its judgment the best interests of the Bank will be served thereby,
but such removal, other than for cause, shall be without prejudice to any
contractual rights of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise may be filled by the board
of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be fixed
from time to time by the board of directors.
ARTICLE VI - Contracts, Loans, Checks, and Deposits
Section 1. Contracts. To the extent permitted by regulations of the
Office, and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the board of directors may authorize any officer,
employee or agent of the Bank to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the Bank. Such authority may be
general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the Bank and
no evidence of indebtedness shall be issued in its name unless authorized by the
board of directors. Such authority may be general or confined to specific
instances.
Section 3. Checks, Drafts, etc. All checks, drafts, or other orders for
the payment of money, notes, or other evidences of indebtedness issued in the
name of the Bank shall be signed by one or more officers, employees, or agents
of the Bank in such manner as shall from time to time be determined by the board
of directors.
Section 4. Deposits. All funds of the Bank not otherwise employed shall
be deposited from time to time to the credit of the Bank in any duly authorized
depositories as the board of directors may select.
ARTICLE VII - Certificates for Shares and Their Transfer
Section 1. Certificates for Shares. Certificates representing shares of
capital stock of the Bank shall be in such form as shall be determined by the
board of directors and approved by the Office. Such certificates shall be
signed by the chief executive officer or by any other officer of the Bank
authorized by the board of directors, attested by the secretary or an assistant
secretary, and sealed with the corporate seal or a facsimile thereof. The
signature of such officers upon a certificate may be facsimiles if the
certificate is manually signed on behalf of a transfer agent or a registrar
other than the Bank itself or one of its employees. Each certificate for shares
of capital stock shall be consecutively numbered or otherwise identified. The
name and address of the person to whom the shares are issued, with the number of
shares and date of issue, shall be entered on the stock transfer books of the
Bank. All certificates surrendered to the Bank for transfer shall be cancelled
and no new certificate shall be issued until the former certificate for a like
number of shares has been surrendered and cancelled, except that in the case of
a lost or destroyed
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certificate, a new certificate may be issued upon such terms and indemnity to
the Bank as the board of directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of the
Bank shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney authorized by a duly executed power of attorney and filed with the
Bank. Such transfer shall be made only on surrender for cancellation of the
certificate for such shares. The person in whose name shares of capital stock
stand on the books of the Bank shall be deemed by the Bank to be the owner for
all purposes.
ARTICLE VIII - Fiscal Year; Annual Audit
The fiscal year of the Bank shall end on the last day of September of each
year. The Bank shall be subject to an annual audit as of the end of its fiscal
year by independent public accountants appointed by and responsible to the board
of directors. The appointment of such accountants shall be subject to annual
ratification by the shareholders.
ARTICLE IX - Dividends
Subject only to the terms of the Bank's charter and the regulations and
orders of the Office, the board of directors may, from time to time, declare,
and the Bank may pay, dividends on its outstanding shares of capital stock.
ARTICLE X - Corporate Seal
The board of directors shall provide a Bank seal which shall be two
concentric circles between which shall be the name of the Bank. The year of
incorporation or an emblem may appear in the center.
ARTICLE XI - Age Limitations
Section 1. Directors. No person seventy (70) years of age or above shall
be eligible for election, reelection, appointment, or reappointment to the board
of the Bank. No director shall serve as such beyond the annual meeting of the
association immediately following the director becoming age seventy (70) except
that a director serving as a director of the Bank's mutual predecessor on
November 19, 1984 may complete the term as director. This age limitation does
not apply to an advisory director or director emeritus.
Section 2. Officers. No person seventy (70) years of age or above shall
be eligible for election, reelection, appointment, or reappointment as an
officer of the Bank. No officer shall serve beyond the annual meeting of the
Bank immediately following the officer becoming age seventy (70), except that an
officer serving as an officer of the Bank's mutual predecessor on November 19,
1984 may complete the term. However, an officer shall, at the option of the
Board, retire at age sixty-five (65) if the officer has served in an executive
or high policy-maker post for at least two (2) years immediately prior to
retirement and is immediately entitled to nonforfeitable annual retirement
benefits of at least Twenty Seven Thousand and No/100 ($27,000.00) Dollars.
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ARTICLE XII - Amendments
These bylaws may be amended in a manner consistent with regulations of the
Office at any time by a majority vote of the full board of directors or by a
majority vote of the votes cast by the shareholders of the Bank at any legal
meeting.
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GASTON FEDERAL BANCORP, INC.
STOCK HOLDING COMPANY CHARTER
Section 1. Corporate Title. The full corporate title of the MHC
subsidiary holding company is Gaston Federal Bancorp, Inc. (the "Company").
Section 2. Domicile. The domicile of the Company shall be located in the
City of Gastonia, in the State of North Carolina.
Section 3. Duration. The duration of the Company is perpetual.
Section 4. Purpose and Powers. The purpose of the Company is to pursue
any or all of the lawful objectives of a federal mutual holding company
chartered under Section 10(o) of the Home Owners' Loan Act, 12 U.S.C. 1467a(o),
and to exercise all of the express, implied, and incidental powers conferred
thereby and by all acts amendatory thereof and supplemental thereto, subject to
the Constitution and laws of the United States as they are now in effect, or as
they may hereafter be amended, and subject to all lawful and applicable rules,
regulations, and orders of the Office of Thrift Supervision (the "Office").
Section 5. Capital Stock. The total number of shares of all classes of
the capital stock which the Company has authority to issue is 11,000,000 of
which 10,000,000 shares shall be common stock, par value $1.00 per share, and
of which 1,000,000 shares shall be serial preferred stock. The shares may be
issued from time to time as authorized by the board of directors without the
approval of its shareholders, except as otherwise provided in this Section 5 or
to the extent that such approval is required by governing law, rule, or
regulation. The consideration for the issuance of the shares shall be paid in
full before their issuance and shall not be less than the par value. Neither
promissory notes nor future services shall constitute payment or part payment
for the issuance of shares of the Company. The consideration for the shares
shall be cash, tangible or intangible property (to the extent direct investment
in such property would be permitted to the Company), labor, or services actually
performed for the Company, or any combination of the foregoing. In the absence
of actual fraud in the transaction, the value of such property, labor, or
services, as determined by the board of directors of the Company, shall be
conclusive. Upon payment of such consideration, such shares shall be deemed to
be fully paid and nonassessable. In the case of a stock dividend, that part of
the retained earnings of the Company that is transferred to common stock or paid
in capital accounts upon the issuance of shares as a stock dividend shall be
deemed to be the consideration for their issuance.
Except for shares issued in the initial organization of the Company, no
shares of capital stock (including shares issuable upon conversion, exchange, or
exercise of other securities) shall be issued, directly or indirectly, to
officers, directors, or controlling persons (except for shares issued to the
parent mutual holding company) of the Company other than as part of a general
public offering or as qualifying shares to a director, unless their issuance or
the plan under which they would be issued has been approved by a majority of the
total votes eligible to be cast at a legal meeting.
Nothing contained in this Section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class or series of capital stock to
vote as a separate class or series or to more than one vote
<PAGE>
per share, and there shall be no cumulation of votes for the election of
directors. Provided, that this restriction on voting separately by class or
series shall not apply:
(i) To any provision which would authorize the holders of preferred
stock, voting as a class or series, to elect some members of the
board of directors, less than a majority thereof, in the event
of default in the payment of dividends on any class or series of
preferred stock;
(ii) To any provision which would require the holders of preferred
stock, voting as a class or series, to approve the merger or
consolidation of the Company with another corporation or the
sale, lease, or conveyance (other than by mortgage or pledge) of
properties or business in exchange for securities of a
corporation other than the Company if the preferred stock is
exchanged for securities of such other corporation: Provided,
that no provision may require such approval for transactions
undertaken with the assistance or pursuant to the direction of
the Office, the Federal Deposit Insurance Corporation, or the
Resolution Trust Corporation;
(iii) To any amendment which would adversely change the specific terms
of any class or series of capital stock as set forth in this
Section 5 (or in any supplementary sections hereto), including
any amendment which would create or enlarge any class or series
ranking prior thereto in rights and preferences. An amendment
which increases the number of authorized shares of any class or
series of capital stock, or substitutes the surviving Company in
a merger or consolidation for the Company, shall not be
considered to be such an adverse change.
A description of the different classes and series of the Company's capital
stock and a statement of the designations, and the relative rights, preferences
and limitations of the shares of each class of and series of capital stock are
as follows:
A. Common Stock. Except as provided in this Section 5 (or in any
supplementary sections thereto) the holders of common stock shall exclusively
possess all voting power. Each holder of shares of common stock shall be
entitled to one vote for each share held by such holder.
Whenever there shall have been paid, or declared and set aside for payment,
to the holders of the outstanding shares of any class of stock having preference
over the common stock as to payment of dividends, the full amount of dividends
and of sinking fund, retirement fund or other retirement payments, if any, to
which such holders are respectively entitled in preference to the common stock,
then dividends may be paid on the common stock and on any class or series of
stock entitled to participate therewith as to dividends out of any assets
legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of the common stock (and the holders of any class or series of stock
entitled to participate with the common stock in the distribution of assets)
shall be entitled to receive, in cash or in kind, the assets of the Company
available for distribution remaining after: (i) payment or provision for
payment of the Company's debts and liabilities; (ii) distributions or provision
for distributions in settlement of its liquidation account; and (iii)
distributions or provisions for distributions to holders of any class or series
of stock having preference
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over the common stock in the liquidation, dissolution, or winding up of the
Company. Each share of common stock shall have the same rights as and be
identical in all respects with all the other shares of common stock.
B. Preferred Stock. The Company may provide in supplementary sections to
its charter for one or more classes of preferred stock, which shall be
separately identified. The shares of any class may be divided into and issued
in series, with each series separately designated so as to distinguish the
shares thereof from the shares of all other series and classes. The terms of
each series shall be set forth in a supplementary section to the charter. All
shares of the same class shall be identical, except as to the following relative
rights and preferences, as to which there may be variations between different
series:
(a) The distinctive serial designation and the number of shares
constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the shares
of such series, whether dividends shall be cumulative and, if so, from
which date(s), the payment date(s) for dividends, and the
participating or other special rights, if any, with respect to
dividends;
(c) The voting powers, full or limited, if any, of shares of such series;
(d) Whether the shares of such series shall be redeemable and, if so, the
price(s) at which, and the terms and conditions of which, such shares
may be redeemed;
(e) The amount(s) payable upon the shares of such series in the event of
voluntary or involuntary liquidation, dissolution, or winding up of
the Company;
(f) Whether the shares of such series shall be entitled to the benefit of
a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such fund
and the manner of its application, including the price(s) at which
such shares may be redeemed or purchased through the application of
such fund;
(g) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes of stock of the
Company and, if so, the conversion price(s) or the rate(s) of
exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made, and any other terms and conditions
of such conversion or exchange;
(h) The price or other consideration for which the shares of such series
shall be issued; and
(i) Whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial
preferred stock and whether such shares may be reissued as shares of
the same or any other series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
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The board of directors shall have authority to divide, by the adoption of
supplementary charter sections, any authorized class of preferred stock into
series and, within the limitations set forth in this section and the remainder
of this charter, fix and determine the relative rights and preferences of the
shares of any series so established.
Prior to the issuance of any preferred shares of a series established by a
supplementary charter section adopted by the board of directors, the Company
shall file with the Secretary to the Office a dated copy of that supplementary
section of this charter establishing and designating the series and fixing and
determining the relative rights and preferences thereof.
Section 6. Preemptive Rights. Holders of the capital stock of the Company
shall not be entitled to preemptive rights with respect to any shares of the
Company which may be issued.
Section 7. Beneficial Ownership Limitation. Notwithstanding anything
contained in the Company's charter or bylaws to the contrary, for a period of
five years from the date of the organization of the Bank in capital stock form,
no person other than the parent mutual holding company shall directly or
indirectly offer to acquire or acquire the beneficial ownership of more than 5%
of any class of any equity security of the Company. This limitation shall not
apply to the purchase of shares by underwriters in connection with a public
offering, or the purchase of shares by a tax-qualified employee stock benefit
plan which is exempt from the approval requirements under 574.3(c)(l)(vii) of
the Office's regulations.
In the event shares are acquired in violation of this Section 6, all shares
beneficially owned by any person in excess of 5 % shall be considered "excess
shares" and 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 the shareholders for a vote.
For purposes of this Section 7, the following definitions apply:
(1) The term "person" includes an individual, a group acting in concert;
a corporation, a partnership, a savings bank, a savings and loan association, a
joint stock company, a trust, an unincorporated organization or similar company,
a syndicate or any other group formed for the purpose of acquiring, holding or
disposing of the equity securities of the Company.
(2) The term "offer" includes every offer to buy or otherwise acquire,
solicitation of an offer to sell, tender offer for, or request or invitation for
tenders of, a security or interest in a security for value.
(3) The term "acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise.
(4) The term "acting in concert" means (a) knowing participation in a
joint activity or conscious parallel action towards a common goal whether or not
pursuant to an express agreement, or (b) a combination or pooling of voting or
other interests in the securities of an issuer for a common purpose pursuant to
any contract, understanding, relationship, agreement or other arrangements,
whether written or otherwise.
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Section 8. Call for Special Meetings. Special meetings of shareholders
relating to changes in control of the Company or amendments to its charter shall
be called only upon direction of the Board of Directors.
Section 9. Directors. The Company shall be under the direction of a board
of directors. The authorized number of directors, as stated in the Company's
bylaws, shall not be fewer than five nor more than fifteen except when a greater
or lesser number is approved by the Director of the Office, or his or her
delegate.
Section 10. Amendment of Charter. Except as provided in Section 5, no
amendment, addition, alteration, change or repeal of this charter shall be made,
unless such is proposed by the board of directors of the Company, approved by
the shareholders by a majority of the votes eligible to be cast at a legal
meeting, unless a higher vote is otherwise required, and approved or preapproved
by the Office.
GASTON FEDERAL BANCORP, INC.
Attest:
------------------------------
Paul L. Teem, Jr, Secretary
By:
------------------------------
Kim S. Price, President
and Chief Executive Officer
Attest:
------------------------------
Secretary of the Office of Thrift Supervision
By:
----------------------------------
Director of the Office of Thrift Supervision
Effective Date:
------------------
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GASTON FEDERAL BANCORP, INC.
BYLAWS
ARTICLE I - Home Office
The home office of Gaston Federal Bancorp, Inc. (the "Company") shall be
245 West Main Avenue, Gastonia, North Carolina.
ARTICLE II - Shareholders
Section 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the Company or at such other
convenient place as the board of directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the Company
for the election of directors and for the transaction of any other business of
the Company shall be held annually within 150 days after the end of the
Company's fiscal year on the _____ ________ in ___ if not a legal holiday, and
if a legal holiday, then on the next day following which is not a legal holiday,
at __________, or at such other date and time within such 150-day period as the
board of directors may determine.
Section 3. Special Meetings. Special meetings of the shareholders for any
purpose or purposes, unless otherwise prescribed by the regulations of the
Office of Thrift Supervision (the "Office"), may be called at any time by the
chairman of the board, the president, or a majority of the board of directors,
and shall be called by the chairman of the board, the president, or the
secretary upon the written request of the holders of not less than one-tenth of
all of the outstanding capital stock of the Company entitled to vote at the
meeting. Such written request shall state the purpose or purposes of the meeting
and shall be delivered to the home office of the Company addressed to the
chairman of the board, the president, or the secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the most current edition of Robert's Rules of Order
unless otherwise prescribed by regulations of the Office or these bylaws or the
Board of Directors adopts another written procedure for the conduct of meetings.
The Board of Directors shall designate, when present, either the chairman of the
board or president to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day, and
hour of the meeting and the purpose(s) for which the meeting is called shall be
delivered not fewer than 20 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the direction of the chairman of
the board, the president, or the secretary, or the directors calling the
meeting, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the mail,
addressed to the shareholder at the address as it appears on the stock transfer
books or records of the Company as of the record date prescribed in Section 6 of
this Article II with postage prepaid. When any shareholders meeting, either
annual or special, is adjourned for 30 days or more, notice of the adjourned
meeting shall be given as in the case of an original meeting. It shall not be
necessary to give any notice of the time and place of any meeting adjourned for
less than 30 days or of the business to be transacted at the meeting, other than
an announcement at the meeting at which such adjournment is taken.
<PAGE>
Section 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the board of directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more
than 60 days and, in case of a meeting of shareholders, not fewer than 10 days
prior to the date on which the particular action, requiring such determination
of shareholders, is to be taken. When a determination of shareholders entitled
to vote at any meeting of shareholders has been made as provided in this
section, such determination shall apply to any adjournment.
Section 7. Voting List. At least 20 days before each meeting of the
shareholders, the officer or agent having charge of the stock transfer books for
shares of the Company shall make a complete list of the shareholders of record
entitled to vote at such meeting, or any adjournment, arranged in alphabetical
order, with the address and the number of shares held by each. This list of
shareholders shall be kept on file at the home office of the Company and shall
be subject to inspection by any shareholder of record or the shareholder's agent
at any time during usual business hours for a period of 20 days prior to such
meeting. Such list also shall be produced and kept open at the time and place
of the meeting and shall be subject to inspection by any shareholder of record
or the shareholder's agent during the entire time of the meeting. The original
stock transfer book shall constitute prima facie evidence of the shareholders
entitled to examine such list or transfer books or to vote at any meeting of
shareholders.
In lieu of making the shareholder list available for inspection by
shareholders as provided in the preceding paragraph, the board of directors may
elect to follow the procedures described in (S) 552.6(d) of the Office's
regulations as now or hereafter in effect.
Section 8. Quorum. A majority of the outstanding shares of the Company
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. If less than a majority of the outstanding shares
is represented at a meeting, a majority of the shares so represented may adjourn
the meeting from time to time without further notice. At such adjourned meeting
at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to constitute less than a quorum. If a quorum is present the
affirmative vote of the majority of the shares represented at the meeting and
entitled to vote on the subject matter shall be the act of the shareholders,
unless the vote of a greater number of shareholders voting together or voting by
classes is required by law or the charter. Directors, however, are elected by a
plurality of the votes cast at an election of directors.
Section 9. Proxies. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his or her duly
authorized attorney in fact. Proxies may be given telephonically or
electronically as long as the holder uses a procedure for verifying the identity
of the shareholder. Proxies solicited on behalf of the management shall be
voted as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
more than eleven months from the date of its execution except for a proxy
coupled with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons. When
ownership stands in the name of two or more persons, in the absence of written
directions to the Company to the contrary,
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at any meeting of the shareholders of the Company any one ore more of such
shareholders may cast, in person or by proxy, all votes to which such ownership
is entitled. In the event an attempt is made to cast conflicting votes, in
person or by proxy, by the several persons in whose names shares of stock stand,
the vote or votes to which those persons are entitled shall be cast as directed
by a majority of those holding such and present in person or by proxy at such
meeting, but no votes shall be cast for such stock if a majority cannot agree.
Section 11. Voting of Shares of Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent, or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian, or conservator may be voted by him or her,
either in person or by proxy, without a transfer of such shares into his or her
name. Shares standing in the name of a trustee may be voted by him or her,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him or her without a transfer of such shares into his name. Shares held
in trust in an IRA or Keogh Account, however, may be voted by the Company if no
other instructions are received. Shares standing in the name of a receiver may
be voted by such receiver, and shares held by or under the control of a receiver
may be voted by such receiver without the transfer into his or her name if
authority to do so is contained in an appropriate order of the court or other
public authority by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Company nor shares
held by another corporation, if a majority of the shares entitled to vote for
the election of directors of such other corporation are held by the Company,
shall be voted at any meeting or counted in determining the total number of
outstanding shares at any given time for purposes of any meeting.
Section 12. Cumulative Voting. Stockholders may not cumulate their votes
for election of directors.
Section 13. Inspectors of Election. In advance of any meeting of
shareholders, the board of directors may appoint any person other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the chairman of the board or the president may, or on the request of
not fewer than 10 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails
or refuses to act, the vacancy may be filled by appointment by the board of
directors in advance of the meeting or at the meeting by the chairman of the
board or the president.
Unless otherwise prescribed by regulations of the Office, the duties of
such inspectors shall include: determining the number of shares and the voting
power of each share, the shares represented at the meeting, the existence of a
quorum, and the authenticity, validity and effect of proxies; receiving votes,
ballots, or consents; hearing and determining all challenges and questions in
any way arising in connection
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with the rights to vote; counting and tabulating all votes or consents;
determining the result; and such acts as may be proper to conduct the election
or vote with fairness to all shareholders.
Section 14. Nominating Committee. The board of directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least 20 days prior to the date
of the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the Company. No nominations for directors
except those made by the nominating committee shall be voted upon at the annual
meeting unless other nominations by shareholders are made in writing and
delivered to the secretary of the Company at least five days prior to the date
of the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the Company. Ballots bearing the names of
all persons nominated by the nominating committee and by shareholders shall be
provided for use at the annual meeting. However, if the nominating committee
shall fail or refuse to act at least 20 days prior to the annual meeting,
nominations for directors may be made at the annual meeting by any shareholder
entitled to vote and shall be voted upon.
Section 15. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the secretary of the Company
at least five days prior to the date of the annual meeting, and all business so
stated, proposed, and filed shall be considered at the annual meeting; but no
other proposal shall be acted upon at the annual meeting. Any shareholder may
make any other proposal at the annual meeting and the same may be discussed and
considered, but unless stated in writing and filed with the secretary at least
five days before the meeting, such proposal shall be laid over for action at an
adjourned, special or annual meeting of the shareholders taking place 30 days or
more thereafter. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors,
and committees; but in connection with such reports, no new business shall be
acted upon at such annual meeting unless stated and filed as herein provided.
Section 16. Informal Action by Shareholders. Any action required to be
taken at a meeting of the shareholders, or any other action which may be taken
at a meeting of shareholders, may be taken without a meeting if consent in
writing, setting forth the action to be taken, shall be given by all of the
shareholders entitled to vote with respect to the subject matter.
ARTICLE III - Board of Directors
Section 1. General Powers. The business and affairs of the Company shall
be under the direction of its board of directors. The board of directors shall
annually elect a chairman of the board and a president from among its members
and shall designate, when present, either the chairman of the board or the
president to preside at its meetings.
Section 2. Number and Term. The board of directors shall consist of five
members and shall be divided into three classes as nearly equal in number as
possible. The members of each class shall be elected for a term of three years
and until their successors are elected and qualified. One class shall be
elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the board of directors
shall be held without other notice than this bylaw following the annual meeting
of shareholders. The board of directors may
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provide, by resolution, the time and place for the holding of additional regular
meetings without notice other than such resolution. Directors may participate in
a meeting by means of a conference telephone or similar communications device
through which all persons participating can hear each other at the same time.
Participation by such means shall constitute presence in person for all
purposes.
Section 4. Qualification. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the Company
unless the company is a wholly-owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chairman of the board, the president,
or one-third of the directors. The persons authorized to call special meetings
of the board of directors may fix any place, within the Company's normal lending
territory, as the place for holding any special meeting of the board of
directors called by such persons.
Members of the board of directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other. Such participation
shall constitute presence in person for all purposes.
Section 6. Notice. Written notice of any special meeting shall be given
to each director at least 24 hours prior thereto when delivered personally or by
telegram or at least five days prior thereto when delivered by mail at the
address at which the director is most likely to be reached. Such notice shall
be deemed to be delivered when deposited in the mail so addressed, with postage
prepaid if sent by mail, when delivered to the telegraph company if sent by
telegram or when the Company receives notice of delivery if electronically
transmitted. Any director may waive notice of any meeting by a writing filed
with the secretary. The attendance of a director at a meeting shall constitute
a waiver of notice of such meeting, except where a director attends a meeting
for the express purpose of objecting to the transaction of any business because
the meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the board of directors need be
specified in the notice of waiver of notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed by Section
2 of this Article III shall constitute a quorum for the transaction of business
at any meeting of the board of directors; but if less than such majority is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time. Notice of any adjourned meeting shall be given in
the same manner as prescribed by Section 5 of this Article III.
Section 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by regulation of the Office
or by these bylaws.
Section 9. Action Without a Meeting. Any action required or permitted to
be taken by the board of directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
Section 10. Resignation. Any director may resign at any time by sending a
written notice of such resignation to the home office of the Company addressed
to the chairman of the board or the president.
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Unless otherwise specified, such resignation shall take effect upon receipt by
the chairman of the board or the president. More than three consecutive absences
from regular meetings of the board of directors, unless excused by resolution of
the board of directors, shall automatically constitute a resignation, effective
when such resignation is accepted by the board of directors.
Section 11. Vacancies. Any vacancy occurring on the board of directors
may be filled by the affirmative vote of a majority of the remaining directors
although less than a quorum of the board of directors. A director elected to
fill a vacancy shall be elected to serve until the next election of directors by
the shareholders. Any directorship to be filled by reason of an increase in the
number of directors may be filled by election by the board of directors for a
term of office continuing only until the next election of directors by the
shareholders.
Section 12. Compensation. Directors, as such, may receive a stated salary
for their services. By resolution of the board of directors, a reasonable fixed
sum, and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the board of directors. Members
of either standing or special committees may be allowed such compensation for
actual attendance at committee meetings as the board of directors may determine.
Section 13. Presumption of Assent. A director of the Company who is
present at a meeting of the board of directors at which action on any Company
matter is taken shall be presumed to have assented to the action taken unless
his or her dissent or abstention shall be entered in the minutes of the meeting
or unless he or she shall file a written dissent to such action with the person
acting as the secretary of the meeting before the adjournment thereof or shall
forward such dissent by registered mail to the secretary of the Company within
five days after the date a copy of the minutes of the meeting is received. Such
right to dissent shall not apply to a director who voted in favor of such
action.
Section 14. Removal of Directors. At a meeting of shareholders called
expressly for that purpose, any director may be removed for cause by a vote of
the holders of a majority of the shares then entitled to vote at an election of
directors. Whenever the holders of the shares of any class are entitled to
elect one or more directors by the provisions of the charter or supplemental
sections thereto, the provisions of this section shall apply, in respect to the
removal of a director or directors so elected, to the vote of the holders of the
outstanding shares of that class and not to the vote of the outstanding shares
as a whole.
ARTICLE IV - Executive And Other Committees
Section 1. Appointment. The board of directors, by resolution adopted by
a majority of the full board, may designate the chief executive officer and two
or more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority shall not operate to relieve the board of directors, or any director,
of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of
directors is not in session, shall have and may exercise all of the authority of
the board of directors except to the extent, if any, that such authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the board of
directors with reference to: the declaration of dividends; the amendment of the
charter or bylaws of the Company or recommending to the shareholders a plan of
merger, consolidation, or conversion; the sale, lease, or other disposition of
all or
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substantially all of the property and assets of the Company otherwise than in
the usual and regular course of its business; a voluntary dissolution of the
Company; a revocation of any of the foregoing; or the approval of a transaction
in which any member of the executive committee, directly or indirectly, has any
material beneficial interest.
Section 3. Tenure. Subject to the provisions of Section 8 of this Article
IV, each member of the executive committee shall hold office until the next
regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
Section 4. Meetings. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee
may be called by any member thereof upon not less than one days notice stating
the place, date, and hour of the meeting, which notice may be written or oral.
Any member of the executive committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof who attends in person.
The notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted to
be taken by the executive committee at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full board of directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the president or secretary of the Company. Unless otherwise
specified, such resignation shall take effect upon its receipt; the acceptance
of such resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a presiding
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceedings and report the same to the board of directors for its information at
the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by resolution
establish an audit, loan, or other committee composed of directors as they may
determine to be necessary or appropriate for the conduct of the business of the
Company and may prescribe the duties, constitution, and procedures thereof.
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ARTICLE V - Officers
Section 1. Positions. The officers of the Company shall be a president,
one or more vice presidents, a secretary, and a treasurer, each of whom shall be
elected by the board of directors. The board of directors also may designate
the chairman of the board and/or a vice chairman as an officer. The president
shall be the chief executive officer, unless the board of directors designates
the chairman of the board as chief executive officer. The president shall be a
director of the Company. The offices of the secretary and treasurer may be held
by the same person and a vice president also may be either the secretary or the
treasurer. The board of directors may designate one or more vice presidents as
executive vice president or senior vice president. The board of directors also
may elect or authorize the appointment of such other officers as the business of
the Company may require. The officers shall have such authority and perform
such duties as the board of directors may from time to time authorize or
determine. In the absence of action by the board of directors, the officers
shall have such powers and duties as generally pertain to their respective
offices.
Section 2. Election and Term of Office. The officers of the Company shall
be elected annually at the first meeting of the board of directors held after
each annual meeting of the shareholders. If the election of officers is not
held at such meeting, such election shall be held as soon thereafter as
possible. Each officer shall hold office until a successor has been duly elected
and qualified or until the officers death, resignation, or removal in the manner
hereinafter provided. Election or appointment of an officer, employee, or agent
shall not of itself create contractual rights. The board of directors may
authorize the Company to enter into an employment contract with any officer in
accordance with regulations of the Office; but no such contract shall impair the
right of the board of directors to remove any officer at any time in accordance
with Section 3 of this Article V.
Section 3. Removal. Any officer may be removed by the board of directors
whenever in its judgment the best interests of the Company will be served
thereby, but such removal, other than for cause, shall be without prejudice to
any contractual rights of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise may be filled by the board
of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be fixed
from time to time by the board of directors.
ARTICLE VI - Contracts, Loans, Checks, and Deposits
Section 1. Contracts. To the extent permitted by regulations of the
Office, and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the board of directors may authorize any officer,
employee or agent of the Company to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Company. Such
authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the Company
and no evidence of indebtedness shall be issued in its name unless authorized by
the board of directors. Such authority may be general or confined to specific
instances.
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Section 3. Checks, Drafts, etc. All checks, drafts, or other orders for
the payment of money, notes, or other evidences of indebtedness issued in the
name of the Company shall be signed by one or more officers, employees, or
agents of the Company in such manner as shall from time to time be determined by
the board of directors.
Section 4. Deposits. All funds of the Company not otherwise employed
shall be deposited from time to time to the credit of the association in any
duly authorized depositors as the board of directors may select.
ARTICLE VII - Certificates for Shares and Their Transfer
Section 1. Certificates for Shares. Certificates representing shares of
capital stock of the Company shall be in such form as shall be determined by the
board of directors and approved by the Office. Such certificates shall be
signed by the chief executive officer or by any other officer of the Company
authorized by the board of directors, attested by the secretary or an assistant
secretary, and sealed with the corporate seal or a facsimile thereof. The
signature of such officers upon a certificate may be facsimiles if the
certificate is manually signed on behalf of a transfer agent or a registrar
other than the Company itself or one of its employees. Each certificate for
shares of capital stock shall be consecutively numbered or otherwise identified.
The name and address of the person to whom the shares are issued, with the
number of shares and date of issue, shall be entered on the stock transfer books
of the Company. All certificates surrendered to the Company for transfer shall
be cancelled and no new certificate shall be issued until the former certificate
for a like number of shares has been surrendered and cancelled, except that in
the case of a lost or destroyed certificate, a new certificate may be issued
upon such terms and indemnity to the Company as the board of directors may
prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of the
Company shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record or by his or her legal
representative, who shall furnish proper evidence of such authority, or by his
or her attorney authorized by a duly executed power of attorney and filed with
the Company. Such transfer shall be made only on surrender for cancellation of
the certificate for such shares. The person in whose name shares of capital
stock stand on the books of the Company shall be deemed by the Company to be the
owner for all purposes.
ARTICLE VIII - Fiscal Year; Annual Audit
The fiscal year of the Company shall end on the last day of March of each
year. The Company shall be subject to an annual audit as of the end of its
fiscal year by independent public accountants appointed by and responsible to
the board of directors.
ARTICLE IX - Dividends
Subject only to the terms of the Company's charter and the regulations and
orders of the Office, the board of directors may, from time to time, declare,
and the Company may pay, dividends on its outstanding shares of capital stock.
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ARTICLE X - Corporate Seal
The board of directors shall provide a Company seal which shall be two
concentric circles between which shall be the name of the Company. The year of
incorporation or an emblem may appear in the center.
ARTICLE XI - Amendments
These bylaws may be amended in a manner consistent with regulations of the
Office and shall be effective after: (i) approval of the amendment by a majority
vote of the authorized board of directors, or by a majority vote of the votes
cast by the shareholders of the Company at any legal meeting; and (ii) receipt
of any applicable regulatory approval. When a Company fails to meet its quorum
requirements, solely due to vacancies on the board, then the affirmative vote of
a majority of the sitting board will be required to amend the bylaws.
Page 10
<PAGE>
GASTON FEDERAL HOLDINGS, MHC
MUTUAL HOLDING COMPANY CHARTER
Section 1. Corporate Title. The name of the mutual holding company hereby
chartered is Gaston Federal Holdings, MHC (the "Mutual Company").
Section 2. Duration. The duration of the Mutual Company is perpetual.
Section 3. Purpose and Powers. The purpose of the Mutual Company is to
pursue any or all of the lawful objectives of a federal mutual savings bank
holding company chartered under section 10(o) of the Home Owners' Loan Act, 12
U.S.C. 1467a(o), and to exercise all of the express, implied, and incidental
powers conferred thereby and all acts amendatory thereof and supplemental
thereto, subject to the Constitution and the laws of the United States as they
are now in effect, or as they may hereafter be amended, and subject to all
lawful and applicable rules, regulations, and orders of the Office of Thrift
Supervision ("OTS").
Section 4. Capital. The Mutual Company shall have no capital stock.
Section 5. Members. All holders of savings, demand, or other authorized
accounts of Gaston Federal Bank (the "Bank") are members of the Mutual Company.
With respect to all questions requiring action by the members of the Mutual
Company, each holder of an account in the Bank shall be permitted to cast one
vote for each $100, or fraction thereof, of the withdrawal value of the member's
account. No member, however, shall cast more than 1,000 votes. Voting may be by
proxy, subject to the rules and regulations of the OTS. Any number of members
present and voting, represented in person or by proxy, at a regular or special
meeting of the members shall constitute a quorum. A majority of all votes cast
at any meeting of the members shall determine any question, subject to the rules
and regulations of the OTS. All accounts shall be nonassessable.
Section 6. Directors. The Mutual Company shall be under the direction of
a board of directors. The authorized number of directors shall not be fewer than
five nor more than 15, as fixed in the Mutual Company's bylaws, except that the
number of directors may be increased to a number greater than 15 with the prior
approval of the OTS. Each director of the Mutual Company shall be a member of
the Mutual Company. Members of the Mutual Company shall elect the directors,
provided that, in the event of a vacancy on the board, the board of directors
may fill such vacancy, if the members of the Mutual Company fail to do so, by
electing a director to serve until the next annual meeting of members. Directors
shall be elected for periods of three years and until their successors are
elected and qualified, except that provision shall be made for the election of
approximately one-third of the board each year.
Section 7. Capital, Surplus, and Distribution of Earnings. The Mutual
Company shall distribute net earnings to account holders of the Bank on such
basis and in accordance with such terms and conditions as may from time to time
be authorized by the Director of the OTS, provided that the Mutual Company may
establish minimum account balance requirements for account holders to be
eligible for distributions of earnings.
All holders of accounts of the Bank shall be entitled to equal distribution
of the assets of the Mutual
<PAGE>
Company, pro rata to the value of their accounts in the Bank, in the event of a
voluntary or involuntary liquidation, dissolution, or winding up of the Mutual
Company.
Section 8. Amendment. Adoption of any preapproved charter amendment
pursuant to the OTS's rules and regulations shall be effective upon filing the
amendment with the OTS in accordance with regulatory procedures, after such
preapproved amendment has been submitted to and approved by the members at a
legal meeting. Any other amendment, addition, alteration, change or repeal of
this charter must be submitted to and preliminarily approved by the OTS prior to
submission to and approval by the members at a legal meeting. Any amendment,
addition, alteration, change, or repeal so acted upon and approved shall be
effective upon filing with the OTS in accordance with regulatory procedures.
Page 2
<PAGE>
GASTON FEDERAL HOLDINGS, MHC
Attest: By:
-------------------------------- -------------------------------
Paul L. Teem, Jr. Kim S. Price
Corporate Secretary President and Chief Executive
Officer
OFFICE OF THRIFT SUPERVISION
Attest: By:
-------------------------------- -------------------------------
Secretary of the Assistant Director for
Office of Thrift Supervision Supervisory Operations
Office of Thrift Supervision
Date:
----------------------------------
Page 3
<PAGE>
GASTON FEDERAL HOLDINGS, MHC
BYLAWS
Section 1. Annual Meeting of Members. The annual meeting of the members
of Gaston Federal Holdings, MHC (the "Mutual Company") for the election of
directors and for the transaction of any other business of the Mutual Company
shall be held, as designated by the board of directors, at a location within the
state of North Carolina that constitutes the principal place of business of the
Mutual Company at ____ __.m. on the _____________ of __________ of each calendar
year, if not a legal holiday, or if a legal holiday, then on the next succeeding
day not a legal holiday. The annual meeting may be held at such other times on
such day or at such other place in the state as the board of directors may
determine. At each annual meeting, the officers shall make a full report of the
financial condition of the Mutual Company and of its progress for the preceding
year and shall outline a program for the succeeding year.
Section 2. Special Meetings of Members. Special meetings of the members
of the Mutual Company may be called at any time by the president or the board of
directors and shall be called by the president, a vice president, or the
secretary upon the written request of members of record, holding in the
aggregate at least one-tenth of the capital of the Mutual Company. Such written
request shall state the purpose of the meeting and shall be delivered at the
principal place of business of the Mutual Company addressed to the president.
Annual and special meetings shall be conducted in accordance with rules
established by the Board of Directors and made available for inspection by
members at the annual or special meeting.
Section 3. Notice of Meeting of Members.
(a) Notice of each annual meeting shall be either published once a
week for the two successive calendar weeks (in each instance on any day of the
week) immediately prior to the week in which such annual meeting shall convene,
in a newspaper printed in the English language and of general circulation in the
city or county in which the principal place of business of the Mutual Company is
located, or mailed postage prepaid at least 15 days and not more than 45 days
prior to the date on which such annual meeting shall convene, to each of its
members of record at the last address appearing on the books of the Mutual
Company. Such notice shall state the name of the Mutual Company, the place of
the annual meeting, the date and time when it shall convene, and the matters to
be considered. A similar notice shall be posted in a conspicuous place in each
of the offices of the Mutual Company during the 14 days immediately preceding
the date on which such annual meeting shall convene. If any member, in person
or by authorized attorney, shall waive in writing notice of any annual meeting
of members, notice thereof need not be given to such member.
(b) Notice of each special meeting shall be either published once a
week for the two consecutive calendar weeks (in each instance on any day of the
week) immediately prior to the week in which such special meeting shall convene,
in a newspaper printed in the English language and of general circulation in the
city or county in which the principal place of business of the Mutual Company is
located, or mailed postage prepaid at least 15 days and not more than 45 days
prior to the date on which such special meeting shall convene to each of its
members of record at the member's last address appearing on the books of the
Mutual Company. Such notice shall state the name of the Mutual Company, the
purpose(s) for which the meeting is called, the place of the special meeting and
the date and time when it
<PAGE>
shall convene. A similar notice shall be posted in a conspicuous place in each
of the offices of the Mutual Company during the 14 days immediately preceding
the date on which such special meeting shall convene. If any member, in person
or by authorized attorney, shall waive in writing notice of any special meeting
of members, notice thereof need not be given to such member.
Section 4. Fixing of Record Date. For the purpose of determining members
entitled to notice of or to vote at any meeting of members or any adjournment
thereof, or in order to make a determination of members for any other proper
purpose, the board of directors shall fix in advance a record date for any such
determination of members. Such date shall be not more than 60 days nor fewer
than 10 days prior to the date on which the action, requiring such determination
of members, is to be taken. The member entitled to participate in any such
action shall be the member of record on the books of the Mutual Company on such
record date. The number of votes which each member shall be entitled to cast at
any meeting of the members shall be determined from the books of the Mutual
Company as of such record date. Any member of such record date who ceases to be
a member prior to such meeting shall not be entitled to vote at that meeting.
Section 5. Voting by Proxy. Voting at any annual or special meeting of
the members may be by proxy pursuant to the rules and regulations of the Office,
provided, that no proxies shall be voted at any meeting unless such proxies
shall have been placed on file with the secretary of the Mutual Company, for
verification, prior to the convening of such meeting. All proxies with a term
greater than eleven months or solicited at the expense of the Mutual Company
must run to the board of directors as a whole, or to a committee appointed by a
majority of such board.
Section 6. Communication Between Members. Communication between members
shall be subject to any applicable rules or regulations of the Office.
Section 7. Number of Directors. The number of directors of the Mutual
Company shall be ___.
Section 8. Meetings of the Board. The board of directors shall meet
regularly without notice at the principal place of business of the Mutual
Company at least once each month at an hour and date fixed by resolution of the
board, provided that the place of meeting may be changed by the directors.
Special meetings of the board may be held at any place specified in a notice of
such meeting and shall be called by the secretary upon the written request of
the chairman or of three directors. All special meetings shall be held upon at
least three days' written notice to each director unless notice is waived in
writing before or after such meeting. Such notice shall state the place, date,
time and purposes of such meeting. A majority of the authorized directors shall
constitute a quorum for the transaction of business. The act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the board. Action may be taken without a meeting if unanimous written consent
is obtained for such action. The meetings shall be under the direction of a
chairman, appointed annually by the board, or in the absence of the chairman,
the meetings shall be under the direction of the president.
Section 9. Officers, Employees and Agents. At the meeting of the board of
directors of the Mutual Company next following the annual meeting of the members
of the Mutual Company, the board shall annually elect a president, one or more
vice presidents, a secretary, and a treasurer; provided, that the offices of
president and secretary may not be held by the same person and a vice president
may also be the treasurer. The board may appoint such additional officers,
employees, and agents as it may from time to time determine. The term of office
of all officers shall be one year or until their respective
Page 2
<PAGE>
successors are elected and qualified; but any officer may be removed at any time
by the board. In the absence of designation from time to time of powers and
duties by the board, the officers shall have such powers and duties as generally
pertain to their respective offices.
Any indemnification by the Mutual Company of the Mutual Company's personnel
is subject to any applicable rules or regulations of the Office.
Section 10. Resignation or Removal of Directors. Any director may resign
at any time by sending a written notice of such resignation to the office of the
Mutual Company delivered to the secretary. Unless otherwise specified therein
such resignation shall take effect upon receipt by the secretary. More than
three consecutive absences from regular meetings of the board, unless excused by
resolution of the board, shall automatically constitute a resignation, effective
when such resignation is accepted by the board.
At a meeting of members called expressly for that purpose, directors or the
entire board may be removed, only with cause, by a vote of the holders of a
majority of the shares then entitled to vote at an election of directors.
Section 11. Powers of the Board. The board of directors shall have the
power:
(a) By resolution, to appoint from among its members an executive
committee, which committee shall have and may exercise the powers of the board
between the meetings of the board, but no such committee shall have the
authority of the board to amend the charter or bylaws, adopt a plan of merger,
consolidation, dissolution, or provide for the disposition of all or
substantially all the property and assets of the Mutual Company. Such committee
shall not operate to relieve the board, or any member thereof, of any
responsibility imposed by law;
(b) To appoint and remove by resolution the members of such other
committees as may be deemed necessary and prescribe the duties thereof;
(c) To fix the compensation of directors, officers, and employees,
and to remove any officer or employee at any time with or without cause; and
(d) To exercise any and all of the powers of the Mutual Company not
expressly reserved by the charter to the members.
Section 12. Execution of Instruments, Generally. All documents and
instruments or writings of any nature shall be signed, executed, verified,
acknowledged, and delivered by such officers, agents, or employees of the Mutual
Company or any one of them and in such manner as from time to time may be
determined by resolution of the board. All notes, drafts, acceptances, checks,
endorsements, and all evidences of indebtedness of the Mutual Company whatsoever
shall be signed by such officer or officers or such agent or agents of the
Mutual Company and in such manner as the board may from time to time determine.
Endorsements for deposit to the credit of the Mutual Company in any of its duly
authorized depositories shall be made in such manner as the board may from time
to time determine. Proxies to vote with respect to shares or accounts of other
associations or stock of other corporations owned by, or standing in the name
of, the Mutual Company may be executed and delivered from time to time on behalf
Page 3
<PAGE>
of the Mutual Company by the president or a vice president and the secretary or
an assistant secretary of the Mutual Company or by any other persons so
authorized by the board.
Section 13. Nominating Committee. The chairman, at least 30 days prior to
the date of each annual meeting, shall appoint a nominating committee of three
persons who are members of the Mutual Company. Such committee shall make
nominations for directors in writing and deliver to the secretary such written
nominations at least 15 days prior to the date of the annual meeting, which
nominations shall then be posted in a prominent place in the principal place of
business for the 15-day period prior to the date of the annual meeting.
Provided such committee is appointed and makes such nominations, no nominations
for directors except those made by the nominating committee shall be voted upon
at the annual meeting unless other nominations by members are made in writing
and delivered to the secretary of the Mutual Company at least 10 days prior to
the date of the annual meeting, which nominations shall then be posted in a
prominent place in the principal place of business for the 10-day period prior
to the date of the annual meeting. Ballots bearing the names of all persons
nominated by the nominating committee and by other members prior to the annual
meeting shall be provided for use by the members at the annual meeting. If at
any time the chairman shall fail to appoint such nominating committee, or the
nominating committee shall fail or refuse to act at least 15 days prior to the
annual meeting, nominations for directors may be made at the annual meeting by
any member and shall be voted upon.
Section 14. New Business. Any new business to be taken up at the annual
meeting, including any proposal to increase or decrease the number of directors
of the Mutual Company, shall be stated in writing and filed with the secretary
of the Mutual Company at least 30 days before the date of the annual meeting,
and all business so stated, proposed, and filed shall be considered at the
annual meeting; but no other proposal shall be acted upon at the annual meeting.
Any member may make any other proposal at the annual meeting and the same may be
discussed and considered; but unless stated in writing and filed with the
secretary 30 days before the meeting, such proposal shall be laid over for
action at an adjourned, special, or regular meeting of the members taking place
at least 30 days thereafter. This provision shall not prevent the consideration
and approval or disapproval at the annual meeting of the reports of officers and
committees, but in connection with such reports no new business shall be acted
upon at such annual meeting unless stated and filed as herein provided.
Section 15. Seal. The seal shall be two concentric circles between which
shall be the name of the Mutual Company. The year of incorporation, the word
"incorporated," or an emblem may appear in the center.
Section 16. Amendment. Adoption of any bylaw amendment, as long as
consistent with applicable law, rules and regulations, and which adequately
addresses the subject and purpose of the stated bylaw section, shall be
effective upon filing with the Office in accordance with the regulatory
procedures after such amendment has been approved by a two-thirds affirmative
vote of the authorized board, or by a vote of the members of the Mutual Company.
Page 4
<PAGE>
Exhibit 4
INCORPORATED UNDER THE LAWS OF THE UNITED STATES OF AMERICA
Gaston Federal Bancorp, Inc.
Gastonia, North Carolina
$1.00 par value common stock--fully paid and non assessable
This certifies that _____________________ is the owner of ______ shares of the
common stock of Gaston Federal Bancorp, Inc. (the "Corporation"), a Federal
corporation.
The shares evidenced by this certificate are transferable only on the stock
transfer books of the Corporation by the holder of record hereof, in person or
by his duly authorized attorney or legal representative, upon surrender of this
certificate properly endorsed. This Certificate in not valid until countersigned
and registered by the Corporation's transfer agent and registrar. This security
is not a deposit or account and is not federally insured or guaranteed.
In Witness Whereof, the Corporation has caused this certificate to be executed
by the facsimile signatures of its duly authorized officers and has caused its
seal to be affixed hereto.
Dated: __________ __, 1998
- ----------------------------- -----------------------------
Secretary President
[SEAL APPEARS HERE]
<PAGE>
GASTON FEDERAL BANCORP, INC.
The Corporation may provide in supplementary sections of its charter for
one or more classes of preferred stock, which shall be separately identified.
The Board of Directors of the Corporation is authorized by resolution or
resolutions, from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the voting powers, designations,
preferences, limitations and restrictions thereof. The Corporation will furnish
to any shareholder upon request and without charge a full description of each
class of stock and any series thereof.
The shares evidenced by this Certificate are subject to a limitation
contained in the Corporation's Stock Holding Company Charter to the effect that
in no event shall any record owner of any outstanding Common Stock which is
beneficially owned, directly or indirectly, by a person who beneficially owns in
excess of 5% of the outstanding shares of Common Stock (the "Limit") be entitled
or permitted to any vote in respect of shares held in excess of the Limit. The
Limit shall not be applicable to Gaston Federal Holdings, MHC, the Corporation's
mutual holding company parent, or an acquisition of Common Stock by an employee
stock purchase plan or other employee benefit plan of the Corporation or any of
its subsidiaries.
The shares represented by this Certificate may not be cumulatively voted on
any matter.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in
common
UNIF GIFT MIN ACT - Custodian
-------------------- --------------------
(Cust) (Minor)
Under Uniform Gifts to Minors Act
----------------------------------------------
(State)
Additional abbreviations may also be used though not in the above list
For value received, hereby sell, assign and
-----------------------------
transfer unto
- ----------------------------------------------------------------
- ----------------------------------------------------------------
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER
- --------------------------------------------------------------------------------
(please print or typewrite name and address including postal zip code of
assignee)
- --------------------------------------------------------------------------------
Shares of
- ---------------------------------------------------------------------
the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
---------------------------------------------
Attorney to transfer the said shares on the books of the within named
corporation with full power of substitution in the premises.
Dated,
-----------------------------
In the presence of Signature:
- ------------------------- ----------------------------------------
NOTE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME OF THE
STOCKHOLDER(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
<PAGE>
Exhibit 5
FORM OF LEGAL OPINION
(202)274-2000
The Board of Directors
Gaston Federal Savings Bank
245 West Maine Avenue
P.O. Box 2249
Gastonia, North Carolina 28053-2249
Re: Gaston Federal Bancorp, Inc.
Common Stock Par Value $1.00 Per Share
--------------------------------------
Gentlemen:
You have requested the opinion of this firm as to certain matters in
connection with the offer and sale (the "Offering") of Gaston Federal Bancorp,
Inc. (the "Company") Common Stock, par value $1.00 per share ("Common Stock").
We have reviewed the Company's proposed Stock Holding Company Charter,
Registration Statement on Form SB-2 ("Form SB-2"), as well as applicable
statutes and regulations governing the Company and the offer and sale of the
Common Stock.
We are of the opinion that upon the declaration of effectiveness of the
Form SB-2 and the incorporation of the Company as a federal corporation, the
Common Stock, when sold, will be legally issued, fully paid and non-assessable.
This Opinion has been prepared solely for the use of the Company in
connection with the Form SB-2. We hereby consent to our firm being referenced
under the caption "Legal Opinions."
Very truly yours,
Luse Lehman Gorman Pomerenk & Schick
A Professional Corporation
By:
----------------------------
Kenneth R. Lehman, Esq.
<PAGE>
Exhibit 8.1
FORM OF
FEDERAL TAX OPINION
__________, 1997
Boards of Directors
Gaston Federal Savings and Loan Association
Gaston Financial Corporation
Gaston Community Bancorp, MHC
55 East Avenue
Gastonia, North Carolina 14095-0886
Re: Mutual Holding Company Formation and Stock Issuance
---------------------------------------------------
Ladies and Gentlemen:
We have been requested as special counsel to Gaston Federal Savings and
Loan Association, a federally-chartered mutual savings association (the "Bank"
or the "Stock Bank", as the context requires), Gaston Community Bancorp, MHC, a
federally-chartered mutual holding company ("Mutual Holding Company") and Gaston
Financial Bancorp, Inc., a federally-chartered savings and loan holding company
("Stock Holding Company"), to express our opinion concerning certain Federal
income tax matters relating to the Plan of Reorganization (as defined herein).
In connection therewith, we have examined the Plan of Reorganization and
certain other documents of or relating to the Reorganization (as defined below),
some of which are described or referred to in the Plan of Reorganization and
which we deemed necessary to examine in order to issue the opinions set forth
below. Unless otherwise defined, all terms used herein have the meanings given
to such terms in the Plan of Reorganization.
In our examination, we have assumed the authenticity of original documents,
the accuracy of copies and the genuineness of signatures. We have further
assumed the absence of adverse facts not apparent from the face of the
instruments and documents we examined.
In issuing our opinions, we have assumed that the Plan of Reorganization
has been duly and validly authorized and has been approved and adopted by the
board of directors of the Bank at a meeting duly called and held; that the Bank
will comply with the terms and conditions of the Plan of Reorganization, and
that the various representations and warranties which are provided to us are
accurate, complete, true and correct. Accordingly, we express no opinion
concerning the effect, if any, of variations from the foregoing. We
specifically express no opinion concerning tax matters
<PAGE>
Boards of Directors
Gaston Federal Savings and Loan Association
Gaston Financial Corporation
Gaston Community Bancorp, MHC
_______________, 1997
Page 2
relating to the Plan of Reorganization under state and local tax laws and under
Federal income tax laws except on the basis of the documents and assumptions
described above.
For purposes of this opinion, we are relying on the representations
provided to us by the Bank, which are incorporated herein by reference.
In issuing the opinions set forth below, we have referred solely to
existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed Treasury Regulations thereunder, current
administrative rulings, notices and procedures and court decisions. Such laws,
regulations, administrative rulings, notices and procedures and court decisions
are subject to change at any time. Any such change could affect the continuing
validity of the opinions set forth below. This opinion is as of the date hereof,
and we disclaim any obligation to advise you of any change in any matter
considered herein after the date hereof.
In rendering our opinions, we have assumed that the persons and entities
identified in the Plan of Reorganization will at all times comply with the
requirements of Code sections 368 and 351, the other applicable state and
Federal laws and the representations of the Bank. In addition, we have assumed
that the activities of the persons and entities identified in the Plan of
Reorganization will be conducted strictly in accordance with the Plan of
Reorganization. Any variations may affect the opinions we are rendering.
We emphasize that the outcome of litigation cannot be predicted with
certainty and, although we have attempted in good faith to opine as to the
probable outcome of the merits of each tax issue with respect to which an
opinion was requested, there can be no assurance that our conclusions are
correct or that they would be adopted by the IRS or a court.
SUMMARY OF OPINIONS
-------------------
Based on the facts, representations and assumptions set forth herein, we
are of the opinion that:
<PAGE>
Boards of Directors
Gaston Federal Savings and Loan Association
Gaston Financial Corporation
Gaston Community Bancorp, MHC
_______________, 1997
Page 3
With Respect to the Exchange of the Bank's Charter for a Stock Charter
("Bank Conversion"):
1. Bank's exchange of its charter for a federal stock savings
association charter is a mere change in identity and form and therefore
qualifies as a reorganization within the meaning of Section 368(a)(1)(F) of the
Internal Revenue Code ("Code").
2. No gain or loss will be recognized by Bank upon the transfer of its
assets to Stock Bank solely in exchange for shares of Stock Bank stock and the
assumption by Stock Bank of the liabilities of Bank. (Code Sections 361(a) and
357(a)).
3 No gain or loss will be recognized by Stock Bank upon the receipt of
the assets of Bank in exchange for shares of Stock Bank common stock. (Code
Section 1032(a)).
4. Stock Bank's holding period in the assets received from Bank will
include the period during which such assets were held by the Bank. (Code
Section 1223(2)).
5. Stock Bank's basis in the assets of Bank will be the same as the
basis of such assets in the hands of Bank immediately prior to the proposed
transaction. (Code Section 362(b)).
6. Bank members will recognize no gain or loss upon the constructive
receipt of Stock Bank common stock solely in exchange for their membership
interests in Bank. (Code Section 354(a)(1)).
7. The basis of the Stock Bank common stock to be constructively
received by the Bank's members will be the same as their basis in their
membership interests in the Bank surrendered in exchange therefor. (Code Section
358(a)(1)).
8. The holding period of the Stock Bank common stock constructively
received by the members of the Bank will include the period during which the
Bank members held their membership interests, provided that the membership
interests were held as capital assets on the date of the exchange. (Code Section
1223(1)).
9. The Stock bank will succeed to and take into account the Bank's
earnings and profits or deficit in earnings and profits, as of the date of the
proposed transaction. (Code Section 381).
<PAGE>
Boards of Directors
Gaston Federal Savings and Loan Association
Gaston Financial Corporation
Gaston Community Bancorp, MHC
_______________, 1997
Page 4
With respect to the transfer of Stock Bank stock to Mutual Holding Company
for membership interests (the "351 Transaction"):
10. The exchange of stock by the Stock Bank stockholders in exchange for
membership interests in the Mutual Holding Company will constitute a tax-free
exchange of property solely for voting "stock" pursuant to Section 351 of the
Internal Revenue Code.
11. Stock Bank's stockholders will recognize no gain or loss upon the
transfer of the Stock Bank stock they constructively received in the Bank
conversion to the Mutual Holding Company solely in exchange for membership
interests in the Mutual Holding Company. (Code Section 351).
12. Stock Bank stockholder's basis in the Mutual Holding Company
membership interests received in the transaction will be the same as the basis
of the property transferred in exchange therefor, reduced by the sum of the
liabilities assumed by Mutual Holding Company or to which assets transferred are
taken subject. (Code Section 358(a)(1)).
13. Stock Bank stockholder's holding period for the membership interests
in Mutual Holding Company received in the transaction will include the period
during which the property exchanged was held by Stock Bank stockholders,
provided that such property was a capital asset on the date of the exchange.
(Code Section 1223(1)).
14. Mutual Holding Company will recognize no gain or loss upon the
receipt of property from Stock Bank stockholders in exchange for membership
interests in the Mutual Holding Company. (Code Section 1032(a)).
15. Mutual Holding Company's basis in the property received from Stock
Bank stockholders will be the same as the basis of such property in the hands of
Stock Bank stockholders immediately prior to the transaction. (Code Section
362(a)).
16. Mutual Holding Company's holding period for the property received
from Stock Bank's stockholders will include the period during which such
property was held by Stock Bank stockholders. (Code Section 1223(2)).
<PAGE>
Boards of Directors
Gaston Federal Savings and Loan Association
Gaston Financial Corporation
Gaston Community Bancorp, MHC
_______________, 1997
Page 5
17. Stock Bank depositors will recognize no gain or loss solely by reason
of the transaction.
With respect to the transfers to the Stock Holding Company in exchange for
Common Stock in the Stock Holding Company
18. The Mutual Holding Company and the persons who purchased Common Stock
of the Stock Holding Company in the Subscription and Community Offering
("Minority Stockholders") will recognize no gain or loss upon the transfer of
Stock Bank stock and cash, respectively, to the Stock Holding Company in
exchange for stock in the Stock Holding Company. Code Sections 351(a) and
357(a).
19. Stock Holding Company will recognize no gain or loss on its receipt
of Stock Bank stock and cash in exchange for Stock Holding Company Stock. (Code
Section 1032(a)).
20. The basis of the Stock Holding Company Common Stock to the Minority
Stockholders will be the actual purchase price thereof, and a shareholders
holding period for Common Stock acquired through the exercise of subscription
rights will begin on the date the rights are exercised.
PROPOSED TRANSACTION
--------------------
On ____________, 1997, the board of directors of the Bank adopted that
certain Plan of Reorganization From A Mutual Savings Association to A Mutual
Holding Company and Stock Issuance Plan (the "Plan of Reorganization"). For what
are represented to be valid business purposes, the Bank's board of directors has
decided to convert to a mutual holding company structure pursuant to statutes.
The following steps are proposed:
(i) The Bank will organize an interim stock savings bank (Interim One) as
its wholly-owned subsidiary;
(ii) Interim One will organize a federal mid-tier holding company as its
wholly-owned subsidiary (Stock Holding Company); and
<PAGE>
Boards of Directors
Gaston Federal Savings and Loan Association
Gaston Financial Corporation
Gaston Community Bancorp, MHC
_______________, 1997
Page 6
(iii) Interim One will also organize another interim federal stock savings
bank as its wholly-owned subsidiary (Interim Two).
The following transactions will occur simultaneously:
(iv) The Bank will exchange its charter for a federal stock savings bank
charter and become a stock savings bank that will constructively
issue its common stock to members of the Bank;
(v) Interim One will cancel its outstanding stock and exchange its
charter for a federal mutual holding company charter and thereby
become the Mutual Holding Company;
(vi) Interim Two will merge with and into the Bank with the Bank as the
surviving entity, the former members of the Bank who constructively
hold stock in the Bank will exchange their stock in the Bank for
membership interests in the Mutual Holding Company; and
(vii) The Mutual Holding Company will contribute the Bank's stock to the
Stock Holding Company, a wholly-owned subsidiary of the Mutual
Holding Company for additional shares of Bank Stock.
(viii) Contemporaneously, with the contribution set forth in "(vii)" the
Stock Holding Company will offer to sell up to 49.9% of its Common
Stock in the Subscription Offering and, if applicable, the Direct
Community Offering.
These transactions are referred to herein collectively as the
"Reorganization."
Those persons who, as of the date of the Bank Conversion (the "Effective
Date"), hold depository rights with respect to the Bank will thereafter have
such rights solely with respect to the Stock Bank. Each deposit account with the
Bank at the time of the exchange will become a deposit account in the Stock Bank
in the same amount and upon the same terms and conditions. Following the
completion of the Reorganization, all depositors and borrowers who had
membership rights with respect to the Bank immediately prior to the
Reorganization will continue to have such rights solely with respect to the
Mutual Holding Company so long as they continue to hold deposit accounts or
borrowings with the Stock Bank. All new depositors of the Stock Bank after the
completion of the
<PAGE>
Boards of Directors
Gaston Federal Savings and Loan Association
Gaston Financial Corporation
Gaston Community Bancorp, MHC
_______________, 1997
Page 7
Reorganization will have ownership rights solely with respect to the Mutual
Holding Company so long as they continue to hold deposit accounts with the Stock
Bank.
The shares of Interim Two common stock owned by the Mutual Holding Company
prior to the Reorganization shall be converted into and become shares of common
stock of the Stock Bank on the Effective Date. The shares of Stock Bank common
stock constructively received by the Stock Bank stockholders (formerly the
members holding liquidation rights of the Bank) will be transferred to the
Mutual Holding Company by such persons in exchange for liquidation rights in the
Mutual Holding Company.
The Stock Holding Company will have the power to issue shares of capital
stock (including common and preferred stock) to persons other than the Mutual
Holding Company. So long as the Mutual Holding Company is in existence, however,
it must own a majority of the voting stock of Stock Holding Company. Stock
Holding Company may issue any amount of non-voting stock to persons other than
Mutual Holding Company. No such non-voting stock will be issued as of the date
of the Reorganization.
* * *
The opinions set forth above represent our conclusions as to the
application of existing Federal income tax law to the facts of the instant
transaction, and we can give no assurance that changes in such law, or in the
interpretation thereof, will not affect the opinions expressed by us. Moreover,
there can be no assurance that contrary positions may not be taken by the IRS,
or that a court considering the issues would not hold contrary to such opinions.
All of the opinions set forth above are qualified to the extent that the
validity of any provision of any agreement may be subject to or affected by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the rights of creditors generally. We do not express any opinion as to
the availability of any equitable or specific remedy upon any breach of any of
the covenants, warranties or other provisions contained in any agreement. We
have not examined, and we express no opinion with respect to the applicability
of, or liability under, any Federal, state or local law, ordinance, or
regulation governing or pertaining to environmental matters, hazardous wastes,
toxic substances, asbestos, or the like.
<PAGE>
Boards of Directors
Gaston Federal Savings and Loan Association
Gaston Financial Corporation
Gaston Community Bancorp, MHC
_______________, 1997
Page 8
It is expressly understood that the opinions set forth above represent our
conclusions based upon the documents reviewed by us and the facts presented to
us. Any material amendments to such documents or changes in any significant fact
would affect the opinions expressed herein.
We have not been asked to, and we do not, render any opinion with respect
to any matters other than those expressly set forth above. This opinion is
rendered for your use only, and may not be delivered to or relied upon by any
other person or entity without our express written consent.
Very truly yours,
LUSE LEHMAN GORMAN POMERENK & SCHICK
A Professional Corporation
<PAGE>
Exhibit 8.3
FELDMAN FINANCIAL ADVISORS, INC.
================================================================================
1725 K STREET, NW . SUITE 205
WASHINGTON, DC 20006
(202) 467-6862 . FAX (202) 467-6963
December 22, 1997
Board of Directors
Gaston Federal Savings and Loan Association
245 West Main Avenue
P.O. Box 2249
Gastonia, North Carolina 28053-2249
Gentlemen:
It is the opinion of Feldman Financial Advisors, Inc., that the
subscription rights to be received by the eligible account holders and
other eligible subscribers of Gaston Federal Savings and Loan Association
(the "Association"), pursuant to the Plan of Reorganization adopted by the
Board of Directors of the Association, do not have any economic value at
the time of distribution or at the time the rights are exercised in the
subscription offering.
Such opinion is based on the fact that the subscription rights are
acquired by the recipients without payment therefor, are nontransferable
and of short duration, and afford the recipients the right only to
purchase shares of common stock of Gaston Financial Corporation, the
holding company formed to acquire all of the capital stock of the
Association, at a price equal to its estimated aggregate pro forma market
value, which will be the same price at which any unsubscribed shares will
be sold in the community offering.
Sincerely,
/s/ Feldman Financial Advisors, Inc.
FELDMAN FINANCIAL ADVISORS, INC.
<PAGE>
Exhibit 10.2
DEFERRED COMPENSATION AND INCOME CONTINUATION AGREEMENT
THIS AGREEMENT, entered into as of the _______ day of ________ between
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION, a corporation having its principal
office in Gastonia, North Carolina (hereinafter referred to as the Association)
and ___________________________________ (hereinafter referred to as the
Director).
WHEREAS, the Director has rendered the Association valuable service and it
is the desire of the Association to have the benefit of his continued loyalty,
service and counsel and also to assist him in providing for the contingencies of
death and old age dependency; and
WHEREAS, in exchange for such deferred benefits as are hereinafter recited
and for periods subsequent to the date hereof, the Director is willing to defer
an amount not exceeding Twenty Thousand and No/100 ($20,000.00) Dollars of his
usual compensation for his future services.
NOW, THEREFORE, in consideration of the agreements hereinafter contained,
the parties hereto agree as follows:
1. MATURITY DATE. Maturity Date referred to herein means the end of the
Association's year in which the Director reaches age 70.
2. DEATH BENEFIT. Should the Director die before the Maturity Date and
before the termination of this Agreement pursuant to paragraph 9, the
Association (beginning at a date to be determined by the Association but within
six (6) months from the date of death) will commence to pay the amount
determinable under the Schedule of Death Benefits as set forth in Schedule A,
attached hereto, to the beneficiary designated by the Director on Schedule A.
The beneficiary(ies) named thereon may be changed at any time by the Director,
by written amendment, delivered to the Association.
3. DEFERRED COMPENSATION BENEFIT. Unless this Agreement is terminated
pursuant to paragraph 9, and subject to the acceleration, postponement or
modification provisions contained in this Agreement (see paragraphs 5 and 6),
the Association shall pay the Director One Thousand, Twenty Six and No/100
($1,026.00) Dollars per month for a continuous period of one hundred twenty
(120) months, commencing on the Maturity Date (or on a date determined by the
Association but within six (6) months of the Maturity Date). In the event that
the Director should die after payments begin hereunder but before the expiration
of said one hundred twenty (120) months payment period, the unpaid payments due
will be paid by the Association to the Director's beneficiary(ies) designated by
the Director in Schedule A, attached hereto.
<PAGE>
4. TERMINATION BENEFIT. If, for whatever reason, this Agreement is
terminated prior to the Maturity Date, the Director, or his beneficiary(ies), as
the case may be, shall be entitled to an amount or amounts determined by
multiplying the benefits otherwise set forth under paragraphs 2 or 3 hereof, as
the case may be, by a fraction, the numerator of which shall be the actual
amount deferred upon termination and the denominator of which shall be the sum
of Twenty Thousand and No/100 ($20,000.00) Dollars.
5. ACCELERATION OR POSTPONEMENT OF BENEFIT PAYMENTS. The Association
hereby reserves the right to accelerate or postpone for a reasonable period of
time the payment of any of those sums specified in paragraphs 2, 3 and 4 above
without the consent of the Director, his estate, beneficiaries, or any other
person claiming through or under him in the event such action is in the best
interest of the Association. If the Association accelerates the payment of
benefits, it may discount the amount of the accelerated portion at the rate of
ten per cent (10%) per year, compounded annually. If the Association postpones
the payment of benefits, the postponed payments shall accrue interest compounded
annually at a rate to be determined by the Association, but not less than the
Association's average cost of funds.
6. MODIFICATION OF BENEFITS. The Association is able to provide the
benefits described in paragraphs 2, 3 and 4 and Schedule A of this Agreement in
part because of currently applicable State and Federal tax statutes and
regulations, particularly as they relate to the investments contemplated by the
Association in support of this plan. If such statutes or regulations, or the
judicial interpretations of such statutes and regulations, change such that, in
the sole discretion of the Association, it is no longer beneficial to the
interests of the Association to continue to plan, the Association may terminate
the plan pursuant to paragraph 9 of this Agreement, or it may accelerate or
postpone the payment of benefits as provided in paragraph 5 of this Agreement,
or it may modify the amount of the benefits listed in Schedule A or pursuant to
the provisions of paragraph 4 hereof, whether or not such benefits are already
being paid (except that no benefit already paid may be recovered by reason of a
reduction in benefits under this provision), but such benefits may not be
reduced to an amount such that the total benefits paid to the Director or his
beneficiary are less than an amount equal to the total amount deferred by the
Director pursuant to paragraph 10 of this Agreement plus interest at a rate to
be determined by the Association, but not less than the Association's average
cost of funds, compounded annually on the unpaid balance.
7. ASSIGNABILITY. Except to the extent that this provision may be
contrary to law, no assignment, pledge, collateralization, or attachment of any
of the benefits under this Agreement shall be valid or recognized by the
Association.
-2-
<PAGE>
8. DIRECTORSHIP RIGHTS. This Agreement creates no right in the Director
to continue in the Association's service for any specific length of time; nor
does it create any other rights in the Director or create any obligations on
the part of the Association, except those set forth in this Agreement. Any
rights accruing to the Director or any designee under the provisions of the
Agreement shall be solely those of an unsecured creditor of this Association.
9. TERMINATION. The Association and the Director each reserves the right
to terminate this Agreement, such termination to be effective sixty (60) days
after filing with the other party written notice of such intent to terminate. If
not terminated sooner, this Agreement shall terminate automatically upon the
termination of the Director's services to the Association.
10. COMPENSATION DEFERRED. Effective May 19, 1986 and until the earlier of
the Director's death or termination of this Agreement, the Director agrees to
defer all compensation for his future services up to but not exceeding the sum
of Twenty Thousand and No/100 ($20,000.00) Dollars. Except however, if within
thirty (30) days prior to the end of any fiscal year of the Association
subsequent to the date hereof, the Director shall notify the Association in
writing that an amount less than his full compensation for his services for the
ensuing year is to be deferred, only such lesser amount in such ensuing year
shall be deferred.
11. LAW GOVERNING. This Agreement shall be governed by the laws of the
State of North Carolina.
THIS AGREEMENT is solely between the Association and the Director. Further,
the Director and his beneficiary (ies) shall have recourse only against the
Association for enforcement. However, it shall be binding upon the
beneficiaries, heirs, executors and administrators of the Director and upon the
successors and assigns of the Association.
EXECUTED as of the day first written above.
-3-
<PAGE>
Exhibit 10.3
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
EMPLOYEE STOCK OWNERSHIP PLAN
(adopted effective ___________, 1997)
<PAGE>
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
EMPLOYEE STOCK OWNERSHIP PLAN
This Employee Stock Ownership Plan, executed on the ____ day of
_____________, 1997, by Gaston Federal Savings and Loan Association, a federal
stock savings bank (the "Bank"),
W I T N E S S E T H T H A T
WHEREAS, the board of directors of the Bank has resolved to adopt an
employee stock ownership plan for eligible employees in accordance with the
terms and conditions presented to the directors;
NOW, THEREFORE, the Bank hereby adopts the following Plan setting forth the
terms and conditions pertaining to contributions by the Employer and the payment
of benefits to Participants and Beneficiaries.
IN WITNESS WHEREOF, the Bank has adopted this Plan and caused this
instrument to be executed by its duly authorized officers as of the above date.
ATTEST:
By:
- ---------------------------------- --------------------------------
Secretary President
<PAGE>
C 0 N T E N T S
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Section 1. Plan Identity ................................................ -1-
-------------
1.1 Name ...................................................... -1-
----
1.2 Purpose ................................................... -1-
-------
1.3 Effective Date ............................................ -1-
--------------
1.4 Fiscal Period ............................................. -1-
-------------
1.5 Single Plan for All Employers ............................. -1-
-----------------------------
1.6 Interpretation of Provisions .............................. -1-
----------------------------
Section 2. Definitions .................................................. -1-
-----------
Section 3. Eligibility for Participation ............................. -8-
-----------------------------
3.1 Initial Eligibility ....................................... -8-
-------------------
3.2 Definition of Eligibility Year ............................ -8-
------------------------------
3.3 Terminated Employees ...................................... -8-
--------------------
3.4 Certain Employees Ineligible .............................. -8-
----------------------------
3.5 Participation and Reparticipation ......................... -8-
---------------------------------
3.6 Omission of Eligible Employee ............................. -8-
-----------------------------
3.7 Inclusion of Ineligible Employee .......................... -9-
--------------------------------
Section 4. Contributions and Credits ................................. -9-
-------------------------
4.1 Discretionary Contributions ............................... -9-
---------------------------
4.2 Contributions for Stock Obligations ....................... -9-
-----------------------------------
4.3 Definitions Related to Contributions ...................... -9-
------------------------------------
4.4 Conditions as to Contributions ............................ -10-
------------------------------
4.5 Transfers ................................................. -10-
---------
Section 5. Limitations on Contributions and Allocations .............. -10-
--------------------------------------------
5.1 Limitation on Annual Additions ............................ -10-
------------------------------
5.2 Coordinated Limitation With Other Plans ................... -12-
---------------------------------------
5.3 Effect of Limitations ..................................... -12-
---------------------
5.4 Limitations as to Certain Participants .................... -13-
--------------------------------------
Section 6. Trust Fund and Its Investment. ............................ -13-
-----------------------------
6.1 Creation of Trust Fund .................................... -13-
----------------------
6.2 Stock Fund and Investment Fund ............................ -13-
------------------------------
6.3 Acquisition of Stock ...................................... -14-
--------------------
6.4 Participants' Option to Diversify ......................... -14-
---------------------------------
Section 7. Voting Rights and Dividends on Stock ...................... -15-
------------------------------------
7.1 Voting and Tendering of Stock ............................. -15-
-----------------------------
7.2 Dividends on Stock ........................................ -16-
------------------
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Section 8. Adjustments to Accounts ................................... -16-
-----------------------
8.1 Adjustments for Transactions .............................. -16-
----------------------------
8.2 Valuation of Investment Fund .............................. -16-
----------------------------
8.3 Adjustments for Investment Experience ..................... -17-
-------------------------------------
Section 9. Vesting of Participants' Interests ........................ -17-
----------------------------------
9.3 Full Vesting Upon Certain Events .......................... -18-
--------------------------------
9.4 Full Vesting Upon Plan Termination ........................ -19-
----------------------------------
9.5 Forfeiture, Repayment, and Restoral ....................... -19-
-----------------------------------
9.6 Accounting for Forfeitures ................................ -19-
--------------------------
9.7 Vesting and Nonforfeitability ............................. -19-
-----------------------------
Section 10. Payment of Benefits ....................................... -19-
-------------------
10.1 Benefits for Participants ................................. -19-
-------------------------
10.2 Time for Distribution ..................................... -20-
---------------------
10.3 Marital Status ............................................ -21-
--------------
10.4 Delay in Benefit Determination ............................ -21-
------------------------------
10.5 Accounting for Benefit Payments ........................... -21-
-------------------------------
10.6 Options to Receive and Sell Stock ......................... -21-
---------------------------------
10.7 Restrictions on Disposition of Stock ...................... -22-
------------------------------------
10.8 Continuing Loan Provisions; Creations of Protections and
--------------------------------------------------------
Rights .................................................... -23-
------
10.9 Direct Rollover of Eligible Distribution .................. -23-
----------------------------------------
10.10 In Service Distribution of Roll-over Account .............. -23-
--------------------------------------------
10.11 Waiver of 30 Day Period After Notice of Distribution ...... -24-
----------------------------------------------------
Section 11. Rules Governing Benefit Claims and Review of Appeals ...... -24-
----------------------------------------------------
11.1 Claim for Benefits ........................................ -24-
------------------
11.2 Notification by Committee ................................. -24-
-------------------------
11.3 Claims Review Procedure ................................... -24-
-----------------------
Section 12. The Committee and Its Functions ........................... -25-
-------------------------------
12.1 Authority of Committee .................................... -25-
----------------------
12.2 Identity of Committee ..................................... -25-
---------------------
12.3 Duties of Committee ....................................... -25-
-------------------
12.4 Valuation of Stock ........................................ -25-
------------------
12.5 Compliance with ERISA ..................................... -26-
---------------------
12.6 Action by Committee ....................................... -26-
-------------------
12.7 Execution of Documents .................................... -26-
----------------------
12.8 Adoption of Rules ......................................... -26-
-----------------
12.9 Responsibilities to Participants .......................... -26-
--------------------------------
12.10 Alternative Payees in Event of Incapacity ................. -26-
-----------------------------------------
12.11 Indemnification by Employers .............................. -26-
----------------------------
12.12 Nonparticipation by Interested Member ..................... -27-
-------------------------------------
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Section 13. Adoption, Amendment, or Termination of the Plan ........... -27-
-----------------------------------------------
13.1 Adoption of Plan by Other Employers ....................... -27-
-----------------------------------
13.2 Adoption of Plan by Successor ............................. -27-
-----------------------------
13.3 Plan Adoption Subject to Qualification .................... -27-
--------------------------------------
13.4 Right to Amend or Terminate ............................... -27-
---------------------------
Section 14. Miscellaneous Provisions .................................. -28-
------------------------
14.1 Plan Creates No Employment Rights ......................... -28-
---------------------------------
14.2 Nonassignability of Benefits .............................. -28-
----------------------------
14.3 Limit of Employer Liability ............................... -28-
---------------------------
14.4 Treatment of Expenses ..................................... -28-
---------------------
14.5 Number and Gender ......................................... -28-
-----------------
14.6 Nondiversion of Assets .................................... -28-
----------------------
14.7 Separability of Provisions ................................ -28-
--------------------------
14.8 Service of Process ........................................ -29-
------------------
14.9 Governing State Law ....................................... -29-
-------------------
14.10 Employer Contributions Conditioned on Deductibility ....... -29-
---------------------------------------------------
14.11 Unclaimed Accounts ........................................ -29-
------------------
14.12 Qualified Domestic Relations Order ........................ -29-
----------------------------------
Section 15. Top-Heavy Provisions ...................................... -30-
--------------------
15.1 Top-Heavy Plan ............................................ -30-
--------------
15.2 Super Top-Heavy Plan ...................................... -30-
--------------------
15.3 Definitions ............................................... -31-
-----------
15.4 Top-Heavy Rules of Application ............................ -32-
------------------------------
15.5 Top-Heavy Ratio ........................................... -33-
---------------
15.6 Minimum Contributions ..................................... -33-
---------------------
15.7 Minimum Vesting ........................................... -34-
---------------
15.8 Top-Heavy Provisions Control in Top-Heavy Plan ............ -34-
----------------------------------------------
</TABLE>
(iii)
<PAGE>
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
EMPLOYEE STOCK OWNERSHIP PLAN
Section 1. Plan Identity.
-------------
1.1 Name. The name of this Plan is "Gaston Federal Savings and Loan
----
Association Employee Stock Ownership Plan."
1.2 Purpose. The purpose of this Plan is to describe the terms and
-------
conditions under which contributions made pursuant to the Plan will be credited
and paid to the Participants and their Beneficiaries.
1.3 Effective Date. The Effective Date of this Plan is _____________
--------------
___________________, 1997.
1.4 Fiscal Period. This Plan shall be operated on the basis of a
-------------
January 1 to December 31 fiscal year for the purpose of keeping the Plan's books
and records and distributing or filing any reports or returns required by law.
1.5 Single Plan for All Employers. This Plan shall be treated as a
-----------------------------
single plan with respect to all participating Employers for the purpose of
crediting contributions and forfeitures and distributing benefits, determining
whether there has been any termination of Service, and applying the limitations
set forth in Section 5.
1.6 Interpretation of Provisions. The Employers intend this Plan and
----------------------------
the Trust to be a qualified stock bonus plan under Section 401(a) of the Code
and an employee stock ownership plan within the meaning of Section 407(d)(6) of
ERISA and Section 4975(e)(7) of the Code. The Plan is intended to have its
assets invested primarily in qualifying employer securities of one or more
Employers within the meaning of Section 407(d)(3) of ERISA, and to satisfy any
requirement under ERISA or the Code applicable to such a plan.
Accordingly, the Plan and Trust Agreement shall be interpreted and applied
in a manner consistent with this intent and shall be administered at all times
and in all respects in a nondiscriminatory manner.
Section 2. Definitions.
-----------
The following capitalized words and phrases shall have the meanings
specified when used in this Plan and in the Trust Agreement, unless the context
clearly indicates otherwise:
"Account" means a Participant's interest in the assets accumulated under
this Plan as expressed in terms of a separate account balance which is
periodically adjusted to reflect his Employer's contributions, the Plan's
investment experience, and distributions and forfeitures.
"Active Participant" means any Employee who has satisfied the eligibility
requirements of Section 3 and who qualifies as an Active Participant for a
particular Plan Year under Section 4.3.
"Bank" means Gaston Federal Savings and Loan Association and any entity
which succeeds to the business of Gaston Federal Savings and Loan Association
and adopts this Plan as its own pursuant to Section 14.2.
<PAGE>
"Beneficiary" means the person or persons who are designated by a
Participant to receive benefits payable under the Plan on the Participant's
death. In the absence of any designation or if all the designated Beneficiaries
shall die before the Participant dies or shall die before all benefits have been
paid, the Participant's Beneficiary shall be his surviving Spouse, if any, or
his estate if he is not survived by a Spouse. The Committee may rely upon the
advice of the Participant's executor or administrator as to the identity of the
Participant's Spouse.
"Break in Service" means any Plan Year in which an Employee has 500 or
fewer Hours of Service. Solely for this purpose, an Employee shall be considered
employed for his normal hours of paid employment during a Recognized Absence
(said Employee shall not be credited with more than 501 Hours of Service to
avoid a Break in Service), unless he does not resume his Service at the end of
the Recognized Absence. Further, if an Employee is absent for any period
beginning on or after January 1, 1985, (i) by reason of the Employee's
pregnancy, (ii) by reason of the birth of the Employee's child, (iii) by reason
of the placement of a child with the Employee in connection with the Employee's
adoption of the child, or (iv) for purposes of caring for such child for a
period beginning immediately after such birth or placement, the Employee shall
be credited with the Hours of Service which would normally have been credited
but for such absence, up to a maximum of 501 Hours of Service.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the committee responsible for the administration of this
Plan in accordance with Section 12.
"Company" means Gaston Bancorp, MHC, the mid-tier mutual holding company of
the Bank.
"Disability" means only a disability which renders the Participant totally
unable, as a result of bodily or mental disease or injury, to perform any duties
for an Employer for which he is reasonably fitted, which disability is expected
to be permanent or of long and indefinite duration. However, this term shall not
include any disability directly or indirectly resulting from or related to
habitual drunkenness or addiction to narcotics, a criminal act or attempt,
service in the armed forces of any country, an act of war, declared or
undeclared, any injury or disease occurring while compensation to the
Participant is suspended, or any injury which is intentionally self-inflicted.
Further, this term shall apply only if (i) the Participant is sufficiently
disabled to qualify for the payment of disability benefits under the federal
Social Security Act or Veterans Disability Act, or (ii) the Participant's
disability is certified by a physician selected by the Committee. Unless the
Participant is sufficiently disabled to qualify for disability benefits under
the federal Social Security Act or Veterans Disability Act, the Committee may
require the Participant to be appropriately examined from time to time by one or
more physicians chosen by the Committee, and no Participant who refuses to be
examined shall be treated as having a Disability. In any event, the Committee's
good faith decision as to whether a Participant's Service has been terminated by
Disability shall be final and conclusive.
"Early Retirement" means retirement on or after a Participant's attainment
of age 55 and the completion of ten years of Service for an Employer. If the
Participant separates from Service before satisfying the age requirement, but
has satisfied the Service requirement, the Participant will be entitled to elect
early retirement upon satisfaction of the age requirement.
"Effective Date" means ______________, 1997.
-2-
<PAGE>
"Employee" means any individual who is or has been employed or self-
employed by an Employer. "Employee" also means an individual employed by a
leasing organization who, pursuant to an agreement between an Employer and the
leasing organization, has performed services for the Employer and any related
persons (within the meaning of Section 414(n)(6) of the Code) on a substantially
full-time basis for more than one year, if such services are performed under the
primary direction or control of the Employer. However, such a "leased employee"
shall not be considered an Employee if (i) he participates in a money purchase
pension plan sponsored by the leasing organization which provides for immediate
participation, immediate full vesting, and an annual contribution of at least 10
percent of the Employee's 415 Compensation, and (ii) leased employees do not
constitute more than 20 percent of the Employer's total work force (including
leased employees, but excluding Highly Paid Employees and any other employees
who have not performed services for the Employer on a substantially full-time
basis for at least one year).
"Employer" means the Bank or any affiliate within the purview of section
414(b), (c) or (m) and 415(h) of the Code, any other corporation, partnership,
or proprietorship which adopts this Plan with the Bank's consent pursuant to
Section 13.1, and any entity which succeeds to the business of any Employer and
adopts the Plan pursuant to Section 13.2.
"Entry Date" means the Effective Date of the Plan and each January 1 and
July 1 of each Plan Year after the Effective Date.
"ERISA" means the Employee Retirement Income Security Act of 1974 (P.L. 93-
406, as amended).
"415 Compensation"
(a) shall mean wages, as defined in Code Section 3401(a) for
purposes of income tax withholding at the source.
(b) For Plan Years beginning after December 31, 1997, any elective
deferral as defined in Code Section 402(g)(3) (any Employer contributions
made on behalf of a Participant to the extent not includible in gross
income and any Employer contributions to purchase an annuity contract under
Code Section 403(b) under a salary reduction agreement) and any amount
which is contributed or deferred by the Employer at the election of the
Participant and which is not includible in gross income of the Participant
by reason of Code Section 125 (Cafeteria Plan) shall also be included in
the definition of 415 Compensation.
(c) 415 Compensation in excess of $160,000 (as indexed) shall be
disregarded for all Participants. For purposes of this sub-section, the
$160,000 limit shall be referred to as the "applicable limit" for the Plan
Year in question. The $160,000 limit shall be adjusted for increases in the
cost of living in accordance with Section 401(a)(17)(B) of the Code,
effective for the Plan Year which begins within the applicable calendar
year. For purposes of the applicable limit, 415 Compensation shall be
prorated over short Plan Years.
"Highly Paid Employee" for any Plan Year means an Employee who, during
either of that or the immediately preceding Plan Year was at any time a five
percent owner of the Employer (as defined in Code
-3-
<PAGE>
Section 416(i)(1)) or had 415 Compensation exceeding $80,000 and was among the
most highly compensated one-fifth of all Employees. For this purpose:
(a) "415 Compensation" shall include any amount which is excludable
from the Employee's gross income for tax purposes pursuant to Sections 125,
402(a)(8), 402(h)(1)(B), or 403(b) of the Code.
(b) The number of Employees in "the most highly compensated one-
fifth of all Employees" shall be determined by taking into account all
individuals working for all related Employer entities described in the
definition of "Service", but excluding any individual who has not completed
six months of Service, who normally works fewer than 17-1/2 hours per week
or in fewer than six months per year, who has not reached age 21, whose
employment is covered by a collective bargaining agreement, or who is a
nonresident alien who receives no earned income from United States sources.
"Hours of Service" means hours to be credited to an Employee under the
following rules:
(a) Each hour for which an Employee is paid or is entitled to be
paid for services to an Employer is an Hour of Service.
(b) Each hour for which an Employee is directly or indirectly paid
or is entitled to be paid for a period of vacation, holidays, illness,
disability, lay-off, jury duty, temporary military duty, or leave of
absence is an Hour of Service. However, except as otherwise specifically
provided, no more than 501 Hours of Service shall be credited for any
single continuous period which an Employee performs no duties. No more than
501 Hours of Service will be credited under this paragraph for any single
continuous period (whether or not such period occurs in a single
computation period). Further, no Hours of Service shall be credited on
account of payments made solely under a plan maintained to comply with
worker's compensation, unemployment compensation, or disability insurance
laws, or to reimburse an Employee for medical expenses.
(c) Each hour for which back pay (ignoring any mitigation of
damages) is either awarded or agreed to by an Employer is an Hour of
Service. However, no more than 501 Hours of Service shall be credited for
any single continuous period during which an Employee would not have
performed any duties. The same Hours of Service will not be credited both
under paragraph (a) or (b) as the case may be, and under this paragraph
(c). These hours will be credited to the employee for the computation
period or periods to which the award or agreement pertains rather than the
computation period in which the award agreement or payment is made.
(d) Hours of Service shall be credited in any one period only under
one of the foregoing paragraphs (a), (b) and (c); an Employee may not get
double credit for the same period.
(e) If an Employer finds it impractical to count the actual Hours
of Service for any class or group of non-hourly Employees, each Employee in
that class or group shall be credited with 45 Hours of Service for each
weekly pay period in which he has at least one Hour of Service. However, an
Employee shall be credited only for his normal working hours during a paid
absence.
(f) Hours of Service to be credited on account of a payment to an
Employee (including back pay) shall be recorded in the period of Service
for which the payment was made. If the period overlaps two or more Plan
Years, the Hours of Service credit shall be allocated in
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<PAGE>
proportion to the respective portions of the period included in the several
Plan Years. However, in the case of periods of 31 days or less, the
Administrator may apply a uniform policy of crediting the Hours of Service
to either the first Plan Year or the second.
(g) In all respects an Employee's Hours of Service shall be counted
as required by Section 2530.200b-2(b) and (c) of the Department of Labor's
regulations under Title I of ERISA.
"Investment Fund" means that portion of the Trust Fund consisting of assets
other than Stock. Notwithstanding the above, assets from the Investment Fund may
be used to purchase Stock in the open market or otherwise, or used to pay on the
Stock Obligation, and shares so purchased will be allocated to a Participant's
Stock Fund.
"Normal Retirement" means retirement on or after the later of a
Participant's 65th birthday or fifth year of Service.
"Normal Retirement Date" means the later of the date on which a Participant
attains age 65 or completes five years of Service.
"Participant" means any Employee who is participating in the Plan, or who
has previously participated in the Plan and still has a balance credited to his
Account.
"Plan Year" means the twelve month period commencing January 1 and ending
December 31, 1997 and each period of 12 consecutive months beginning on January
1 of each succeeding year.
"Recognized Absence" means a period for which --
(a) an Employer grants an Employee a leave of absence for a limited
period, but only if an Employer grants such leave on a nondiscriminatory
basis; or
(b) an Employee is temporarily laid off by an Employer because of a
change in business conditions; or
(c) an Employee is on active military duty, but only to the extent
that his employment rights are protected by the Military Selective Service
Act of 1967 (38 U.S.C. Sec. 2021).
"Roll Over Account" means the separate account established to hold a
Participant's roll-over contributions and direct transfers.
"Service" means an Employee's period(s) of employment or self-employment
with an Employer, excluding for initial eligibility purposes any period in which
the individual was a nonresident alien and did not receive from an Employer any
earned income which constituted income from sources within the United States. An
Employee's Service shall include any service which constitutes service with a
predecessor employer within the meaning of Section 414(a) of the Code. An
Employee's Service shall also include any service with an entity which is not an
Employer, but only either (i) for a period after 1975 in which the other entity
is a member of a controlled group of corporations or is under common control
with other trades and businesses within the meaning of Section 414(b) or 414(c)
of the Code, and a member of the controlled group or one of the trades and
businesses is an Employer, (ii) for a period after 1979 in which the other
entity is a member of an affiliated service group within the meaning of Section
414(m) of the Code, and a member of the affiliated service group is an Employer,
or (iii) all employers aggregated with
-5-
<PAGE>
the Employer under Section 414(o) of the Code (but not until the Proposed
Regulations under Section 414(o) become effective).
"Spouse" means the individual, if any, to whom a Participant is lawfully
married on the date benefit payments to the Participant are to begin, or on the
date of the Participant's death, if earlier. A former spouse shall be treated as
the Spouse or surviving Spouse to the extent provided under a qualified domestic
relations order as described in section 414(p) of the Code.
"Stock" means shares of the Company's voting common stock or preferred
stock meeting the requirements of Section 409(e)(3) of the Code issued by an
Employer which is a member of the same controlled group of corporations within
the meaning of Code Section 414(b).
"Stock Fund" means that portion of the Trust Fund consisting of Stock.
"Stock Obligation" means an indebtedness arising from any extension of
credit to the Plan or the Trust which satisfies the requirements set forth in
Section 6.3 and which was obtained for any or all of the following purposes:
(i) to acquire qualifying employer securities as defined in
Treasury Regulations (S) 54.4975-12
(ii) to repay such Stock Obligation; or
(iii) to repay a prior exempt loan.
"Trust" or "Trust Fund" means the trust fund created under this Plan.
"Trust Agreement" means the agreement between the Bank and the Trustee
concerning the Trust Fund. If any assets of the Trust Fund are held in a co-
mingled trust fund with assets of other qualified retirement plans, "Trust
Agreement" shall be deemed to include the trust agreement governing that co-
mingled trust fund. With respect to the allocation of investment responsibility
for the assets of the Trust Fund, the provisions of Article II of the Trust
Agreement are incorporated herein by reference.
"Trustee" means one or more corporate persons or individuals selected from
time to time by the Bank to serve as trustee or co-trustees of the Trust Fund.
"Unallocated Stock Fund" means that portion of the Stock Fund consisting of
the Plan's holding of Stock which have been acquired in exchange for one or more
Stock obligations and which have not yet been allocated to the Participant's
Accounts in accordance with Section 4.2
"Valuation Date" means the last day of the Plan Year and each other date as
of which the Committee shall determine the investment experience of the
Investment Fund and adjust the Participants' Accounts accordingly.
"Valuation Period" means the period following a Valuation Date and ending
with the next Valuation Date.
"Vesting Year" means a unit of Service credited to a Participant pursuant
to Section 9.2 for purposes of determining his vested interest in his Account.
-6-
<PAGE>
Section 3. Eligibility for Participation.
-----------------------------
3.1 Initial Eligibility. An Employee shall enter the Plan as of the
-------------------
Entry Date coincident with or next following the later of the following dates:
(a) the last day of the Employee's first Eligibility Year, and
(b) the Employee's 21st birthday. However, if an Employee is not
in active Service with an Employer on the date he would otherwise first
enter the Plan, his entry shall be deferred until the next day he is in
Service.
3.2 Definition of Eligibility Year. An "Eligibility Year" means an
------------------------------
applicable eligibility period (as defined below) in which the Employee has
completed 1,000 Hours of Service for the Employer. For this purpose:
(a) an Employee's first "eligibility period" is the 12-
consecutive month period beginning on the first day on which he has an
Hour of Service, and
(b) his subsequent eligibility periods will be 12-consecutive
month periods beginning on each January 1 after that first day of
Service.
3.3 Terminated Employees. No Employee shall have any interest or
--------------------
rights under this Plan if he is never in active Service with an Employer on or
after the Effective Date.
3.4 Certain Employees Ineligible. No Employee shall participate in the
----------------------------
Plan while his Service is covered by a collective bargaining agreement between
an Employer and the Employee's collective bargaining representative if (i)
retirement benefits have been the subject of good faith bargaining between the
Employer and the representative and (ii) the collective bargaining agreement
does not provide for the Employee's participation in the Plan.
3.5 Participation and Reparticipation. Subject to the satisfaction of
---------------------------------
the foregoing requirements, an Employee shall participate in the Plan during
each period of his Service from the date on which he first becomes eligible
until his termination. For this purpose, an Employee who returns before five (5)
consecutive Breaks in Service who previously satisfied the initial eligibility
requirements or who returns after 5 consecutive one year Breaks in Service with
a vested Account balance in the Plan shall re-enter the Plan as of the date of
his return to Service with an Employer.
3.6 Omission of Eligible Employee. If, in any Plan Year, any Employee
-----------------------------
who should be included as a Participant in the Plan is erroneously omitted and
discovery of such omission is not made until after a contribution by his
Employer for the year has been made, the Employer shall make a subsequent
contribution with respect to the omitted Employee in the amount which the said
Employer would have contributed shall be made regardless of whether or not it is
deductible in whole or in part in any taxable year under applicable provisions
of the Code.
3.7 Inclusion of Ineligible Employee. If, in any Plan Year, any person
--------------------------------
who should not have been included as a Participant in the Plan is erroneously
included and discovery of such incorrect inclusion is not made until after a
contribution for the year has been made, the Employer shall not be entitled to
recover the contribution made with respect to the ineligible person regardless
of whether or not a deduction
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<PAGE>
is allowable with respect to the ineligible person shall constitute a forfeiture
for the Plan Year in which the discovery is made.
Section 4. Contributions and Credits.
-------------------------
4.1 Discretionary Contributions. The Employer shall from time to time
---------------------------
contribute, with respect to a Plan Year, such amounts as it may determine from
time to time. The Employer shall have no obligation to contribute any amount
under this Plan except as so determined in its sole discretion. The Employer's
contributions and available forfeitures for a Plan Year shall be credited as of
the last day of the year to the Accounts of the Active Participants in
proportion to their amounts of Cash Compensation.
4.2 Contributions for Stock Obligations. If the Trustee, upon
-----------------------------------
instructions from the Committee, incurs any Stock Obligation upon the purchase
of Stock, the Employer may contribute for each Plan Year an amount sufficient to
cover all payments of principal and interest as they come due under the terms of
the Stock Obligation. If there is more than one Stock Obligation, the Employer
shall designate the one to which any contribution is to be applied. Investment
earnings realized on Employer contributions and any dividends paid by the
Employer on Stock held in the Unallocated Stock Account, shall be applied to the
Stock Obligation related to that Stock, subject to Section 7.2.
In each Plan Year in which Employer contributions, earnings on
contributions, or dividends on unallocated Stock are used as payments under a
Stock Obligation, a certain number of shares of the Stock acquired with that
Stock Obligation which is then held in the Unallocated Stock Fund shall be
released for allocation among the Participants. The number of shares released
shall bear the same ratio to the total number of those shares then held in the
Unallocated Stock Fund (prior to the release) as (i) the principal and interest
payments made on the Stock Obligation in the current Plan Year bears to (ii) the
sum of (i) above, and the remaining principal and interest payments required (or
projected to be required on the basis of the interest rate in effect at the end
of the Plan Year) to satisfy the Stock Obligation.
At the direction of the Committee, the current and projected payments of
interest under a Stock Obligation may be ignored in calculating the number of
shares to be released in each year if (i) the Stock Obligation provides for
annual payments of principal and interest at a cumulative rate that is not less
rapid at any time than level annual payments of such amounts for 10 years, (ii)
the interest included in any payment is ignored only to the extent that it would
be determined to be interest under standard loan amortization tables, and (iii)
the term of the Stock Obligation, by reason of renewal, extension, or
refinancing, has not exceeded 10 years from the original acquisition of the
Stock.
For these purposes, each Stock Obligation, the Stock purchased with it,
and any dividends on such Stock, shall be considered separately. The Stock
released from the Unallocated Stock Fund in any Plan Year shall be credited as
of the last day of the year to the Accounts of the Active Participants in
proportion to their amounts of Cash Compensation.
4.3 Definitions Related to Contributions. For the purposes of this
------------------------------------
Plan, the following terms have the meanings specified:
"Active Participant" means a Participant who has satisfied the
eligibility requirements under Section 3 and who has at least 1000 Hours of
Service during the current Plan Year. However, a Participant shall not qualify
as an Active Participant unless (i) he is in active Service with an Employer as
of the last day of the Plan Year, or (ii) he is on a Recognized Absence as of
that date, or (iii) his Service terminated during the Plan Year by reason of
Disability, death, Early or Normal Retirement.
-8-
<PAGE>
"Cash Compensation" means a Participant's 415 Compensation as defined in
Section 2 of the Plan and shall also include amounts contributed under a salary
reduction agreement pursuant to Section 401(k) or Section 125 of the Code.
In the event a Plan Year is a period of less than 12 months for any
reason, then Cash Compensation for the short period shall not exceed the pro
rata portion of this limit created by multiplying a fraction which is the number
of months in the short period divided by twelve times the annual compensation
limit.
4.4 Conditions as to Contributions. Employers' contributions shall in
------------------------------
all events be subject to the limitations set forth in Section 5. Contributions
may be made in the form of cash, or securities and other property to the extent
permissible under ERISA, including Stock, and shall be held by the Trustee in
accordance with the Trust Agreement. In addition to the provisions of Section
13.3 for the return of an Employer's contributions in connection with a failure
of the Plan to qualify initially under the Code, any amount contributed by an
Employer due to a good faith mistake of fact, or based upon a good faith but
erroneous determination of its deductibility under Section 404 of the Code,
shall be returned to the Employer within one year after the date on which the
contribution was originally made, or within one year after its nondeductibility
has been finally determined. However, the amount to be returned shall be reduced
to take account of any adverse investment experience within the Trust Fund in
order that the balance credited to each Participant's Account is not less that
it would have been if the contribution had never been made.
4.5 Transfers. This Plan shall accept direct and indirect transfers,
---------
including roll-over contributions from other tax-qualified plans, provided,
however, that this Plan shall not accept any direct or indirect transfers from
any other retirement plan that is tax-qualified under Section 401(a) of the Code
and which is subject to the survivor annuity requirements of section 401(a)(11)
and section 417 of the Code.
Section 5. Limitations on Contributions and Allocations.
--------------------------------------------
5.1 Limitation on Annual Additions. Notwithstanding anything herein to
------------------------------
the contrary, allocation of Employer contributions for any Plan Year shall be
subject to the following:
5.1-1 If allocation of Employer contributions in accordance with
Section 4.1 will result in an allocation of more than one-third the
total contributions for a Plan Year to the Accounts of Highly Paid
Employees, then allocation of such amount shall be adjusted so that such
excess will not occur.
5.1-2 After adjustment, if any, required by the preceding
paragraph, the annual additions during any Plan Year to any
Participant's Account under this and any other defined contribution
plans maintained by the Employer or an affiliate (within the purview of
Section 414(b), (c) and (m) and Section 415(h) of the Code, which
affiliate shall be deemed the Employer for this purpose) shall not
exceed the lesser of $30,000 (or such other dollar amount which results
from cost-of-living adjustments under Section 415(d) of the Code) or "25
percent of the Participant's 415 Compensation for such limitation year."
In the event that annual additions exceed the aforesaid limitations,
they shall be reduced in the following priority:
(i) If the Participant is covered by the Plan at the end of the
Plan Year, any excess amount at the end of the Plan Year that cannot be
allocated to the Participant's Account shall be
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<PAGE>
used to reduce the Employer contribution for such Participant in the
next limitation year and any succeeding limitation years if necessary.
(ii) If the Participant is not covered by the Plan at the end of
the Plan Year, the excess amount will be held unallocated in a suspense
account. The suspense account will be applied to reduce future Employer
contributions for all remaining Participants in the next limitation year
and each succeeding limitation year if necessary.
(iii) If a suspense account is in existence at any time during a
limitation year, it will not participate in any allocation of investment
gains and losses. All amounts held in suspense accounts must be
allocated to Participant's Accounts before any contributions may be made
to the Plan for the limitation year.
(iv) If a suspense account exists at the time of Plan
termination, amounts held in the suspense account that cannot be
allocated shall revert to the Employer.
5.1-3 For purposes of this Section 5.1 and the following Section
5.2, the "annual addition" to a Participant's accounts means the sum of
(i) Employer contributions, (ii) Employee contributions, if any, and
(iii) forfeitures. Annual additions to a defined contribution plan also
include amounts allocated, after March 31, 1984, to an individual
medical account, as defined in Section 415(l)(2) of the Internal Revenue
Code, which is part of a pension or annuity plan maintained by the
Employer, amounts derived from contributions paid or accrued after
December 31, 1985, in taxable years ending after such date, which are
attributable to post-retirement medical benefits allocated to the
separate account of a Key Employee under a welfare benefit fund, as
defined in Section 419A(d) of the Internal Revenue Code, maintained by
the Employer. For these purposes, annual additions to a defined
contribution plan shall not include the allocation of the excess amounts
remaining in the Unallocated Stock Fund subsequent to a sale of stock
from such fund in accordance with a transaction described in Section 8.1
of the Plan. The $30,000 limitations referred to shall, for each
limitation year ending after 1988, be automatically adjusted to the new
dollar limitations determined by the Commissioner of Internal Revenue
for the calendar year beginning in that limitation year.
5.1-4 Notwithstanding the foregoing, if no more than one-third of
the Employer contributions to the Plan for a year which are deductible
under Section 404(a)(9) of the Code are allocated to Highly Paid
Employees (within the meaning of Section 414(q) of the Internal Revenue
Code), the limitations imposed herein shall not apply to:
(i) forfeitures of Employer securities (within the meaning of
Section 409 of the Code) under the Plan if such securities were acquired
with the proceeds of a loan described in Section 404(a)(9)(A) of the
Code), or
(ii) Employer contributions to the Plan which are deductible
under Section 404(a)(9)(B) and charged against a Participant's Account.
5.1-5 If the Employer contributes amounts, on behalf of Employees
covered by this Plan, to other "defined contribution plans" as defined
in Section 3(34) of ERISA, the limitation on annual additions provided
in this Section shall be applied to annual additions in the aggregate to
this Plan and to such other plans. Reduction of annual additions, where
required, shall be accomplished first by reductions under such other
plan pursuant to the directions of the named fiduciary for
-10-
<PAGE>
administration of such other plans or under priorities, if any,
established under the terms of such other plans and then by allocating
any remaining excess for this Plan in the manner and priority set out
above with respect to this Plan.
5.1-6 A limitation year shall mean each 12 consecutive month
period beginning each January 1.
5.2 Coordinated Limitation With Other Plans. Aside from the limitation
---------------------------------------
prescribed by Section 5.1 with respect to the annual addition to a Participant's
Accounts for any single limitation year, if a Participant has ever participated
in one or more defined benefit plans maintained by an Employer or an affiliate,
then the accrued benefit shall be limited so that the sum of his defined plan
fraction and his defined contribution plan fraction does not exceed one. For
this purpose:
5.2-1 A Participant's defined contribution plan fraction with
respect to a Plan Year shall be a fraction, (i) the numerator of which
is the sum of the annual additions to his Accounts through the current
year, and (ii) the denominator of which is the sum of the lesser of the
following amounts-A- and -B- determined for the current limitation year
and each prior limitation year of Service with an Employer: -A- is 1.25
times the dollar limit in effect for the year under Section 415(c)(1)(A)
of the Code, or 1.0 times such dollar limitation if the Plan is top-
heavy, and -B- is 35 percent of the Participant's 415 Compensation for
such year. Further, if the Participant participated in any related
defined contribution plan in any years beginning before 1976, any excess
of the sum of the actual annual additions to the Participant's Accounts
for those years over the maximum annual additions which could have been
made in accordance with Section 5.1 shall be ignored, and voluntary
contributions by the Participant during those years shall be taken into
account as to each such year only to the extent that his average annual
voluntary contribution in those years exceeded 10 percent of his average
annual 415 Compensation in those years.
5.2-2 A Participant's defined benefit plan fraction with respect
to a limitation year shall be a fraction, (i) the numerator of which is
his projected annual benefit payable at normal retirement under the
Employers' defined benefit plans, and (ii) the denominator of which is
the lesser of (a) 1.25 times $90,000, or 1.0 times such dollar
limitation if the Plan is top-heavy, and (b) 1.4 times the Participant's
average 415 Compensation during his highest-paid three consecutive
limitation years.
5.3 Effect of Limitations. The Committee shall take whatever action
---------------------
may be necessary from time to time to assure compliance with the limitations set
forth in Section 5.1 and 5.2. Specifically, the Committee shall see that each
Employer restrict its contributions for any Plan Year to an amount which, taking
into account the amount of available forfeitures, may be completely allocated to
the Participants consistent with those limitations. Where the limitations would
otherwise be exceeded by any Participant, further allocations to the Participant
shall be curtailed to the extent necessary to satisfy the limitations. Where an
excessive amount is contributed on account of a mistake as to one or more
Participants' compensation, or there is an amount of forfeitures which may not
be credited in the Plan Year in which it becomes available, the amount shall be
corrected in accordance with Section 5.1-2 of the Plan.
5.4 Limitations as to Certain Participants. Aside from the
--------------------------------------
limitations set forth in Section 5.1 and 5.2, if the Plan acquires any Stock in
a transaction as to which a selling shareholder or the estate of a deceased
shareholder is claiming the benefit of Section 1042 of the Code, the Committee
shall see that none of such Stock, and no other assets in lieu of such Stock,
are allocated to the Accounts of certain Participants in order to comply with
Section 409(n) of the Code.
-11-
<PAGE>
This restriction shall apply at all times to a Participant who owns
(taking into account the attribution rules under Section 318(a) of the Code,
without regard to the exception for employee plan trusts in Section
318(a)(2)(B)(i) more than 25 percent of any class of stock of a corporation
which issued the Stock acquired by the Plan, or another corporation within the
same controlled group, as defined in Section 409(l)(4) of the Code (any such
class of stock hereafter called a "Related Class"). For this purpose, a
Participant who owns more than 25 percent of any Related Class at any time
within the one year preceding the Plan's purchase of the Stock shall be subject
to the restriction as to all allocations of the Stock, but any other Participant
shall be subject to the restriction only as to allocations which occur at a time
when he owns more than 25 percent of any Related Class.
Further, this restriction shall apply to the selling shareholder
claiming the benefit of Section 1042 and any other Participant who is related to
such a shareholder within the meaning of Section 267(b) of the Code, during the
period beginning on the date of sale and ending on the later of (1) the date
that is ten years after the date of sale, or (2) the date of the Plan allocation
attributable to the final payment of acquisition indebtedness incurred in
connection with the sale.
This restriction shall not apply to any Participant who is a lineal
descendant of a selling shareholder if the aggregate amounts allocated under the
Plan for the benefit of all such descendants do not exceed five percent of the
Stock acquired from the shareholder.
Section 6. Trust Fund and Its Investment.
-----------------------------
6.1 Creation of Trust Fund. All amounts received under the Plan from
----------------------
Employers and investments shall be held as the Trust Fund pursuant to the terms
of this Plan and of the Trust Agreement between the Bank and the Trustee. The
benefits described in this Plan shall be payable only from the assets of the
Trust Fund, and none of the Bank, any other Employer, its board of directors or
trustees, its stockholders, its officers, its employees, the Committee, and the
Trustee shall be liable for payment of any benefit under this Plan except from
the Trust Fund.
6.2 Stock Fund and Investment Fund. The Trust Fund held by the Trustee
------------------------------
shall be divided into the Stock Fund, consisting entirely of Stock, and the
Investment Fund, consisting of all assets of the Trust other than Stock. The
Trustee shall have no investment responsibility for the Stock Fund, but shall
accept any Employer contributions made in the form of Stock, and shall acquire,
sell, exchange, distribute, and otherwise deal with and dispose of Stock in
accordance with the instructions of the Committee. The Trustee shall have full
responsibility for the investment of the Investment Fund, except to the extent
such responsibility may be delegated from time to time to one or more investment
managers pursuant to Section 2.2 of the Trust Agreement, or to the extent the
Committee directs the Trustee to purchase Stock with the assets in the
Investment Fund.
6.3 Acquisition of Stock. From time to time the Committee may, in its
--------------------
sole discretion, direct the Trustee to acquire Stock from the issuing Employer
or from shareholders, including shareholders who are or have been Employees,
Participants, or fiduciaries with respect to the Plan. The Trustee shall pay for
such Stock no more than its fair market value, which shall be determined
conclusively by the Committee pursuant to Section 12.4. The Committee may direct
the Trustee to finance the acquisition of Stock by incurring or assuming
indebtedness to the seller or another party which indebtedness shall be called a
"Stock Obligation". The term "Stock Obligation" shall refer to a loan made to
the Plan by a disqualified person within the meaning of Section 4975(e)(2) of
the Code, or a loan to the Plan which is guaranteed by a disqualified person. A
Stock Obligation includes a direct loan of cash, a purchase-money transaction,
and an assumption of an obligation of a tax-qualified employee stock ownership
plan under
-12-
<PAGE>
Section 4975(e)(7) of the Code ("ESOP"). For these purposes, the term
"guarantee" shall include an unsecured guarantee and the use of assets of a
disqualified person as collateral for a loan, even though the use of assets may
not be a guarantee under applicable state law. An amendment of a Stock
Obligation in order to qualify as an "exempt loan" is not a refinancing of the
Stock Obligation or the making of another Stock Obligation. The term "exempt
loan" refers to a loan that satisfies the provisions of this paragraph. A "non-
exempt loan" fails to satisfy this paragraph. Any Stock Obligation shall be
subject to the following conditions and limitations:
6.3-1 A Stock Obligation shall be for a specific term, shall not
be payable on demand except in the event of default, and shall bear a
reasonable rate of interest.
6.3-2 A Stock Obligation may, but need not, be secured by a
collateral pledge of either the Stock acquired in exchange for the Stock
Obligation, or the Stock previously pledged in connection with a prior
Stock Obligation which is being repaid with the proceeds of the current
Stock Obligation. No other assets of the Plan and Trust may be used as
collateral for a Stock Obligation, and no creditor under a Stock
Obligation shall have any right or recourse to any Plan and Trust assets
other than Stock remaining subject to a collateral pledge.
6.3-3 Any pledge of Stock to secure a Stock Obligation must
provide for the release of pledged Stock in connection with payments on
the Stock obligations in the ratio prescribed in Section 4.2.
6.3-4 Repayments of principal and interest on any Stock
Obligation shall be made by the Trustee only from Employer cash
contributions designated for such payments, from earnings on such
contributions, and from cash dividends received on Stock, in the last
case, however, subject to the further requirements of Section 7.2.
6.3-5 In the event of default of a Stock Obligation, the value of
Plan assets transferred in satisfaction of the Stock Obligation must not
exceed the amount of the default. If the lender is a disqualified person
within the meaning of Section 4975 of the Code, a Stock Obligation must
provide for a transfer of Plan assets upon default only upon and to the
extent of the failure of the Plan to meet the payment schedule of said
Stock Obligation. For purposes of this paragraph, the making of a
guarantee does not make a person a lender.
6.4 Participants' Option to Diversify. The Committee shall provide for
---------------------------------
a procedure under which each Participant may, during the qualified election
period, elect to "diversify" a portion of the Employer Stock allocated to his
Account, as provided in Section 401(a)(28)(B) of the Code. An election to
diversity must be made on the prescribed form and filed with the Committee
within the period specified herein. For each of the first five (5) Plan years in
the qualified election period, the Participant may elect to diversify an amount
which does not exceed 25% of the number of shares allocated to his Account since
the inception of the Plan, less all shares with respect to which an election
under this Section has already been made. For the last year of the qualified
election period, the Participant may elect to have up to 50 percent of the value
of his Account committed to other investments, less all shares with respect to
which an election under this Section has already been made. The term "qualified
election period" shall mean the six (6) Plan Year period beginning with the
first Plan Year in which a Participant has both attained age 55 and completed 10
years of participation in the Plan. A Participant's election to diversify his
Account may be made within each year of the qualified election period and shall
continue for the 90-day period immediately following the last day of each year
in the qualified election period. Once a Participant makes such election, the
Plan must complete diversification in accordance with such election within 90
days after
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<PAGE>
the end of the period during which the election could be made for the Plan Year.
In the discretion of the Committee, the Plan may satisfy the diversification
requirement by any of the following methods:
6.4-1 The Plan may distribute all or part of the amount subject
to the diversification election.
6.4-2 The Plan may offer the Participant at least three other
distinct investment options, if available under the Plan. The other
investment options shall satisfy the requirements of Regulations under
Section 404(c) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA").
6.4-3 The Plan may transfer the portion of the Participant's
Account subject to the diversification election to another qualified
defined contribution plan of the Employer that offers at least three
investment options satisfying the requirements of the Regulations under
Section 404(c) of ERISA.
Section 7. Voting Rights and Dividends on Stock.
------------------------------------
7.1 Voting and Tendering of Stock. The Trustee generally shall vote
-----------------------------
all shares of Stock held under the Plan in accordance with the written
instructions of the Committee. However, if any Employer has registration-type
class of securities within the meaning of Section 409(e)(4) of the Code, or if a
matter submitted to the holders of the Stock involves a merger, consolidation,
recapitalization, reclassification, liquidation, dissolution, or sale of
substantially all assets of an entity, then (i) the shares of Stock which have
been allocated to Participants' Accounts shall be voted by the Trustee in
accordance with the Participants' written instructions, and (ii) the Trustee
shall vote any unallocated Stock and allocated Stock for which it has received
no voting instructions in the same proportions as it votes the allocated Stock
for which it has received instructions from Participants; provided, however,
that if an exempt loan, as defined in Section 4975(d) of the Code, is
outstanding and the Plan is in default on such exempt loan, as default is
defined in the loan documents, then to the extent that such loan documents
require the lender to exercise voting rights with respect to the unallocated
shares, the loan documents will prevail. In the event no shares of Stock have
been allocated to Participants' Accounts at the time Stock is to be voted and
any exempt loan which may be outstanding is not in default, each Participant
shall be deemed to have one share of Stock allocated to his or her Account for
the sole purpose of providing the Trustee with voting instructions.
Notwithstanding any provision hereunder to the contrary, all unallocated
shares of Stock must be voted by the Trustee in a manner determined by the
Trustee to be for the exclusive benefit of the Participants and Beneficiaries.
Whenever such voting rights are to be exercised, the Employers shall provide the
Trustee, in a timely manner, with the same notices and other materials as are
provided to other holders of the Stock, which the Trustee shall distribute to
the Participants. The Participants shall be provided with adequate opportunity
to deliver their instructions to the Trustee regarding the voting of Stock
allocated to their Accounts. The instructions of the Participants' with respect
to the voting of allocated shares hereunder shall be confidential.
7.1-1 In the event of a tender offer, Stock shall be tendered by
the Trustee in the same manner as set forth above with respect to the
voting of Stock. Notwithstanding any provision hereunder to the
contrary, Stock must be tendered by the Trustee in a manner determined
by the Trustee to be for the exclusive benefit of the Participants and
Beneficiaries.
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<PAGE>
7.2 Dividends on Stock. Dividends on Stock which are received by the
------------------
Trustee in the form of additional Stock shall be retained in the Stock Fund, and
shall be allocated among the Participant's Accounts and the Unallocated Stock
Fund in accordance with their holdings of the Stock on which the dividends have
been paid. Dividends on Stock credited to Participants' Accounts which are
received by the Trustee in the form of cash shall, at the direction of the
Employer paying the dividends, either (i) be credited to the Accounts in
accordance with Section 8.3 and invested as part of the Investment Fund, (ii) be
distributed immediately to the Participants in proportion with the Participants'
Stock Fund Account balance (iii) be distributed to the Participants within 90
days of the close of the Plan Year in which paid in proportion with the
Participants' Stock Fund Account balance or (iv) be used to make payments on the
Stock Obligation. If dividends on Stock allocated to a Participant's Account are
used to repay the Stock Obligation, Stock with a fair market value equal to the
dividends so used must be allocated to such Participant's Account in lieu of the
dividends. Dividends on Stock held in the Unallocated Stock Fund which are
received by the Trustee in the form of cash shall be allocated to Participants'
Investment Fund Accounts (pro rata based on the Participant's Account balance in
relation to all Participants' Account balances) and shall be applied as soon as
practicable to payments of principal and interest under the Stock Obligation
incurred with the purchase of the Stock.
Section 8. Adjustments to Accounts.
-----------------------
8.1 Adjustments for Transactions. An Employer contribution pursuant to
----------------------------
Section 4.1 shall be credited to the Participants' Accounts as of the last day
of the Plan Year for which it is contributed, in accordance with Section 4.1.
Stock released from the Unallocated Stock Fund upon the Trust's repayment of a
Stock Obligation pursuant to Section 4.2 shall be credited to the Participants'
Accounts as of the last day of the Plan Year in which the repayment occurred,
pro rata based on the cash applied from such Participant's Account relative to
the cash applied from all Participants' Accounts. Any excess amounts remaining
from the use of proceeds of a sale of Stock from the Unallocated Stock Fund to
repay a Stock Obligation shall be allocated as earnings of the Plan as of the
last day of the Plan Year in which the repayment occurred among the
Participants' Accounts in proportion to the opening balance in each Account. Any
benefit which is paid to a Participant or Beneficiary pursuant to Section 10
shall be charged to the Participant's Account as of the first day of the
Valuation Period in which it is paid. Any forfeiture or restoral shall be
charged or credited to the Participant's Account as of the first day of the
Valuation Period in which the forfeiture or restoral occurs pursuant to
Section 9.6.
8.2 Valuation of Investment Fund. As of each Valuation Date, the
----------------------------
Trustee shall prepare a balance sheet of the Investment Fund, recording each
asset (including any contribution receivable from an Employer) and liability at
its fair market value. Any liability with respect to short positions or options
and any item of accrued income or expense and unrealized appreciation or
depreciation shall be included; provided, however, that such an item may be
estimated or excluded if it is not readily ascertainable unless estimating or
excluding it would result in a material distortion. The Committee shall then
determine the net gain or loss of the Investment Fund since the preceding
Valuation Date, which shall mean the entire income of the Investment Fund,
including realized and unrealized capital gains and losses, net of any expenses
to be charged to the general Investment Fund and excluding any contributions by
the Employer. The determination of gain or loss shall be consistent with the
balance sheets of the Investment Fund for the current and preceding Valuation
Dates.
8.3 Adjustments for Investment Experience. Any net gain or loss of the
-------------------------------------
Investment Fund during a Valuation Period, as determined pursuant to Section
8.2, shall be allocated as of the last day of the Valuation Period among the
Participants' Accounts in proportion to the opening balance in each Account, as
adjusted for benefit payments and forfeitures during the Valuation Period,
without regard to
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<PAGE>
whatever Stock may be credited to an Account. Any cash dividends received on
Stock credited to Participant's Accounts shall be allocated as of the last day
of the Valuation Period among the Participants' Accounts based on the opening
balance in each Participant's Stock Fund Account.
Section 9. Vesting of Participants' Interests.
----------------------------------
9.1 Deferred Vesting in Accounts. A Participant's vested interest in
----------------------------
his Account shall be based on his Vesting Years in accordance with the following
Table, subject to the balance of this Section 9:
<TABLE>
<CAPTION>
Vesting Percentage of
Years Interest Vested
------- ---------------
<S> <C>
Fewer than 5 0%
5 or more 100%
</TABLE>
9.2 Computation of Vesting Years. For purposes of this Plan, a
----------------------------
"Vesting Year" means generally a calendar year in which an Employee has at least
1,000 Hours of Service, beginning with the first Plan Year in which the Employee
has completed an Hour of Service with the Employer, including Service with other
employers as provided in the definition of "Service". Notwithstanding the above,
an Employee who was employed with Gaston Federal Savings and Loan Association, a
federal mutual savings association (the "Mutual Association") which is the
predecessor to the Bank, shall receive credit for vesting purposes for each
calendar year of employment with the Mutual Association in which such Employee
completed 1,000 Hours of Service, not to exceed 5 years of credit for vesting
purpose (such years shall also be referred to as "Vesting Years"). However, a
Participant's Vesting Years shall be computed subject to the following
conditions and qualifications:
9.2-1 A Participant's Vesting Years shall not include any
Service prior to the date on which an Employee attains age 18.
9.2-2 A Participant's vested interest in his Account accumulated
before five (5) consecutive Breaks in Service shall be determined
without regard to any Service after such five consecutive Breaks in
Service. Further, if a Participant has five (5) consecutive Breaks in
Service before his interest in his Account has become vested to some
extent, pre-Break years of Service shall not be required to be taken
into account for purposes of determining his post-Break vested
percentage.
9.2-3 In the case of a Participant who has 5 or more consecutive
1-year Breaks in Service, the Participant's pre-break Service will count
in vesting of the Employer-derived post-break accrued benefit only if
either:
(i) such Participant has any nonforfeitable interest in the
accrued benefit attributable to Employer contributions at
the time of separation from Service, or
(ii) upon returning to Service the number of consecutive 1-year
Breaks in Service is less than the number of years of
Service.
9.2-4 Unless otherwise specifically excluded, a Participant's
Vesting Years shall include any period of active military duty to the
extent required by the Military Selective Service Act of 1967 (38 U.S.C.
Section 2021).
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<PAGE>
9.2-5 If any amendment changes the vesting schedule, including an
automatic change to or from a top-heavy vesting schedule, any
Participant with three (3) or more Vesting Years may, by filing a
written request with the Employer, elect to have his vested percentage
computed under the vesting schedule in effect prior to the amendment.
The election period must begin not later than the later of sixty (60)
days after the amendment is adopted, the amendment becomes effective, or
the Participant is issued written notice of the amendment by the
Employer or the Committee.
9.3 Full Vesting Upon Certain Events.
--------------------------------
9.3-1 Notwithstanding Section 9.1, a Participant's interest in his
Account shall fully vest on the Participant's Normal Retirement Date. The
Participant's interest shall also fully vest in the event that his Service is
terminated by Early Retirement, Disability or by death.
9.3-2 The Participant's interest in his Account shall also fully vest
in the event of a "Change in Control" of the Bank, or the Company. For these
purposes, "Change in Control" shall mean a change in control of a nature that:
(i) would be required to be reported in response to Item 1(a) of the current
report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii)
results in a Change in Control of the Bank or the Company within the meaning of
the Home Owners Loan Act, as amended ("HOLA"), and applicable rules and
regulations promulgated thereunder, as in effect at the time of the Change in
Control; or (iii) without limitation such a Change in Control shall be deemed to
have occurred at such time as (a) any "person" (as the term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner"(as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 25% or more of the combined voting power
of Company's outstanding securities except for any securities purchased by the
Bank's employee stock ownership plan or trust; or (b) individuals who constitute
the Board on the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election was approved by a vote of
at least three-quarters of the directors comprising the Incumbent Board, or
whose nomination for election by the Company's stockholders was approved by the
same Nominating Committee serving under an Incumbent Board, shall be, for
purposes of this clause (b), considered as though he were a member of the
Incumbent Board; or (c) a plan of reorganization, merger, consolidation, sale of
all or substantially all the assets of the Bank or the Company or similar
transaction in which the Bank or Company is not the surviving institution
occurs; or (d) a proxy statement soliciting proxies from stockholders of the
Company, by someone other than the current management of the Company, seeking
stockholder approval of a plan of reorganization, merger or consolidation of the
Company or similar transaction with one or more corporations as a result of
which the outstanding shares of the class of securities then subject to the Plan
are to be exchanged for or converted into cash or property or securities not
issued by the Company; or (e) a tender offer is made for 25% or more of the
voting securities of the Company and the shareholders owning beneficially or of
record 25% or more of the outstanding securities of the Company have tendered or
offered to sell their shares pursuant to such tender offer and such tendered
shares have been accepted by the tender offeror.
9.4 Full Vesting Upon Plan Termination. Notwithstanding Section 9.1,
----------------------------------
a Participant's interest in his Account shall fully vest if he is in active
Service upon termination of this Plan or upon the permanent and complete
discontinuance of contributions by his Employer. In the event of a partial
termination, the interest of each affected Participant who is in Service shall
fully vest with respect to that part of the Plan which is terminated.
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<PAGE>
9.5 Forfeiture, Repayment, and Restoral. If a Participant's Service
-----------------------------------
terminates before his interest in his Account is fully vested, that portion
which has not vested shall be forfeited if he either (i) receives a distribution
of his entire vested interest pursuant to Section 10.1, or (ii) incurs five (5)
consecutive one year Breaks In Service. If a Participant's Service terminates
prior to having any portion of his Account become vested, such Participant shall
be deemed to have a received a distribution of his vested interest as of the
Valuation Date next following his termination of Service.
If a Participant who has received his entire vested interest returns to
Service before he has five (5) consecutive Breaks in Service, he may repay to
the Trustee an amount equal to the distribution. The Participant may repay such
amount at any time within five years after he has returned to Service. The
amount shall be credited to his Account at the time it is repaid; an additional
amount equal to that portion of his Account which was previously forfeited shall
be restored to his Account at the same time from other Employees' forfeitures
and, if such forfeitures are insufficient, from a special contribution by his
Employer for that year. A Participant who was deemed to have received a
distribution of his vested interest in the Plan shall have his Account restored
as of the first day on which he performs an Hour of Service after his return.
9.6 Accounting for Forfeitures. If a portion of a Participant's
--------------------------
Account is forfeited, Stock allocated to said Participant's Account shall be
forfeited only after other assets are forfeited. If interests in more than one
class of Stock have been allocated to a Participant's account, the Participant
must be treated as forfeiting the same proportion of each class of Stock. A
forfeiture shall be charged to the Participant's Account as of the first day of
the first Valuation Period in which the forfeiture becomes certain pursuant to
Section 9.5. Except as otherwise provided in that Section, a forfeiture shall be
added to the contributions of the terminated Participant's Employer which are to
be credited to other Participants pursuant to Section 4.1 as of the last day of
the Plan Year in which the forfeiture becomes certain.
9.7 Vesting and Nonforfeitability. A Participant's interest in his
-----------------------------
Account which has become vested shall be nonforfeitable for any reason.
Section 10. Payment of Benefits.
-------------------
10.1 Benefits for Participants. For a Participant whose Service ends
-------------------------
for any reason, distribution will be made to or for the benefit of the
Participant or, in the case of the Participant's death, his Beneficiary, by
payment in a lump sum, in accordance with Section 10.2.
Notwithstanding the foregoing, if the balance credited to his Account
exceeds $5,000, his benefits shall not be paid before the latest of his 65th
birthday or the tenth anniversary of the year in which he commenced
participation in the Plan unless he elects an early payment date in a written
election filed with the Committee. A Participant may modify such an election at
any time, provided any new benefit payment date is at least 30 days after a
modified election is delivered to the Committee, subject to the provisions of
Section 10.11 hereof.
10.2 Time for Distribution.
---------------------
10.2.1 Distribution of the balance of a Participant's Account
generally shall commence as soon as practicable after the last day of
the Plan Year in which the Participant terminates Service for any
reason, but no later than one year after the close of the Plan Year:
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<PAGE>
(i) in which the Participant separates from Service by
reason of Normal Retirement, Disability, or death; or
(ii) which is the fifth Plan Year following the year in
which the Participant resigns or is dismissed, unless he is
reemployed before such date.
10.2.2 Unless the Participant elects otherwise, the
distribution of the balance of a Participant's Account shall commence not later
than the 60th day after the latest of the close of the Plan Year in which -
(i) the Participant attains the age of 65;
(ii) occurs the tenth anniversary of the year in which
the Participant commenced participation in the Plan; or
(iii) the Participant terminates his Service with the
Employer.
10.2.3 Notwithstanding anything to the contrary, (1) with
respect to a 5-percent owner (as defined in Code Section 416),
distribution of a Participant's Account shall commence (whether or not
he remains in the employ of the Employer) not later than the April 1 of
the calendar year next following the calendar year in which the
Participant attains age 70-1/2, and (2) with respect to all other
Participants, payment of a Participant's benefit will commence not later
than April 1 of the calendar year following the calendar year in which
the Participant attains age 70-1/2, or, if later, the year in which the
Participant retires. A Participant's benefit from that portion of his
Account committed to the Investment Fund shall be calculated on the
basis of the most recent Valuation Date before the date of payment.
10.2.4 Distribution of a Participant's Account balance after
his death shall comply with the following requirements:
(i) If a Participant dies before his distributions
have commenced, distribution of his Account to his Beneficiary
shall commence not later than one year after the end of the Plan
Year in which the Participant died, however, if the Participant's
Beneficiary is his surviving Spouse, distributions may commence
on the date on which the Participant would have attained age
70-1/2.
(ii) If a married Participant dies before his benefit
payments begin, then unless he has specifically elected otherwise
the Committee shall cause the balance in his Account to be paid
to his Spouse. No election by a married Participant of a
different Beneficiary shall be valid unless the election is
accompanied by the Spouse's written consent, which (i) must
acknowledge the effect of the election, (ii) must explicitly
provide either that the designated Beneficiary may not
subsequently be changed by the Participant without the Spouse's
further consent, or that it may be changed without such consent,
and (iii) must be witnessed by the Committee, its representative,
or a notary public. (This requirement shall not apply if the
Participant establishes to the Committee's satisfaction that the
Spouse may not be located.)
10.3 Marital Status. The Committee shall from time to time take
--------------
whatever steps it deems appropriate to keep informed of each Participant's
marital status. Each Employer shall provide the
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<PAGE>
Committee with the most reliable information in the Employer's possession
regarding its Participants' marital status, and the Committee may, in its
discretion, require a notarized affidavit from any Participant as to his marital
status. The Committee, the Plan, the Trustee, and the Employers shall be fully
protected and discharged from any liability to the extent of any benefit
payments made as a result of the Committee's good faith and reasonable reliance
upon information obtained from a Participant and his Employer as to his marital
status.
10.4 Delay in Benefit Determination. If the Committee is unable to
------------------------------
determine the benefits payable to a Participant or Beneficiary on or before the
latest date prescribed for payment pursuant to Section 10.1 or 10.2, the
benefits shall in any event be paid within 60 days after they can first be
determined, with whatever makeup payments may be appropriate in view of the
delay.
10.5 Accounting for Benefit Payments. Any benefit payment shall be
-------------------------------
charged to the Participant's Account as of the first day of the Valuation Period
in which the payment is made.
10.6 Options to Receive and Sell Stock. Unless ownership of virtually
---------------------------------
all Stock is restricted to active Employees and qualified retirement plans for
the benefit of Employees pursuant to the certificates of incorporation or by-
laws of the Employers issuing Stock, a terminated Participant or the Beneficiary
of a deceased Participant may instruct the Committee to distribute the
Participant's entire vested interest in his Account in the form of Stock. In
that event, the Committee shall apply the Participant's vested interest in the
Investment Fund to purchase sufficient Stock from the Stock Fund or from any
owner of Stock to make the required distribution. Alternatively, a terminated
Participant or the Beneficiary of a deceased Participant may instruct the
Committee to distribute the Participant's entire vested interest in his Account
in cash. In all other cases, the Participant's vested interest in the Stock Fund
shall be distributed in shares of Stock, and his vested interest in the
Investment Fund shall be distributed in cash.
Any Participant who receives Stock pursuant to Section 10.1, and any
person who has received Stock from the Plan or from such a Participant by reason
of the Participant's death or incompetency, by reason of divorce or separation
from the Participant, or by reason of a rollover contribution described in
Section 402(a)(5) of the Code, shall have the right to require the Employer
which issued the Stock to purchase the Stock for its current fair market value
(hereinafter referred to as the "put right"). The put right shall be exercisable
by written notice to the Committee during the first 60 days after the Stock is
distributed by the Plan, and, if not exercised in that period, during the first
60 days in the following Plan Year after the Committee has communicated to the
Participant its determination as to the Stock's current fair market value.
However, the put right shall not apply to the extent that the Stock, at the time
the put right would otherwise be exercisable, may be sold on an established
market in accordance with federal and state securities laws and regulations.
Similarly, the put option shall not apply with respect to the portion of a
Participant's Account which the Employee elected to have reinvested under Code
Section 401(a)(28)(B). If the put right is exercised, the Trustee may, if so
directed by the Committee in its sole discretion, assume the Employer's rights
and obligations with respect to purchasing the Stock. Notwithstanding anything
herein to the contrary, in the case of a plan established by a Bank (as defined
in Code Section 581), the put option shall not apply if prohibited by a federal
or state law and Participants are entitled to elect their benefits be
distributed in cash.
The Employer or the Trustee, as the case may be, may elect to pay for
the Stock in equal periodic installments, not less frequently than annually,
over a period not longer than five years from the day after the put right is
exercised, with adequate security and interest at a reasonable rate on the
unpaid balance, all such terms to be set forth in a promissory note delivered to
the seller with normal terms as to acceleration upon any uncured default.
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<PAGE>
Nothing contained herein shall be deemed to obligate any Employer to
register any Stock under any federal or state securities law or to create or
maintain a public market to facilitate the transfer or disposition of any Stock.
The put right described herein may only be exercised by a person described in
the second preceding paragraph, and may not be transferred with any Stock to any
other person. As to all Stock purchased by the Plan in exchange for any Stock
Obligation, the put right shall be nonterminable. The put right for Stock
acquired through a Stock Obligation shall continue with respect to such Stock
after the Stock Obligation is repaid or the Plan ceases to be an employee stock
ownership plan.
10.7 Restrictions on Disposition of Stock. Except in the case of Stock
------------------------------------
which is traded on an established market, a Participant who receives Stock
pursuant to Section 10.1, and any person who has received Stock from the Plan or
from such a Participant by reason of the Participant's death or incompetency, by
reason of divorce or separation from the Participant, or by reason of a rollover
contribution described in Section 402(a)(5) of the Code, shall, prior to any
sale or other transfer of the Stock to any other person, first offer the Stock
to the issuing Employer and to the Plan at the greater of (i) its current fair
market value, or (ii) the purchase price offered in good faith by an independent
third party purchaser. This restriction shall apply to any transfer, whether
voluntary, involuntary, or by operation of law, and whether for consideration or
gratuitous. Either the Employer or the Trustee may accept the offer within 14
days after it is delivered. Any Stock distributed by the Plan shall bear a
conspicuous legend describing the right of first refusal under this Section
10.7, as well as any other restrictions upon the transfer of the Stock imposed
by federal and state securities laws and regulations.
10.8 Continuing Loan Provisions; Creations of Protections and Rights.
---------------------------------------------------------------
Except as otherwise provided in Sections 10.6 and 10.7 and this Section, no
shares of Employer Stock held or distributed by the Trustee may be subject to a
put, call or other option, or buy-sell arrangement. The provisions of this
Section shall continue to by applicable to such Stock even if the Plan ceases to
be an employee stock ownership plan under Section 4975(e)(7) of the Code.
10.9 Direct Rollover of Eligible Distribution. A Participant or
----------------------------------------
distributee may elect, at the time and in the manner prescribed by the Trustee
or the Committee, to have any portion of an eligible rollover distribution paid
directly to an eligible retirement plan specified by the Participant or
distributee in a direct rollover.
10.9-1 An "eligible rollover" is any distribution that does not
include: any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life
(or life expectancy) of the distributee or the joint lives (or joint
life expectancies) of the Participant and the Participant's Beneficiary,
or for a specified period of ten years or more; any distribution to the
extent such distribution is required under Code Section 401(a)(9); and
the portion of any distribution that is not included in gross income
(determined without regard to the exclusion for net unrealized
appreciation with respect to employer securities).
10.9-2 An "eligible retirement plan" is an individual
retirement account described in Code Section 401(a), an individual
retirement annuity described in Code Section 408(b), an annuity plan
described in Code Section 403(a), or a qualified trust described in Code
Section 401(a), that accepts the distributee's eligible rollover
distribution. However, in the case of an eligible rollover distribution
to the surviving Spouse, an eligible retirement plan is an individual
retirement account or individual retirement annuity.
10.9-3 A "direct rollover" is a payment by the Plan to the
eligible retirement plan specified by the distributee.
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10.9-4 The term "distributee" shall refer to a deceased
Participant's Spouse or a Participant's former Spouse who is the alternate
payee under a qualified domestic relations order, as defined in Code
Section 414(p).
10.10 In Service Distribution of Roll-over Account. Upon the written
--------------------------------------------
election of a Participant delivered to the Committee, all or any portion of the
amounts held in the Participant's Roll-over Account, shall be distributed to the
Participant at any time within 30 days or as soon thereafter as is reasonably
practicable.
10.11 Waiver of 30 Day Period After Notice of Distribution. If a
----------------------------------------------------
distribution is one to which Sections 401(a)(11) and 417 of the Code do not
apply, such distribution may commence less than 30 days after the notice
required under Section 1.411(a)-11(c) of the Income Tax Regulations is given,
provided that:
(i) the Trustee or Administrative Committee, as
applicable, clearly informs the Participant that the
Participant has a right to a period of at least 30
days after receiving the notice to consider the
decision of whether or not to elect a distribution
(and, if applicable, a particular option), and
(ii) the Participant, after receiving the notice,
affirmatively elects a distribution.
Section 11. Rules Governing Benefit Claims and Review of Appeals.
----------------------------------------------------
11.1 Claim for Benefits. Any Participant or Beneficiary who qualifies
------------------
for the payment of benefits shall file a claim for his benefits with the
Committee on a form provided by the Committee. The claim, including any
election of an alternative benefit form, shall be filed at least 30 days before
the date on which the benefits are to begin. If a Participant or Beneficiary
fails to file a claim by the day before the date on which benefits become
payable, he shall be presumed to have filed a claim for payment for the
Participant's benefits in the standard form prescribed by Sections 10.1 or 10.2
11.2 Notification by Committee. Within 90 days after receiving a claim
-------------------------
for benefits (or within 180 days, if special circumstances require an extension
of time and written notice of the extension is given to the Participant or
Beneficiary within 90 days after receiving the claim for benefits), the
Committee shall notify the Participant or Beneficiary whether the claim has been
approved or denied. If the Committee denies a claim in any respect, the
Committee shall set forth in a written notice to the Participant or Beneficiary:
(i) each specific reason for the denial;
(ii) specific references to the pertinent Plan provisions on
which the denial is based;
(iii) a description of any additional material or information
which could be submitted by the Participant or Beneficiary to support his
claim, with an explanation of the relevance of such information; and
(iv) an explanation of the claims review procedures set forth in
Section 11.3.
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11.3 Claims Review Procedure. Within 60 days after a Participant or
-----------------------
Beneficiary receives notice from the Committee that his claim for benefits has
been denied in any respect, he may file with the Committee a written notice of
appeal setting forth his reasons for disputing the Committee's determination.
In connection with his appeal the Participant or Beneficiary or his
representative may inspect or purchase copies of pertinent documents and records
to the extent not inconsistent with other Participants' and Beneficiaries'
rights of privacy. Within 60 days after receiving a notice of appeal from a
prior determination (or within 120 days, if special circumstances require an
extension of time and written notice of the extension is given to the
Participant or Beneficiary and his representative within 60 days after receiving
the notice of appeal), the Committee shall furnish to the Participant or
Beneficiary and his representative, if any, a written statement of the
Committee's final decision with respect to his claim, including the reasons for
such decision and the particular Plan provisions upon which it is based.
Section 12. The Committee and Its Functions.
-------------------------------
12.1 Authority of Committee. The Committee shall be the "plan
----------------------
administrator" within the meaning of ERISA and shall have exclusive
responsibility and authority to control and manage the operation and
administration of the Plan, including the interpretation and application of its
provisions, except to the extent such responsibility and authority are otherwise
specifically (i) allocated to the Bank, the Employers, or the Trustee under the
Plan and Trust Agreement, (ii) delegated in writing to other persons by the
Bank, the Employers, the Committee, or the Trustee, or (iii) allocated to other
parties by operation of law. The Committee shall have exclusive responsibility
regarding decisions concerning the payment of benefits under the Plan. The
Committee shall have no investment responsibility with respect to the Investment
Fund except to the extent, if any, specifically provided in the Trust Agreement.
In the discharge of its duties, the Committee may employ accountants, actuaries,
legal counsel, and other agents (who also may be employed by an Employer or the
Trustee in the same or some other capacity) and may pay their reasonable
expenses and compensation.
12.2 Identity of Committee. The Committee shall consists of three or
---------------------
more individuals selected by the Bank. Any individual, including a director,
trustee, shareholder, officer, or Employee of an Employer, shall be eligible to
serve as a member of the Committee. The Bank shall have the power to remove any
individual serving on the Committee at any time without cause upon 10 days
written notice, and any individual may resign from the Committee at any time
upon 10 days written notice to the Bank. The Bank shall notify the Trustee of
any change in membership of the Committee.
12.3 Duties of Committee. The Committee shall keep whatever records may
-------------------
be necessary to implement the Plan and shall furnish whatever reports may be
required from time to time by the Bank. The Committee shall furnish to the
Trustee whatever information may be necessary to properly administer the Trust.
The Committee shall see to the filing with the appropriate government agencies
of all reports and returns required of the Plan Committee under ERISA and other
laws.
Further, the Committee shall have exclusive responsibility and authority
with respect to the Plan's holdings of Stock and shall direct the Trustee in all
respects regarding the purchase, retention, sale, exchange, and pledge of Stock
and the creation and satisfaction of Stock Obligations. The Committee shall at
all times act consistently with the Bank's long-term intention that the Plan, as
an employee stock ownership plan, be invested primarily in Stock. Subject to
the direction of the Board as to the application of Employer contributions to
Stock Obligations, and subject to the provisions of Sections 6.4 and 10.6 as to
Participants' rights under certain circumstances to have their Accounts invested
in Stock or in assets other than Stock, the Committee shall determine in its
sole discretion the extent to which assets of the Trust shall be used to repay
Stock Obligations, to purchase Stock, or to invest in other assets to be
selected by
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<PAGE>
the Trustee or an investment manager. No provision of the Plan relating to the
allocation or vesting of any interests in the Stock Fund or the Investment Fund
shall restrict the Committee from changing any holdings of the Trust, whether
the changes involve an increase or a decrease in the Stock or other assets
credited to Participants' Accounts. In determining the proper extent of the
Trust's investment in Stock, the Committee shall be authorized to employ
investment counsel, legal counsel, appraisers, and other agents to pay their
reasonable expenses and compensation.
12.4 Valuation of Stock. If the valuation of any Stock is not
------------------
established by reported trading on a generally recognized public market, the
Committee shall have the exclusive authority and responsibility to determine its
value for all purposes under the Plan. Such value shall be determined as of
each Valuation Date, and on any other date as of which the Plan purchases or
sells such Stock. The Committee shall use generally accepted methods of valuing
stock of similar corporations for purposes of arm's length business and
investment transactions, and in this connection the Committee shall obtain, and
shall be protected in relying upon, the valuation of such Stock as determined by
an independent appraiser experienced in preparing valuations of similar
businesses.
12.5 Compliance with ERISA. The Committee shall perform all acts
---------------------
necessary to comply with ERISA. Each individual member or employee of the
Committee shall discharge his duties in good faith and in accordance with the
applicable requirements of ERISA.
12.6 Action by Committee. All actions of the Committee shall be governed
-------------------
by the affirmative vote of a number of members which is a majority of the total
number of members currently appointed, including vacancies. The members of the
Committee may meet informally and may take any action without meeting as a
group.
12.7 Execution of Documents. Any instrument executed by the Committee
----------------------
shall be signed by any member or employee of the Committee.
12.8 Adoption of Rules. The Committee shall adopt such rules and
-----------------
regulations of uniform applicability as it deems necessary or appropriate for
the proper administration and interpretation of the Plan.
12.9 Responsibilities to Participants. The Committee shall determine
--------------------------------
which Employees qualify to enter the Plan. The Committee shall furnish to each
eligible Employee whatever summary plan descriptions, summary annual reports,
and other notices and information may be required under ERISA. The Committee
also shall determine when a Participant or his Beneficiary qualifies for the
payment of benefits under the Plan. The Committee shall furnish to each such
Participant or Beneficiary whatever information is required under ERISA (or is
otherwise appropriate) to enable the Participant or Beneficiary to make whatever
elections may be available pursuant to Sections 6 and 10, and the Committee
shall provide for the payment of benefits in the proper form and amount from the
assets of the Trust Fund. The Committee may decide in its sole discretion to
permit modifications of elections and to defer or accelerate benefits to the
extent consistent with applicable law and the best interests of the individuals
concerned.
12.10 Alternative Payees in Event of Incapacity. If the Committee finds
-----------------------------------------
at any time that an individual qualifying for benefits under this Plan is a
minor or is incompetent, the Committee may direct the benefits to be paid, in
the case of a minor, to his parents, his legal guardian, or a custodian for him
under the Uniform Gifts to Minors Act, or, in the case of an incompetent, to his
spouse, or his legal guardian, the payments to be used for the individual's
benefit. The Committee and the Trustee shall not be obligated to inquire as to
the actual use of the funds by the person receiving them under this Section
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<PAGE>
12.10, and any such payment shall completely discharge the obligations of the
Plan, the Trustee, the Committee, and the Employers to the extent of the
payment.
12.11 Indemnification by Employers. Except as separately agreed in
----------------------------
writing, the Committee, and any member or employee of the Committee, shall be
indemnified and held harmless by the Employer, jointly and severally, to the
fullest extent permitted by law against any and all costs, damages, expenses,
and liabilities reasonably incurred by or imposed upon it or him in connection
with any claim made against it or him or in which it or he may be involved by
reason of its or his being, or having been, the Committee, or a member or
employee of the Committee, to the extent such amounts are not paid by insurance.
12.12 Nonparticipation by Interested Member. Any member of the Committee
-------------------------------------
who also is a Participant in the Plan shall take no part in any determination
specifically relating to his own participation or benefits, unless his
abstention would leave the Committee incapable of acting on the matter.
Section 13. Adoption, Amendment, or Termination of the Plan.
-----------------------------------------------
13.1 Adoption of Plan by Other Employers. With the consent of the Bank,
-----------------------------------
any entity may become a participating Employer under the Plan by (i) taking such
action as shall be necessary to adopt the Plan, (ii) becoming a party to the
Trust Agreement establishing the Trust Fund, and (iii) executing and delivering
such instruments and taking such other action as may be necessary or desirable
to put the Plan into effect with respect to the entity's Employees.
13.2 Adoption of Plan by Successor. In the event that any Employer
-----------------------------
shall be reorganized by way of merger, consolidation, transfer of assets or
otherwise, so that an entity other than an Employer shall succeed to all or
substantially all of the Employer's business, the successor entity may be
substituted for the Employer under the Plan by adopting the Plan and becoming a
party to the Trust Agreement. Contributions by the Employer shall be
automatically suspended from the effective date of any such reorganization until
the date upon which the substitution of the successor entity for the Employer
under the Plan becomes effective. If, within 90 days following the effective
date of any such reorganization, the successor entity shall not have elected to
become a party to the Plan, or if the Employer shall adopt a plan of complete
liquidation other than in connection with a reorganization, the Plan shall be
automatically terminated with respect to Employees of the Employer as of the
close of business on the 90th day following the effective date of the
reorganization, or as of the close of business on the date of adoption of a plan
of complete liquidation, as the case may be.
13.3 Plan Adoption Subject to Qualification. Notwithstanding any other
--------------------------------------
provision of the Plan, the adoption of the Plan and the execution of the Trust
Agreement are conditioned upon their being determined initially by the Internal
Revenue Service to meet the qualification requirements of Section 401(a) of the
Code, so that the Employers may deduct currently for federal income tax purposes
their contributions to the Trust and so that the Participants may exclude the
contributions from their gross income and recognize income only when they
receive benefits. In the event that this Plan is held by the Internal Revenue
Service not to qualify initially under Section 401(a), the Plan may be amended
retroactively to the earliest date permitted by U.S. Treasury Regulations in
order to secure qualification under Section 401(a). If this Plan is held by the
Internal Revenue Service not to qualify initially under Section 401(a) either as
originally adopted or as amended, each Employer's contributions to the Trust
under this Plan (including any earnings thereon) shall be returned to it and
this Plan shall be terminated. In the event that this Plan is amended after its
initial qualification and the Plan as amended is held by the Internal Revenue
Service not to qualify under Section 401(a), the amendment may be modified
retroactively to the
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<PAGE>
earliest date permitted by U.S. Treasury Regulations in order to secure approval
of the amendment under Section 401(a).
13.4 Right to Amend or Terminate. The Bank intends to continue this Plan
---------------------------
as a permanent program. However, each participating Employer separately reserves
the right to suspend, supersede, or terminate the Plan at any time and for any
reason, as it applies to that Employer's Employees, and the Bank reserves the
right to amend, suspend, supersede, merge, consolidate, or terminate the Plan at
any time and for any reason, as it applies to the Employees of each Employer. No
amendment, suspension, supersession, merger, consolidation, or termination of
the Plan shall (i) reduce any Participant's or Beneficiary's proportionate
interest in the Trust Fund, (ii) reduce or restrict, either directly or
indirectly, the benefit provided any Participant prior to the amendment, or
(iii) divert any portion of the Trust Fund to purposes other than the exclusive
benefit of the Participants and their Beneficiaries prior to the satisfaction of
all liabilities under the Plan. Moreover, there shall not be any transfer of
assets to a successor plan or merger or consolidation with another plan unless,
in the event of the termination of the successor plan or the surviving plan
immediately following such transfer, merger, or consolidation, each participant
or beneficiary would be entitled to a benefit equal to or greater than the
benefit he would have been entitled to if the plan in which he was previously a
participant or beneficiary had terminated immediately prior to such transfer,
merger, or consolidation. Following a termination of this Plan by the Bank, the
Trustee shall continue to administer the Trust and pay benefits in accordance
with the Plan as amended from time to time and the Committee's instructions.
Section 14. Miscellaneous Provisions.
------------------------
14.1 Plan Creates No Employment Rights. Nothing in this Plan shall be
---------------------------------
interpreted as giving any Employee the right to be retained as an Employee by an
Employer, or as limiting or affecting the rights of an Employer to control its
Employees or to terminate the Service of any Employee at any time and for any
reason, subject to any applicable employment or collective bargaining
agreements.
14.2 Nonassignability of Benefits. No assignment, pledge, or other
----------------------------
anticipation of benefits from the Plan will be permitted or recognized by the
Employer, the Committee, or the Trustee. Moreover, benefits from the Plan shall
not be subject to attachment, garnishment, or other legal process for debts or
liabilities of any Participant or Beneficiary, to the extent permitted by law.
This prohibition on assignment or alienation shall apply to any judgment,
decree, or order (including approval of a property settlement agreement) which
relates to the provision of child support, alimony, or property rights to a
present or former spouse, child or other dependent of a Participant pursuant to
a State domestic relations or community property law, unless the judgment,
decree, or order is determined by the Committee to be a qualified domestic
relations order within the meaning of Section 414(p) of the Code, as more fully
set forth in Section 14.12 hereof.
14.3 Limit of Employer Liability. The liability of the Employer with
---------------------------
respect to Participants under this Plan shall be limited to making contributions
to the Trust from time to time, in accordance with Section 4.
14.4 Treatment of Expenses. All expenses incurred by the Committee and
---------------------
the Trustee in connection with administering this Plan and Trust Fund shall be
paid by the Trustee from the Trust Fund to the extent the expenses have not been
paid or assumed by the Employer or by the Trustee.
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<PAGE>
14.5 Number and Gender. Any use of the singular shall be interpreted to
-----------------
include the plural, and the plural the singular. Any use of the masculine,
feminine, or neuter shall be interpreted to include the masculine, feminine, or
neuter, as the context shall require.
14.6 Nondiversion of Assets. Except as provided in Sections 5.3 and
----------------------
13.3, under no circumstances shall any portion of the Trust Fund be diverted to
or used for any purpose other than the exclusive benefit of the Participants and
their Beneficiaries prior to the satisfaction of all liabilities under the Plan.
14.7 Separability of Provisions. If any provision of this Plan is held
--------------------------
to be invalid or unenforceable, the other provisions of the Plan shall not be
affected but shall be applied as if the invalid or unenforceable provision had
not been included in the Plan.
14.8 Service of Process. The agent for the service of process upon the
------------------
Plan shall be the president of the Bank, or such other person as may be
designated from time to time by the Bank.
14.9 Governing State Law. This Plan shall be interpreted in accordance
-------------------
with the laws of the State of North Carolina to the extent those laws are
applicable under the provisions of ERISA.
14.10 Employer Contributions Conditioned on Deductibility. Employer
---------------------------------------------------
Contributions to the Plan are conditioned on deductibility under Code Section
404. In the event that the Internal Revenue Service shall determine that all or
any portion of an Employer Contribution is not deductible under that Section,
the nondeductible portion shall be returned to the Employer within one year of
the disallowance of the deduction.
14.11 Unclaimed Accounts. Neither the Employer nor the Trustees shall
------------------
be under any obligation to search for, or ascertain the whereabouts of, any
Participant or Beneficiary. The Employer or the Trustees, by certified or
registered mail addressed to his last known address of record with the Employer,
shall notify any Participant or Beneficiary that he is entitled to a
distribution under this Plan, and the notice shall quote the provisions of this
Section. If the Participant or Beneficiary fails to claim his benefits or make
his whereabouts known in writing to the Employer or the Trustees within seven
(7) calendar years after the date of notification, the benefits of the
Participant or Beneficiary under the Plan will be disposed of as follows:
(a) If the whereabouts of the Participant is unknown but the
whereabouts of the Participant's Beneficiary is known to the Trustees,
distribution will be made to the Beneficiary.
(b) If the whereabouts of the Participant and his Beneficiary are
unknown to the Trustees, the Plan will forfeit the benefit, provided that
the benefit is subject to a claim for reinstatement if the Participant or
Beneficiary make a claim for the forfeited benefit.
Any payment made pursuant to the power herein conferred upon the Trustees
shall operate as a complete discharge of all obligations of the Trustees, to the
extent of the distributions so made.
14.12 Qualified Domestic Relations Order. Section 14.2 shall not apply
----------------------------------
to a "qualified domestic relations order" defined in Code Section 414(p), and
such other domestic relations orders permitted to be so treated by Administrator
under the provisions of the Retirement Equity Act of 1984. Further, to the
extent provided under a "qualified domestic relations order", a former Spouse of
a Participant shall be treated as the Spouse or surviving Spouse for all
purposes under the Plan.
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<PAGE>
In the case of any domestic relations order received by the Plan:
(a) The Employer or the Plan Committee shall promptly notify the
Participant and any other alternate payee of the receipt of such order and
the Plan's procedures for determining the qualified status of domestic
relations orders, and
(b) Within a reasonable period after receipt of such order, the
Employer or the Plan Committee shall determine whether such order is a
qualified domestic relations order and notify the Participant and each
alternate payee of such determination. The Employer or the Plan Committee
shall establish reasonable procedures to determine the qualified status of
domestic relations orders and to administer distributions under such
qualified orders.
During any period in which the issue of whether a domestic relations order
is a qualified domestic relations order is being determined (by the Employer or
Plan Committee, by a court of competent jurisdiction, or otherwise), the
Employer or the Plan Committee shall segregate in a separate account in the Plan
or in an escrow account the amounts which would have been payable to the
alternate payee during such period if the order had been determined to be a
qualified domestic relations order. If within eighteen (18) months the order
(or modification thereof) is determined to be a qualified domestic relations
order, the Employer or the Plan Committee shall pay the segregated amounts (plus
any interest thereon) to the person or persons entitled thereto. If within
eighteen (18) months it is determined that the order is not a qualified domestic
relations order, or the issue as to whether such order is a qualified domestic
relations order is not resolved, then the Employer or the Plan Committee shall
pay the segregated amounts (plus any interest thereon) to the person or persons
who would have been entitled to such amounts if there had been no order. Any
determination that an order is a qualified domestic relations order which is
made after the close of the eighteen (18) month period shall be applied
prospectively only. The term "alternate payee" means any Spouse, former Spouse,
child or other dependent of a Participant who is recognized by a domestic
relations order as having a right to receive all, or a portion of, the benefit
payable under a Plan with respect to such Participant.
Section 15. Top-Heavy Provisions.
--------------------
15.1 Top-Heavy Plan. For any Plan Year beginning after December 31,
--------------
1983, this Plan is top-heavy if any of the following conditions exist:
(a) If the top-heavy ratio for this Plan exceeds sixty percent
(60%) and this Plan is not part of any required aggregation group or permissive
aggregation group;
(b) If this Plan is a part of a required aggregation group (but is
not part of a permissive aggregation group) and the aggregate top-heavy ratio
for the group of Plans exceeds sixty percent (60%); or
(c) If this Plan is a part of a required aggregation group and
part of a permissive aggregation group and the aggregate top-heavy ratio for the
permissive aggregation group exceeds sixty percent (60%).
15.2 Super Top-Heavy Plan For any Plan Year beginning after December 31,
--------------------
1983, this Plan will be a super top-heavy Plan if any of the following
conditions exist:
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(a) If the top-heavy ratio for this Plan exceeds ninety percent
(90%) and this Plan is not part of any required aggregation group or permissive
aggregation group.
(b) If this Plan is a part of a required aggregation group (but is
not part of a permissive aggregation group) and the aggregate top-heavy ratio
for the group of Plans exceeds ninety percent (90%), or
(c) If this Plan is a part of a required aggregation group and
part of a permissive aggregation group and the aggregate top-heavy ratio for the
permissive aggregation group exceeds ninety percent (90%).
15.3 Definitions.
-----------
In making this determination, the Committee shall use the following definitions
and principles:
15.3-1 The "Determination Date", with respect to the first Plan
Year of any plan, means the last day of that Plan Year, and with respect to
each subsequent Plan Year, means the last day of the preceding Plan Year.
If any other plan has a Determination Date which differs from this Plan's
Determination Date, the top-heaviness of this Plan shall be determined on
the basis of the other plan's Determination Date falling within the same
calendar years as this Plan's Determination Date.
15.3-2 A "Key Employee", with respect to a Plan Year, means an
Employee who at any time during the five years ending on the top-heavy
Determination Date for the Plan Year has received compensation from an
Employer and has been (i) an officer of the Employer having 415
Compensation greater than 50 percent of the limit then in effect under
Section 415(b)(1)(A) of the Code, (ii) one of the 10 Employees owning the
largest interests in the Employer having 415 Compensation greater than the
limit then in effect under Section 415(c)(1)(A), (iii) an owner of more
than five percent of the outstanding equity interest or the outstanding
voting interest in any Employer, or (iv) an owner of more than one percent
of the outstanding equity interest or the outstanding voting interest in an
Employer whose annual compensation exceeds $150,000. For purposes of
determining whether an Employee is a Key Employee, annual compensation
means compensation as defined in Section 415(c)(3) of the Code, but
including amounts contributed by the Employee pursuant to a salary
reduction agreement which are excludable from the Employee's gross income
under Section 125, Section 402(e)(3), Section 402(H)(1)(B) or Section
403(b) of the Code. The Beneficiary of a Key Employee shall also be
considered a Key Employee.
15.3-3 A "Non-key Employee" means an Employee who at any time
during the five years ending on the top-heavy Determination Date for the
Plan Year has received compensation from an Employer and who has never been
a Key Employee, and the Beneficiary of any such Employee.
15.3-4 A "required aggregation group" includes (a) each qualified
Plan of the Employer in which at least one Key Employee participates in the
Plan Year containing the Determination Date and any of the four (4)
preceding Plan Years, and (b) any other qualified Plan of the Employer
which enables a Plan described in (a) to meet the requirements of Code
Sections 401(a)(4) and 410. For purposes of the preceding sentence, a
qualified Plan of the Employer includes a terminated Plan maintained by the
Employer within the five (5) year period ending on the Determination Date.
In the case of a required aggregation group, each Plan in the group will be
considered a top-heavy Plan if the required aggregation group is a top-
heavy group. No Plan
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<PAGE>
in the required aggregation group will be considered a top-heavy Plan if
the required aggregation group is not a top-heavy group. All Employers
aggregated under Code Sections 414(b), (c) or (m) or (o) (but only after
the Code Section 414(o) regulations become effective) are considered a
single Employer.
15.3-5 A "permissive aggregation group" includes the required
aggregation group of Plans plus any other qualified Plan(s) of the Employer
that are not required to be aggregated but which, when considered as a
group with the required aggregation group, satisfy the requirements of Code
Sections 401(a)(4) and 410 and are comparable to the Plans in the required
aggregation group. No Plan in the permissive aggregation group will be
considered a top-heavy Plan if the permissive aggregation group is not a
top-heavy group. Only a Plan that is part of the required aggregation
group will be considered a top-heavy Plan if the permissive aggregation
group is top-heavy.
15.4 Top-Heavy Rules of Application.
------------------------------
For purposes of determining the value of Account balances and the
present value of accrued benefits the following provisions shall apply:
15.4-1 The value of Account balances and the present value of
accrued benefits will be determined as of the most recent Valuation Date
that falls within or ends with the twelve (12) month period ending on the
Determination Date.
15.4-2 For purposes of testing whether this Plan is top-heavy, the
present value of an individual's accrued benefits and an individual's
Account balances is counted only once each year.
15.4-3 The Account balances and accrued benefits of a Participant
who is not presently a Key Employee but who was a Key Employee in a Plan
Year beginning on or after January 1, 1984 will be disregarded.
15.4-4 Employer contributions attributable to a salary reduction
or similar arrangement will be taken into account.
15.4-5 When aggregating Plans, the value of Account balances and
accrued benefits will be calculated with reference to the Determination
Dates that fall within the same calendar year.
15.4-6 The present value of the accrued benefits or the amount of
the Account balances of an Employee shall be increased by the aggregate
distributions made to such Employee from a Plan of the Employer. No
distribution, however, made from the Plan to an individual (other than the
beneficiary of a deceased Employee who was an Employee within the five (5)
year period ending on the Determination Date) who has not been an Employee
at any time during the five (5) year period ending on the Determination
Date shall be taken into account in determining whether the Plan is top-
heavy. Also, any amounts recontributed by an Employee upon becoming a
Participant in the Plan shall no longer be counted as a distribution under
this paragraph.
15.4-7 The present value of the accrued benefits or the amount of
the Account balances of an Employee shall be increased by the aggregate
distributions made to such Employee from a terminated Plan of the Employer,
provided that such Plan (if not terminated) would have been required to be
included in the aggregation group.
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15.4-8 Accrued benefits and Account balances of an individual
shall not be taken into account for purposes of determining the top-heavy
ratios if the individual has performed no services for the Employer during
the five (5) year period ending on the applicable Determination Date.
Compensation for purposes of this subparagraph shall not include any
payments made to an individual by the Employer pursuant to a qualified or
non-qualified deferred compensation plan.
15.4-9 The present value of the accrued benefits or the amount of
the Account balances of any Employee participating in this Plan shall not
include any rollover contributions or other transfers voluntarily initiated
by the Employee except as described below. If a rollover was received by
this Plan after December 31, 1983, the rollover or transfer voluntarily
initiated by the Employee was received prior to January 1, 1984, then the
rollover or transfer shall be considered as part of the accrued benefit by
the Plan receiving such rollover or transfer. If this Plan transfers or
rolls over funds to another Plan in a transaction voluntarily initiated by
the Employee after December 31, 1983, then this Plan shall count the
distribution for purposes of determining Account balances or the present
value of accrued benefits. A transfer incident to a merger or consolidation
of two or more Plans of the Employer (including Plans of related Employers
treated as a single Employer under Code Section 414), or a transfer or
rollover between Plans of the Employer, shall not be considered as
voluntarily initiated by the Employee.
15.5 Top-Heavy Ratio.
---------------
If the Employer maintains one (1) or more defined contribution plans
(including any simplified Employee pension plan) and the Employer has never
maintained any defined benefit plans which have covered or could cover a
Participant in this Plan, the top-heavy ratio is a fraction, the numerator of
which is the sum of the Account balances of all Key Employees as of the
Determination Date, and the denominator of which is the sum of the Account
balances of all Employees as of the Determination Date. Both the numerator and
denominator of the top-heavy ratio shall be increased to reflect any
contribution which is due but unpaid as of the Determination Date.
If the Employer maintains one (1) or more defined contribution plans
(including any simplified Employee pension plan) and the Employer maintains or
has maintained one (1) or more defined benefit plans which have covered or could
cover a Participant in this Plan, the top-heavy ratio is a fraction, the
numerator of which is the sum of Account balances under the defined contribution
plans for all Key Employees and the present value of accrued benefits under the
defined benefit plans for all Key Employees, and the denominator of which is the
sum of the Account balances under the defined contribution plans for all
Employees and the present value of accrued benefits under the defined benefit
plans for all Employees.
15.6 Minimum Contributions. For any Top-Heavy Year, each Employer shall
---------------------
make a special contribution on behalf of each Participant to the extent that the
total allocations to his Account pursuant to Section 4 is less than the lesser
of:
(i) three percent of his 415 Compensation for that year, or
(ii) the highest ratio of such allocation to 415 Compensation
received by any Key Employee for that year. For purposes of the special
contribution of this Section 15.2, a Key Employee's 415 Compensation shall
include amounts the Key Employee elected to defer under a qualified 401(k)
arrangement. Such a special contribution shall be made on behalf of each
Participant who is employed by an Employer on the last day of the Plan
Year, regardless of the number of his Hours of Service, and shall be
allocated to his Account.
-31-
<PAGE>
For any Plan Year when (1) the Plan is top-heavy and (2) a Non-key Employee
is a Participant in both this Plan and a defined benefit plan included in the
plan aggregation group which is top heavy, the sum of the Employer contributions
and forfeitures allocated to the Account of each such Non-key Employee shall be
equal to at least five percent (5%) of such Non-key Employee's 415 Compensation
for that year.
15.7 Minimum Vesting. If a Participant's vested interest in his Account
---------------
is to be determined in a Top-Heavy Year, it shall be based on the following
"top-heavy table":
<TABLE>
<CAPTION>
Vesting Percentage of
Years Interest Vested
------- ---------------
<S> <C>
Fewer than 3 years 0%
3 or more 100%
</TABLE>
15.8 Top-Heavy Provisions Control in Top-Heavy Plan. In the event this
----------------------------------------------
Plan becomes top-heavy and a conflict arises between the top-heavy provisions
herein set forth and the remaining provisions set forth in this Plan, the top-
heavy provisions shall control.
-32-
<PAGE>
Exhibit 10.4
NORTH CAROLINA,
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
--------------------------------------
GASTON COUNTY.
THIS AGREEMENT entered into this ______ day of. ___________
____, by and between GASTON FEDERAL SAVINGS & LOAN ASSOCIATION, a corporation
organized and existing under the laws of the United States of America, with its
principal office at Gastonia, North Carolina, (hereinafter referred to as the
"Association"), and _____________, hereinafter referred to as the "Executive").
WHEREAS, the Executive has performed his duties as President and Chief
Executive Officer of the Association in a capable and efficient manner,
resulting in substantial growth and progress to the Association; and
WHEREAS, the experience of the Executive is such that assurance of his
continued services is beneficial to the future growth and profits of the
Association; and
WHEREAS, the Association desires to encourage the Executive to remain
in the employ of the Association and realizes that if he were to leave the
Association it would suffer a substantial financial loss; and
WHEREAS, the Executive is willing to continue in the employ of the
Association and the Association is willing to pay to him or his designees
certain benefits in accordance with the provisions and conditions hereinafter
set forth:
NOW, THEREFORE, in consideration of the agreements between the
parties, the parties covenant and agree as follows:
1. PROMISE TO PAY. Notwithstanding any other agreements between the
parties, in consideration of the Executive's future employment, the Association
agrees to pay the Executive certain additional amounts, payments of which will
be deferred pursuant to and conditional upon the terms of this Agreement as
hereinafter set forth.
2. RETIREMENT DATE. The Association agrees that the Executive may
retire on his seventieth (70th) birthday, hereinafter called the Retirement
Date.
3. RETIREMENT BENEFIT. If the Executive is living on the Retirement
Date, regardless of whether or not he shall then be in the employ of
Association, he shall be entitled to receive commencing upon such date in equal
monthly installments over a period of one hundred eighty (180) months a total
benefit of Seventy Eighty Thousand, Seven Hundred Thirty Five and No/100
($78,735.00) Dollars (hereinafter the "Benefit"), which monthly installments
shall each be in the sum of Four Hundred Thirty Seven and 42/100 ($437.42)
Dollars each, and paid on the first
<PAGE>
day of each month. Attached hereto as Exhibit "A" is a Forecast Cash Flow
Schedule setting forth the year in which the Executive shall attain the
Retirement Date and payments shall be due to commence. If the Executive retires
with the Association's approval prior to his Retirement Date, Executive shall
nonetheless be entitled to payment of the Benefit except that the payments shall
not commence until the Executive's Retirement Date and shall be payable from
such date in the same manner as above set forth; or in the event of his
subsequent death, as provided in Paragraphs 5 and 6 hereof. Payment of benefits
shall commence the first day of the month following the Executive's Retirement
Date.
4. DEATH PRIOR TO OR AFTER RETIREMENT DATE. If the Executive shall
die prior to or after his Retirement Date, his beneficiary or beneficiaries,
determined in accordance with Paragraph 5 hereof, shall be entitled to receive
the Benefit set forth in Paragraph 5 hereof, payable as provided in Paragraph 6
hereof. The Association shall have no obligation to pay Executive's beneficiary,
spouse or estate any benefit if Executive's death occurs:
(a) by suicide which occurs within two (2) years from the date
hereof;
(b) from injuries sustained in an attempted suicide (which attempted
suicide occurs within two (2) years from the date hereof) or
complication arising from such injuries; or
(c) from injuries sustained or complications arising from such
injuries
(i) while the Executive is under the influence of an impairing
substance as defined in N.C.G.S. Section 20-4.01(14a),
whether or not the Executive was legally entitled to use the
impairing substance; or
(ii) while the Executive is engaged in the commission of a
criminal act.
5. BENEFICIARY OF DEATH BENEFIT. In the event that the Executive
should die prior to receipt of any amount to which he is entitled hereunder, or
of all such amounts, any amounts remaining unpaid shall be paid to such
beneficiary or beneficiaries as the Executive may designate by filing with the
Association a notice in writing, but in the absence of any such designation,
such unpaid amounts shall be so paid to his surviving spouse, if any. If the
unpaid amounts are not fully paid out to the Executive, the Executive's
designated beneficiary
2
<PAGE>
or beneficiaries or to his surviving spouse, then the balance remaining unpaid
shall be discounted and paid in a single lump sum to the Executive's estate. The
discount rate used to determine the lump sum present value of the remaining
monthly installments shall be a reasonable one determined by the Association and
binding on all persons having an interest in Executive's estate.
6. INSTALLMENT PAYMENT OF DEATH BENEFIT. Whenever the Executive's
beneficiary or beneficiaries (other than his estate) or his spouse shall become
entitled to receive any amount hereunder, the amount shall be paid to such
beneficiary, beneficiaries or spouse in monthly installments as follows:
(a) In the event that no monthly installment payments have
theretofore commenced to the Executive, over a period of one
hundred eighty (180) months commencing with the date the
Executive would otherwise have attained his Retirement Date, as
described above, or
(b) In the event payment of monthly installments shall have
theretofore commenced to the Executive, for the balance of the
period during which such payments were to be made to the
Executive had he survived.
7. NON-ASSIGNABLE RIGHTS. Except as otherwise provided by this
Agreement, it is agreed that neither the Executive nor his spouse, nor any other
beneficiary, shall have any right to commute, sell, assign, transfer or
otherwise convey the right to receive any payments hereunder, which payments and
the right thereto are expressly declared to be non-assignable and
non-transferable.
8. INDEPENDENCE OF AGREEMENT. The benefits payable under this
Agreement shall be independent of, and in addition to, any other employment
agreement that may exist from time to time between the parties hereto, or any
other compensation payable by the Association to the Executive, whether as
salary, bonus or otherwise. This Agreement shall not affect any other such
agreement.
9. NON-SECURED PROMISE. The rights of the Executive under this
Agreement and of any beneficiary of the Executive shall be solely those of an
unsecured creditor of the Association. The Association shall be under no
obligation whatsoever to procure or obtain any insurance policy or any other
asset to fund or provide security for the satisfaction of the liabilities
arising under this Agreement, and any decision to do so shall be solely in the
discretion of the Association. Any insurance policy or any other asset acquired
or held by the Association in connection with the liabilities assumed by it
hereunder, shall not, except as
3
<PAGE>
otherwise expressly provided, be deemed to be held under any trust for the
benefit of the Executive or his beneficiaries or his spouse or estate or to be
security for the performance of the obligations of the Association, but shall
be, and remain, a general, unpledged, unrestricted asset of the Association.
If the Association procures a life insurance policy upon Executive's
life to fund in whole or in part the Association's obligations hereunder (or
under agreements with any other employee) and the Executive fails to answer
truthfully and completely any question or request for information by an
insurance company in connection with the issuance of the policy, and the
liability of the insurer under such policy is unrestricted to any degree as a
result of such failure, then the association shall be relieved of its
obligations hereunder.
10. CHANGE OF BUSINESS FORM. The Association agrees that it will not
merge or consolidate with any other association, corporation or organization, or
permit its business activities to be taken over by any other organization,
unless and until the succeeding or continuing association, corporation or other
organization shall expressly assume the rights and obligations of the
Association herein set forth or the Association makes adequate provision for the
fulfilling of its obligations hereunder. The Association further agrees that it
will not cease its business activities or terminate its existence, other than as
heretofore set forth in this Paragraph 10, without having made adequate
provisions for the fulfilling of its obligations hereunder.
11. EMPLOYMENT RIGHTS. This Agreement shall not be deemed to create a
contract of employment between the Association and the Executive and shall
create no right in the Executive to continue in the Association's employ for any
specific period of time or to create any other rights in the Executive or
obligations on the part of the Association, except as are set forth in this
Agreement. Nor shall this Agreement restrict the right of the Association to
terminate the Executive with or without cause, or restrict the right of the
Executive to terminate his employment.
12. TERMINATION FOR CAUSE AND FORFEITURE OF PAYMENTS.
(a) Termination for Cause. All payments under this Agreement shall
immediately and forever terminate and the right to receive said payments shall
be forever forfeited if in the opinion and discretion of the members of the
Board of Directors (excluding the Director subject of this Agreement):
(i) Executive's employment is terminated by the Association for cause
prior to his Retirement Date; or
4
<PAGE>
(ii) After Executive's Retirement or termination, this Agreement is
terminated by the Association as a result of Executive's having
committed an act of embezzlement or larceny of money or other
property from the Association that would constitute a felony; or
(iii) Executive shall materially and willfully breach any provision of
this Agreement or any other agreement between Executive and the
Association.
For purpose of this Agreement, "cause" means:
(i) A material and willful breach of any of Executive's obligations
under this Agreement or of Executive's fiduciary duties to the
Association; or
(ii) In connection with the discharge of Executive's duties with the
Association, one or more material acts of fraud or dishonesty or
gross abuse of authority; or
(iii) Executive's commission of any willful act involving moral
turpitude that materially and adversely affects the name and good
will of the Association or the Association's relationship with
its employees or customers; or
(iv) Executive's habitual and intemperate use of an impairing
substance as defined in N.C.G.S. Section 20-4.0l(14a) to the
extent that the same materially interferes with Executive's
ability to competently, diligently and substantially perform the
duties of his employment; or
(v) Executive's failure to fully, faithfully and promptly perform his
job duties.
(b) Approved Voluntary Termination. In the event Executive
voluntarily terminates his employment with the Association prior to reaching
seventy (70) years of age and said termination is expressly approved by the
Association, Executive shall receive payments commencing with his Retirement
Date in the amount and in accordance with a payment schedule set forth in
Paragraph 3 hereof.
13. LEAVES OF ABSENCE. The Association may, in its sole discretion,
permit the Executive to take a leave of absence for a period not to exceed one
year. During such leave, the Executive will still be considered to be in
continuous employment of the Association for purposes of this Agreement.
5
<PAGE>
14. AMENDMENT AND REVOCATION OF AGREEMENT. This Agreement may be
revoked or amended in whole or in part by a writing signed by both of the
parties hereto.
15. CLAIMS PROVISION. The following provisions are part of this
Agreement and are intended to meet the requirements of the Employee Retirement
Income Security Act of 1974:
(a) The "Named Fiduciary": The Pension Funding Policy Committee, or
the person or persons designated by the Board of Directors of the
Association.
(b) The funding policy under this Agreement shall be unfunded and all
payments hereunder shall be made from the general fund of the
Association.
(c) Direct payment by the Association is the basis of payment of
benefits under this Agreement, with those benefits in turn being
based on the amounts as provided in this Agreement.
(d) For claims procedure purposes, the Named Fiduciary shall be the
"Claims Manager".
(i) If for any reason a claim for benefits under this Agreement
is denied by the Association, the Claims Manager shall
deliver to the claimant a written explanation setting forth
the specific reasons for the denial, pertinent references to
the Agreement section on which the denial is based, such
other date as may be pertinent and information on the
procedures to be followed by the claimant in obtaining a
review of its claim, all written in a manner calculated to
be understood by the claimant. For this purpose:
(A) The claimant's claim shall be deemed filed when
presented orally or in writing to the Claims Manager.
(B) The Claims Manager's explanation shall be in writing
delivered to the claimant within ninety (90) days of
the date the claim is filed.
(ii) The claimant shall have sixty (60) days following his
receipt of the denial of the claim to file with the Claims
Manager a written request for review of the denial. For such
review, the claimant or its representative may submit
pertinent documents and written issues and comments.
6
<PAGE>
(iii) The Claims Manager shall decide the issue on review and
furnish the claimant with a copy of the decision within
sixty (60) days of receipt of the claimant's request for
review of his claim. The decision on review shall be in
writing and shall include specific reasons for the decision
written in a manner calculated to be understood by the
claimant, as well as specific references to the pertinent
Agreement provisions on which the decision is based. If a
copy of the decision is not so furnished to the claimant
within such sixty (60) days, the claim shall be deemed
denied on review.
16. STATE LAW. This Agreement shall be construed under the laws of
the State of North Carolina.
17. WHOLE AGREEMENT. This writing contains the whole Agreement, with
no other understandings or provisions other than what is contained herein.
18. BINDING EFFECT. This Agreement is solely between the Association
and the Executive. The Executive and his beneficiaries and payees will have
recourse only against the Association for enforcement, and this Agreement will
be binding upon the beneficiaries, heirs, assigns, and personal representatives
of the Executive and upon the successors and assigns of the Association.
19. PRIOR AGREEMENTS. This Agreement supersedes all prior
non-qualified deferred compensation agreements between the Association and the
Executive, and from and after the execution hereof, all such prior
non-qualified deferred compensation agreements shall be null and void and of no
further effect. Except however, there is expressly excluded from this paragraph
that certain policy issued by Provident Life and Accident Insurance Company as
evidenced by certificate dated May 1, 1986 and purchased with premiums paid by
deferred directors' fees.
IN WITNESS WHEREOF, the Association has caused this Agreement to be
signed in its corporate name by its ___________ President, attested by its
Assistant Secretary and impressed with its corporate seal, by authority of its
- ---------
Board of Directors duly given and the Executive has hereunto set his hand and
seal as of the day and year first above written, in duplicate originals, one of
which is retained by each party hereto.
7
<PAGE>
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
By: /s/ Paul L. Teem Jr.
--------------------------------------
Executive Vice-President
Attest:
/s/ Lorice J. Tolbert
- -------------------------
(Assistant) Secretary
(Corporate Seal)
/s/ Robert W. Williams (SEAL)
-----------------------------------
Robert W. Williams, Executive
James A Pittman, Jr.
- -------------------------
Witness
8
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of the subsidiaries of Gaston Federal Bancorp,
Inc. following the Reorganization:
Name State of Incorporation
---- ----------------------
Gaston Federal Bank Federal
Gaston Financial Services, Inc.,
d.b.a. Gaston Federal Investment Services North Carolina
<PAGE>
EXHIBIT 23.2
The Board of Directors
Gaston Federal Savings & Loan Association
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ Cherry, Bekaert & Holland, L.L.P.
Gastonia, North Carolina
December 18, 1997
<PAGE>
Exhibit 23.3
[LETTERHEAD OF FELDMAN FINANCIAL ADVISORS, INC. APPEARS HERE]
December 22, 1997
Board of Directors
Gaston Federal Savings and Loan Association
245 West Main Avenue
P.O. Box 2249
Gastonia, North Carolina 28053-2249
Gentlemen:
We hereby consent to the use of our name and summary of our valuation opinion,
as referenced in the Application for Approval of Reorganization (the
"Application") filed by Gaston Federal Savings and Loan Association (the
"Association") with the Office of Thrift Supervision, regarding the estimated
aggregate pro forma market value of the Association in connection with its
reorganization from mutual to stock form and simultaneous offering for sale of a
minority ownership interest of shares of common stock by Gaston Financial
Corporation (the "Company").
We also consent to reference in the Application the summary of our opinion as to
the value of subscription rights granted by the Association. We further consent
to the use of our name and summary opinions as noted above in the Registration
Statement and Prospectus filed by the Company with the Securities and Exchange
Commission.
Sincerely,
/s/ Feldman Financial Advisors, Inc.
Feldman Financial Advisors, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,422
<INT-BEARING-DEPOSITS> 2,203
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,248
<INVESTMENTS-CARRYING> 20,494
<INVESTMENTS-MARKET> 20,619
<LOANS> 135,601
<ALLOWANCE> 1,110
<TOTAL-ASSETS> 173,470
<DEPOSITS> 145,444
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,658
<LONG-TERM> 3,500
0
0
<COMMON> 0
<OTHER-SE> 20,868
<TOTAL-LIABILITIES-AND-EQUITY> 173,470
<INTEREST-LOAN> 10,826
<INTEREST-INVEST> 2,110
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 12,936
<INTEREST-DEPOSIT> 6,805
<INTEREST-EXPENSE> 147
<INTEREST-INCOME-NET> 5,984
<LOAN-LOSSES> 293
<SECURITIES-GAINS> 52
<EXPENSE-OTHER> 3,492
<INCOME-PRETAX> 2,251
<INCOME-PRE-EXTRAORDINARY> 1,432
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,432
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.81
<LOANS-NON> 1,059
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,300
<ALLOWANCE-OPEN> 830
<CHARGE-OFFS> 13
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,110
<ALLOWANCE-DOMESTIC> 1,110
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
[LETTERHEAD OF FELDMAN FINANCIAL ADVISORS, INC. APPEARS HERE]
Exhibit 17.1
July 30, 1997
Board of Directors
Gaston Federal Savings and Loan Association
245 West Main Avenue
Gastonia, North Carolina 28052
Gentlemen:
This letter sets forth the agreement between Gaston Federal Savings and Loan
Association (the "Association") and Feldman Financial Advisors, Inc. ("FFA"),
whereby the Association has engaged FFA to provide an independent appraisal of
the estimated aggregate pro forma market value (the "Valuation") of the shares
of common stock that are to be outstanding upon completion of the reorganization
of the Association from a federally chartered savings and loan association into
the mutual holding company structure and the contemporaneous issuance of a
minority ownership interest in the resulting stock savings and loan association
subsidiary (the "Reorganization").
FFA agrees to deliver the Valuation, in writing, to the Association at the
address above on or before a mutually agreed upon date. Further, FFA agrees to
perform such other services as are necessary or required of the independent
appraiser in connection with comments from the Association's regulatory
authorities and updates of the Valuation as from time to time may be necessary,
both after initial approval by the Association's regulatory authorities and
prior to the time the Reorganization is completed. FFA also agrees to assist the
Association in the preparation of its regulatory business plan in connection
with the Reorganization application to be filed with the Office of Thrift
Supervision ("OTS") and to accompany the Association at all meetings with the
OTS to review the business plan. FFA will also assist the Association in
responding to all OTS inquiries regarding the business plan.
The Association agrees to pay FFA a consulting fee of $22,500: $17,500 for
FFA's appraisal services and $5,000 for services in conjunction with the
preparation of the Association's regulatory business plan. The Association also
agrees to reimburse FFA for certain out-of-pocket expenses necessary and
incident to the completion of the services described above. These expenses
shall not exceed $2,500 without the prior consent of the Association.
Reimbursable expenses for courier delivery, copying, travel, data materials and
report reproduction shall be paid to FFA as incurred and billed. Payment of the
consulting fee shall be made according to the following schedule:
. $ 3,000 upon execution of this Agreement;
. $ 5,000 upon completion of the Association's regulatory business
plan;
. $ 12,000 upon delivery of the completed appraisal report to the
Association; and,
. $ 2,500 upon completion of the Reorganization.
<PAGE>
Feldman Financial Advisors, Inc.
Board of Directors
Gaston Federal Savings and Loan Association
July 30, 1997
Page 2
If, during the course of the Association's Reorganization, unforeseen events
occur so as to materially change the nature of the work content of the appraisal
services described above such that FFA must supply services beyond that
contemplated at the time this contract was executed, the terms of this agreement
shall be subject to renegotiation by the Association and FFA. Such unforeseen
events shall include, but not be limited to, major changes in the stock
conversion and mutual holding company regulations, appraisal guidelines or
processing procedures as they relate to conversion appraisals, major changes in
the Association's management or operating policies, and excessive delays or
suspension of processing of the Reorganization.
In the event the Association shall for any reason discontinue the Reorganization
prior to delivery of the completed appraisal and payment of the progress payment
fee amounting to $12,000, the Association agrees to compensate FFA according to
FFA's standard billing rates for consulting appraisal services based on
accumulated and verifiable time expended, provided that the total of such
charges shall not exceed $15,000 plus reimbursable expenses.
In order to induce FFA to render the aforesaid services, the Association agrees
to the following:
1. The Association agrees to supply FFA such information with respect to
the Association's business and financial condition as FFA may reasonably
request in order for FFA to perform the aforesaid services. Such
information shall include, without limitation: annual financial
statements, periodic regulatory filings and material agreements,
corporate books and records, and such other documents as are material
for the performance by FFA of the aforesaid services.
2. The Association hereby represents and warrants to FFA (i) that to its
best knowledge any information provided to FFA by or on behalf of the
Association, will not, at any relevant time, contain any untrue
statement of a material fact or fail to state a material fact necessary
to make the information or statements therein not false or misleading,
(ii) that the Association will not use the product of FFA services in
any manner, including in a proxy or offering circular, in connection
with any untrue statement of a material fact or in connection with the
failure to state a material fact necessary to make other statements not
false or misleading, and (iii) that all documents incorporating or
relying upon FFA services or the product of FFA services will otherwise
comply with all applicable federal and state laws and regulations. Any
valuations or opinions issued by FFA may be included in its entirety in
any communication by the Association in any application, proxy statement
or prospectus; however, such valuations or opinions may not be excerpted
or otherwise publicly referred to without FFA's prior written consent
nor shall FFA be publicly referred to without FFA's prior written
consent; however, such consent shall not be unreasonably withheld.
<PAGE>
Feldman Financial Advisors, Inc.
Board of Directors
Gaston Federal Savings and Loan Association
July 30, 1997
Page 3
3. FFA's Valuation will be based upon the Association's representation that
the information contained in the Reorganization application and
additional information furnished to us by the Association and its
independent auditors is truthful, accurate, and complete in all material
respects. FFA will not independently verify the financial statements
and other information provided by the Association and its independent
auditors, nor will FFA independently value the assets or liabilities of
the Association. The Valuation will consider the Association only as a
going concern and will not be considered as an indication of the
liquidation value of the Association.
4. FFA's Valuation is not intended, and must not be represented to be, a
recommendation of any kind as to the advisability of purchasing shares
of common stock in the Reorganization. Moreover, because the Valuation
is necessarily based upon estimates and projections of a number of
matters, all of which are subject to change from time to time, FFA will
give no assurance that persons who purchase shares of common stock in
the Reorganization will thereafter be able to sell such shares at prices
related to FFA's Valuation.
5. The Association agrees that it will indemnify and hold harmless FFA and
its officers and employees (collectively, "FFA indemnified persons")
from and against any and all liabilities arising from or based upon this
agreement or the services provided by FFA hereunder, except to the
extent that such liabilities are adjudicated by a final judgment (after
all appeals or the expiration of time to appeal) to result from the
negligence or willful misconduct of a FFA indemnified person. The
Association agrees that it will promptly reimburse, as incurred, all
reasonable legal fees and expenses, and other reasonable out-of-pocket
disbursements, paid by any FFA indemnified person in connection with any
claim subject to indemnification hereunder in advance of the final
determination of any proceeding if the FFA indemnified person furnishes
the Association: (i) a written statement that it is FFA's good faith
belief that the FFA indemnified person is entitled to indemnification
hereunder; (ii) a written undertaking by such indemnified person to
repay the advance if a final judgment (after all appeals or the
expiration of time to appeal) is entered against such person based upon
such person's negligence or willful misconduct; and (iii) an
acknowledgment that the FFA indemnified person shall not be entitled to
indemnification hereunder and shall promptly reimburse any advancement
of fees and expenses if the FFA indemnified person enters into any
settlement of a claim subject to indemnification hereunder without the
prior written consent of the Association. Each FFA indemnified person
shall give prompt written notice to the Association of the commencement
of any action or proceeding and the Association shall have the right to
participate, at its expense, in contesting, defending or litigating the
<PAGE>
Feldman Financial Advisors, Inc.
Board of Directors
Gaston Federal Savings and Loan Association
July 30, 1997
Page 4
same. A FFA indemnified person shall have the right to employ its own
counsel in connection with all matters referred to in this Paragraph,
and such counsel shall have the right to take charge of such matter for
such person; provided, however, that the Association shall not be liable
under this Paragraph for the fees and expenses of more than one counsel
for all FFA indemnified persons.
6. The Association and FFA are not affiliated, and neither the Association
nor FFA has an economic interest in, or is held in common with, the
other and has not derived a significant portion of its gross revenues,
receipts or net income for any period from transactions with the other.
It is understood that FFA is not a seller of securities within the scope
of any federal or state securities law and any report prepared by FFA
shall not be used as an offer or solicitation with respect to the
purchase or sale of any security, it being understood that the foregoing
shall not be construed to prohibit the filing of any such report as part
of the Reorganization application or SEC and blue sky filings or
customary references thereto in applications, filings, proxy statements
and prospectuses.
* * * *
Please acknowledge your agreement to the foregoing by signing as indicated below
and returning to FFA a signed copy of this letter.
Yours very truly,
FELDMAN FINANCIAL ADVISORS, INC.
By: /s/ Trent R. Feldman
-----------------------------
Trent R. Feldman
President
AGREED AND ACCEPTED:
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
By: /s/ Robert W. Williams
-----------------------------
Title: President and CEO
---------------------------
Date: 08-01-97
---------------------------
<PAGE>
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
245 West Main Avenue, P.O. Box 2249
Gastonia, North Carolina 28053
(704) 868-5200
-------------------------------
NOTICE OF SPECIAL MEETING OF MEMBERS
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Notice is hereby given that a Special Meeting of Members (the "Special
Meeting") of Gaston Federal Savings and Loan Association (the "Association"),
will be held at the main office of the Association, located at 245 West Main
Avenue, Gastonia, North Carolina, on _______, ____________, 1998 at _:__ _.m.,
local time. The purpose of this Special Meeting is to consider and vote upon:
The approval of a Plan of Reorganization from Mutual Savings
Association to Mutual Holding Company and Stock Issuance Plan (the
"Plan") pursuant to which the Association will be reorganized into the
mutual holding company structure. As part of the Plan, the
Association will convert to a federally-chartered stock savings
association which will be wholly-owned by Gaston Federal Bancorp,
Inc., a newly-formed federal corporation (the "Company"). The Company
will be a majority-owned subsidiary of Gaston Federal Holdings, MHC, a
newly-formed federally-chartered mutual holding company (the "Mutual
Holding Company"). Pursuant to the Plan, the Company will offer for
sale to certain depositors 47% of its common stock and issue 53% of
its to-be outstanding shares to the Mutual Holding Company.
such other business as may properly come before this Special Meeting or any
adjournment thereof. Management is not aware of any such other business.
The members who shall be entitled to notice of and to vote at the
Special Meeting and any adjournment thereof are depositors at the close of
business on January ____, 1998. In the event there are insufficient votes for
approval of the Plan at the time of the Special Meeting, the Special Meeting may
be adjourned from time to time in order to permit further solicitation of
proxies.
BY ORDER OF THE BOARD OF DIRECTORS
Kim S. Price
President and Chief Executive Officer
Gastonia, North Carolina
February ____, 1998
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YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR APPROVAL OF THE PLAN BY COMPLETING THE
ENCLOSED PROXY CARD AND RETURNING IT IN THE ENCLOSED
POSTAGE-PAID ENVELOPE AS SOON AS POSSIBLE.
YOUR VOTE IS VERY IMPORTANT
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SUMMARY OF PROPOSED REORGANIZATION
This summary does not purport to be complete and is qualified in its
entirety by the more detailed information contained in the remainder of this
Proxy Statement and the accompanying Prospectus.
Under its present mutual form of organization, the Association has no
stockholders. Its deposit account holders are members of the Association and
have voting rights in that capacity. In the unlikely event of liquidation, the
Association's deposit account holders would have the sole right to receive any
assets of the Association remaining after payment of its liabilities (including
the claims of all deposit account holders to the withdrawal value of their
deposits). Under the Plan to be voted on at the Special Meeting, the
Association would be converted into a federally chartered savings association
organized in stock form and all of the Association's common stock would be
issued concurrently to the Company. The Company will issue 53% of its to-be
outstanding shares of common stock ("Common Stock") to Gaston Federal Holdings,
MHC (the "Mutual Holding Company"), a federally chartered mutual holding company
formed by the Association in connection under the Plan, and offer and sell 47%
of its to-be outstanding shares of Common Stock in a subscription offering (the
"Subscription Offering," and together with any community offering, the
"Offering") to the following persons: (1) depositors of the Association with an
account balance of $50 or more as of March 31, 1996 ("Eligible Account
Holders"); (2) tax-qualified employee stock benefit plans of the Association
("Tax-Qualified Employee Plans"); (3) depositors of the Association with an
account balance of $50 or more as of December 31, 1997 who are not Eligible
Account Holders ("Supplemental Eligible Account Holders"); and (4) depositors
with account balances of $50 as of January ___, 1998 who are not Eligible
Account Holders or Supplemental Eligible Account Holders ("Other Members"). It
is anticipated that Tax-Qualified Employee Plans will purchase 8% of the Common
Stock sold in the Offering. The above transactions collectively are referred to
herein as the "Reorganization."
Concurrent with, during or following completion of the Subscription
Offering, the Company may offer Common Stock to members of the general public to
whom a Prospectus has been delivered, with first preference to natural persons
residing in Gaston County, North Carolina (the "Community Offering"). All
depositors who have membership and liquidation rights with respect to the
Association immediately prior to the completion of the Reorganization will
continue to have such rights solely with respect to the Mutual Holding Company
as long as they maintain deposit accounts in the Association after the
completion of the Reorganization.
THE REORGANIZATION WILL NOT AFFECT THE BALANCE, INTEREST RATE OR FEDERAL
INSURANCE PROTECTION OF ANY SAVINGS DEPOSIT, AND NO PERSON WILL BE OBLIGATED TO
PURCHASE ANY STOCK IN THE OFFERING.
Business Purposes The use of a mutual holding company structure is expected
for Reorganization to enhance the Association's ability to expand through
and Offering possible mergers and acquisitions (although no such
transactions are contemplated at this time) and will
facilitate the future access of the Company and the
Association to the capital markets. Net Offering proceeds
are expected to increase the capital of the Association,
which will support the expansion of its financial services
to the public. The Reorganization shall be deemed to occur
and shall be effective upon completion of all actions
necessary or appropriate under applicable federal statutes
and regulations and the policies of the Office of Thrift
Supervision ("OTS") to complete the Reorganization,
including without limitation the approval of the
Reorganization by the members of the Association.
Subscription and As part of the Offering, Common Stock is being offered for
Community Offering sale in the Subscription Offering, in the following
priorities: (1) Eligible Account Holders; (2) Tax-
Qualified Employee Plans; (3) Supplemental Eligible
Account Holders; and (4) Other Members. In addition,
should a Community Offering be conducted, members of the
general public may purchase Common Stock to the extent
shares are available after satisfaction of subscriptions
in the Subscription Offering, with a preference first to
natural persons residing in Gaston County, North Carolina.
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Subscription Rights Each Eligible Account Holder shall be given non-
of Eligible Account transferable rights to subscribe for up to $250,000 of
Holders Common Stock; provided, however, that no Eligible Account
Holder may purchase alone or with his or her Associates
(as defined in the Plan and including relatives living in
the same household) and persons acting in concert, more
than $250,000 of Common Stock. The Association may, in its
sole discretion and without further notice to, or
solicitation of subscribers or other prospective
purchasers, increase the maximum purchase limitation to 5%
of the maximum number of shares offered in the Offering,
or decrease the maximum purchase limitation to .5% of the
maximum number of shares offered in the Offering. If there
are insufficient shares available to satisfy all
subscriptions of Eligible Account Holders, shares will be
allocated to Eligible Account Holders so as to permit each
such subscribing Eligible Account Holder to purchase a
number of shares sufficient to make his total allocation
equal to the lesser of 100 shares or the number of shares
subscribed for. Thereafter, unallocated shares will be
allocated pro rata to remaining subscribing Eligible
Account Holders whose subscriptions remain unfilled based
on the size of their account. To ensure proper allocation
of stock, each Eligible Account Holder must list on his
subscription order form all accounts in which he had an
ownership interest as March 31, 1996.
Subscription Rights The Association's Tax-Qualified Employee Plans shall be
of Tax-Qualified given non-transferable rights to subscribe for up to 8% of
Employee Plans the total number of shares of Common Stock offered in the
Offering, provided that shares remain available after
satisfying the subscription rights of Eligible Account
Holders. In the event that Eligible Account Holders
subscribe for more shares than are offered, the
Association's Tax Qualified Employee Plans may still
purchase shares if additional shares are issued in the
Offering due to an increase in the estimated pro forma
market value of the Company. It is anticipated that Tax-
Qualified Employee Plans will purchase 8% of the Common
Stock sold in the Offering.
Subscription Rights To the extent there are sufficient shares remaining after
of Supplemental satisfaction of subscriptions by Eligible Account Holders
Eligible Account and the Tax-Qualified Employee Plans, each Supplemental
Holders Eligible Account Holder shall be given non-transferable
rights to subscribe for up to $250,000 of Common Stock;
provided, however, that no Supplemental Eligible Account
Holder may purchase alone or with his or her Associates
(as defined in the Plan, and including relatives living in
the same household) and persons acting in concert, more
than $250,000 of Common Stock. The Association may, in its
sole discretion and without further notice to, or
solicitation of subscribers or other prospective
purchasers, increase the maximum purchase limitation to 5%
of the maximum number of shares offered in the Offering,
or decrease the maximum purchase limitation to .5% of the
maximum number of shares offered in the Offering. If there
are insufficient shares available to satisfy all
subscription of Supplemental Eligible Account Holders,
shares will be allocated to Supplemental Eligible Account
Holders so as to permit each such subscribing Eligible
Account Holder to purchase a number of shares sufficient
to make his total allocation equal to the lesser of 100
shares or the number of shares subscribed for. Thereafter,
unallocated shares will be allocated po rata to each
subscribing Supplemental Eligible Account Holder whose
subscription remains unfilled based on the size of their
account.
Subscription Rights To the extent that there are sufficient shares remaining
of Other Members after satisfaction of subscriptions by Eligible Account
Holders, the Tax-Qualified Employee Plans, and
Supplemental Account Holders each Other Member shall be
given non-transferable rights to subscribe for up to
$250,000 of Common Stock; provided, however, that no Other
Member Holder may purchase alone or with his or her
Associates (as defined in the Plan, and including
relatives living in the same household) and persons acting
in concert, more than $250,000 of Common Stock. The
Association may, in its sole discretion and without
further notice to, or
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solicitation of subscribers or other prospective
purchasers, increase the maximum purchase limitation to 5%
of the maximum number of shares offered in the Offering,
or decrease the maximum purchase limitation to .5% of the
maximum number of shares offered in the Offering. If there
are insufficient shares available to satisfy all
subscription of Supplemental Eligible Account Holders,
shares will be allocated to Other Member based on the size
of his subscription.
Purchase The minimum order in the Offering is 25 shares (or $250).
Limitations The maximum order in the Offering is 25,000 shares (or
$250,000); provided, however, that no Eligible Account
Holder may purchase alone or with his or her Associates
(as defined in the Plan, and including relatives living in
the same household) and persons acting in concert, more
than 25,000 shares of Common Stock. The Association may,
in its sole discretion and without further notice to, or
solicitation of, subscribers or other prospective
purchasers, increase the maximum purchase limitation to 5%
of the maximum number of shares offered in the Offering,
or decrease the maximum purchase limitation to .5% of the
maximum number of shares offered in the Offering.
Expiration Date of All subscriptions for Common Stock must be received by
Subscription and noon local time on March __, 1998 (the "Expiration Date").
Community Offerings The Expiration Date may be extended by the Association and
the Company for successive 45-day periods, subject to OTS
approval, to ________, 1998.
How to Subscribe For information on how to subscribe for Common Stock being
for Shares offered in the Stock Conversion, please read the
Prospectus and the stock order form and instructions
accompanying this Proxy Statement. Subscriptions will not
become effective until the Plan has been approved by the
Association's members and at least the minimum number of
shares offered in the Offering have been subscribed for or
sold in the Offering.
Price of Common All sales of Common Stock in the Subscription and
Stock Community Offering will be made at the same $10.00 price
per share. On the basis of a preliminary appraisal by
Feldman Financial which has been reviewed by the OTS, a
minimum of 1,358,300 and a maximum of 1,837,700 shares
(subject to a possible increase to 2,113,355 shares) will
be offered in the Offering. See "The Reorganization and
Offering--Stock Pricing and Number of Shares to be Issued"
in the Prospectus.
Required Vote Approval of the Plan will require the affirmative vote of
a majority of all votes eligible to be cast at the Special
Meeting.
YOUR BOARD OF DIRECTORS URGES YOU TO VOTE FOR
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THE PLAN
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GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
PROXY STATEMENT
SPECIAL MEETING OF MEMBERS TO BE HELD ON MARCH ____, 1998
PURPOSE OF MEETING
This Proxy Statement is being furnished to you in connection with the
solicitation on behalf of the Board of Directors of Gaston Federal Savings and
Loan Association (the "Association") of the proxies to be voted at the Special
Meeting of Members (the "Special Meeting") of the Association to be held at the
main office of the Association, located at 245 West Main Avenue, Gastonia, North
Carolina, on March ____, 1998 at _:__ _.m. local time and at any adjournments
thereof. The Special Meeting is being held for the purpose of considering and
voting upon a Plan of Reorganization from Mutual Savings Association to Mutual
Holding Company (the "Plan"). Under the Plan, the Association would be
converted into a federally chartered savings association organized in stock form
and all of the Association's common stock would be issued concurrently to the
Company. The Company will issue 53% of its to-be outstanding shares of Common
Stock to the Mutual Holding Company, and offer and sell 47% of its to-be
outstanding shares of Common Stock in a subscription offering to Eligible
Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account
Holders, and Other Members.
A description of the Reorganization and Offering is described in detail in
the section of the Prospectus entitled "The Reorganization and Offering--
Description of and Reasons for the Reorganization," which is incorporated herein
by reference.
THE SUBSCRIPTION OFFERING HAS COMMENCED AS OF THE DATE OF MAILING OF THIS
PROXY STATEMENT. A PROSPECTUS EXPLAINING THE TERMS OF THE OFFERING, INCLUDING
HOW TO ORDER AND PAY FOR SHARES AND DESCRIBING THE BUSINESS OF THE ASSOCIATION,
THE COMPANY AND THE MUTUAL HOLDING COMPANY, ACCOMPANIES THIS PROXY STATEMENT AND
SHOULD BE READ BY ALL PERSONS WHO WISH TO CONSIDER SUBSCRIBING FOR COMMON STOCK.
THE SUBSCRIPTION AND COMMUNITY OFFERING EXPIRES AT NOON LOCAL TIME ON MARCH __,
1998 UNLESS EXTENDED BY THE ASSOCIATION, THE COMPANY AND THE MUTUAL HOLDING
COMPANY.
INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING
The Board of Directors of the Association has fixed January __, 1998 as the
voting record date ("Voting Record Date") for the determination of members
entitled to notice of the Special Meeting. All holders of the Association's
savings and demand accounts are members of the Association under its current
charter. All Association members of record as of the close of business on the
Voting Record Date will be entitled to vote at the Special Meeting or any
adjournment thereof.
Each holder of an account (including IRA and Keogh account beneficiaries)
will be entitled at the Special Meeting to cast one vote for each $100, or
fraction thereof, of the aggregate withdrawal value of all of such depositor's
accounts in the Association as of the Voting Record Date, up to a maximum of
1,000 votes. Joint accounts shall be entitled to no more than 1,000 votes, and
any owner may cast all the votes unless notified in writing. In general,
accounts held in different ownership capacities will be treated as separate
memberships for purposes of applying the 1,000 vote limitation. For example, if
two persons hold a $50,000 account in their joint names and each of the persons
also holds a separate account for $50,000 in his own name, each person would be
entitled to 500 votes for each separate account and they would together be
entitled to cast 500 votes on the basis of the joint account.
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Where no proxies are received from IRA and Keogh account beneficiaries, after
due notification, the Association, as trustee of these accounts, is entitled to
vote these accounts in favor of the Plan.
Approval of the Plan requires the affirmative vote of a majority of the
total outstanding votes of the Association's members eligible to be cast at the
Special Meeting. As of the Voting Record Date the Association had _____ members
who were entitled to cast a total of ______ votes at the Special Meeting.
Association members may vote at the Special Meeting or any adjournment
thereof in person or by proxy. Any member giving a proxy will have the right to
revoke the proxy at any time before it is voted by giving written notice to the
Secretary of the Association, provided that such written notice is received by
the Secretary prior to the Special Meeting or any adjournment thereof, or upon
request if the member is present and chooses to vote in person.
All properly executed proxies received by the Board of Directors of the
Association will be voted in accordance with the instructions indicated thereon
by the members giving such proxies. If no instructions are given, such proxies
will be voted in favor of the Plan. If any other matters are properly presented
at the Special Meeting and may properly be voted on, the proxies solicited
hereby will be voted on such matters in accordance with the best judgment of the
proxy holders named thereon. Management is not aware of any other business to
be presented at the Special Meeting.
If a proxy is not executed and is returned or the member does not vote in
person, the Association is prohibited by OTS regulations from using a previously
executed proxy to vote for the Plan. As a result, failure to vote may have the
same effect as a vote against the Plan.
To the extent necessary to permit approval of the Plan, proxies may be
solicited by officers, directors or regular employees of the Association, in
person, by telephone or through other forms of communication and, if necessary,
the Special Meeting may be adjourned to a later date. Such persons will be
reimbursed by the Association for their expenses incurred in connection with
such solicitation. The Association will bear all costs of this solicitation.
The proxies solicited hereby will be used only at the Special Meeting and at any
adjournment thereof.
PRINCIPAL EFFECT OF THE REORGANIZATION
General. Each savings depositor in a mutual savings association such as the
Association has both a savings account and a pro rata ownership interest in the
net worth of that institution, based upon the balance in his or her savings
account. This ownership interest has no tangible market value separate from the
depositor's savings account. Upon completion of the Reorganization, the
ownership of the Association's net worth will be represented by the outstanding
shares of stock to be owned by the Company. Stock certificates will be issued
to evidence ownership of the capital stock.
Continuity. While the Reorganization is being accomplished, the
Association's normal business of accepting deposits and making loans will be
continued without interruption. After the Reorganization, the Association will
continue to provide services for account holders and borrowers under current
policies carried on by the Association's present management and staff.
The Association's directors at the time of Reorganization will continue to
serve as our directors after the Reorganization until the expiration of their
current terms, and thereafter, if reelected. All of the Association's executive
officers at the time of Reorganization will retain their positions after the
Reorganization.
Effect on Deposit Accounts. Under the Plan, each of the Association's
depositors at the time of the Reorganization will automatically continue as a
depositor after the Reorganization, and each deposit account will remain the
same with respect to deposit balance, interest rate and other terms. Each
account will also continue to be
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insured by the FDIC in exactly the same way as before. Depositors will continue
to hold their existing certificates, passbooks and other evidence of their
accounts.
Effect on Loans of Borrowers. None of the Association's loans will be
affected by the Reorganization. The amount, interest rate, maturity and security
for each loan will be unchanged.
Effect on Voting Rights of Members. Currently in the Association's mutual
form, members have voting rights and may vote for the election of directors.
Following the Reorganization, members will cease to have voting rights in the
Association, but will have voting rights in the Mutual Holding Company. All
voting rights in the Association will be vested in the Company as the
Association's sole shareholder. Voting rights in the Company will be vested
exclusively in its shareholders, with one vote for each share of Common Stock.
The Mutual Holding Company will at all times own a majority of the Company's
Common Stock. Neither the Common Stock to be sold in the Offering or issued to
the Mutual Holding Company in the Reorganization, nor the capital stock of the
Association will be insured by the FDIC or by any other government entity.
Tax Consequences. The Association intends to proceed with the
Reorganization on the basis of an opinion from Luse Lehman Gorman Pomerenk &
Schick, P.C., Washington, D.C., as to certain tax matters that are material to
the Reorganization. The opinion is based, among other things, on certain
representations made by the Association. See the section of the Prospectus
entitled "The Reorganization and Offering--Federal and State Tax Consequences of
the Reorganization" which is incorporated herein by reference.
Approval, Interpretation, Amendment and Termination
Under the Plan, the letter from the OTS giving approval thereto, and
applicable regulations, consummation of the Reorganization is subject to the
satisfaction of the following conditions: (a) approval of the Plan by members
of the Association casting at least a majority of the votes eligible to be cast
at the Special Meeting; (b) sale of at least the minimum number of shares
offered in the Offering; and (c) receipt of favorable rulings or opinions of
counsel as to the federal tax consequences of the Reorganization.
The Plan may be substantively amended by the Boards of Directors of the
Association with the concurrence of the OTS. If the Plan is amended, proxies
which have been received prior to such amendment will not be resolicited unless
otherwise required by the OTS. Also, as required by the federal regulations,
the Plan provides that the transactions contemplated thereby may be terminated
by the Board of Directors of the Association alone at any time prior to the
Special Meeting and may be terminated by the Board of Directors of the
Association at any time thereafter with the concurrence of the OTS,
notwithstanding approval of the Plan by the members of the Association at the
Special Meeting. All interpretations by the Association of the Plan and of the
Stock Order Forms and related materials for the Subscription and Community
Offering will be final, except as regards or affects the OTS.
Judicial Review
Section 5(i)(2)(B) of the Home Owners' Loan Act, as amended, 12 U.S.C.
(S)1464(i)(2)(B) and Section 563b.8(u) of the Rules and Regulations promulgated
thereunder (12 C.F.R. Section 563b.8(u)) provide: (i) that persons aggrieved by
a final action of the OTS which approves, with or without conditions, or
disapproves a plan of conversion, may obtain review of such final action only by
filing a written petition in the United States Court of Appeals for the circuit
in which the principal office or residence of such person is located, or in the
United States Court of Appeals for the District of Columbia, requesting that the
final action of the OTS be modified, terminated or set aside, and (ii) that such
petition must be filed within 30 days after publication of notice of such final
action in the Federal Register, or 30 days after the date of mailing of the
notice and proxy statement for the meeting of the converting institution's
members at which the conversion is to be voted on, whichever is later. The
notice of the Special Meeting of the Association's members to vote on the Plan
described herein is included at the beginning of this Proxy Statement. The
statute and regulation referred to above should be consulted for further
information.
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ADDITIONAL INFORMATION
The information contained in the accompanying Prospectus, including a more
detailed description of the Plan, financial statements of the Association and a
description of the capitalization and business of the Association the Company
and the Mutual Holding Company, including the Association's directors and
executive officers and their compensation, the anticipated use of the net
proceeds from the sale of the Common Stock and a description of the Common
Stock, is intended to help you evaluate the Plan and is incorporated herein by
this reference.
YOUR VOTE IS VERY IMPORTANT TO US. PLEASE TAKE A MOMENT NOW TO COMPLETE
AND RETURN YOUR PROXY CARD IN THE POSTAGE-PAID ENVELOPE PROVIDED. YOU MAY STILL
ATTEND THE SPECIAL MEETING AND VOTE IN PERSON EVEN THOUGH YOU HAVE VOTED YOUR
PROXY. FAILURE TO SUBMIT A PROXY WILL HAVE THE SAME EFFECT AS VOTING AGAINST
THE PLAN.
If you have any questions, please call our Stock Information Center at
(704) ________.
IMPORTANT: YOU MAY BE ENTITLED TO VOTE IN MORE THAN ONE CAPACITY. PLEASE
SIGN, DATE AND PROMPTLY RETURN EACH PROXY CARD YOU RECEIVE.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY STOCK. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR
GUARANTEED.
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REVOCABLE PROXY
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
FOR A SPECIAL MEETING OF MEMBERS
TO BE HELD ON MARCH ____, 1998
The undersigned member of Gaston Federal Savings and Loan Association (the
"Association"), hereby appoints the full Board of Directors, with full powers of
substitution, as attorneys-in-fact and agents for and in the name of the
undersigned, to vote such votes as the undersigned may be entitled to vote at
the Special Meeting of Members of the Association, to be held at the main office
of the Association, located at 245 West Main Avenue, Gastonia, North Carolina on
March ____, 1998, at _:__ _.m., local time, and at any and all adjournments
thereof. They are authorized to cast all votes to which the undersigned is
entitled as follows:
FOR AGAINST
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1. Approval of the Plan of Reorganization from Mutual [_] [_]
Savings Association to Mutual Holding Company and
Stock Issuance Plan (the "Plan") pursuant to which
the Association will be reorganized into the mutual
holding company structure. As part of the Plan, the
Association will convert to a federally-chartered
stock savings association which will be wholly-owned
by Gaston Federal Bancorp, Inc., a newly-formed
federal corporation (the "Company"). The Company
will be a majority-owned subsidiary of Gaston
Federal Holdings, MHC (the "Mutual Holding
Company"), a newly-formed federally-chartered mutual
holding company. Pursuant to the Plan, the Company
will offer for sale to certain depositors 47% of its
to-be outstanding shares of common stock and issue
53% of its to-be outstanding shares to the Mutual
Holding Company.
NOTE: The Board of Directors is not aware of any other matter that may come
before the Special Meeting of Members.
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THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE PROPOSITIONS STATED. IF ANY OTHER BUSINESS IS
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PRESENTED AT THE MEETING, THIS PROXY WILL BE VOTED BY THE BOARD OF DIRECTORS IN
THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO
OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
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Votes will be cast in accordance with the Proxy. Should the undersigned
be present and elect to vote at the Special Meeting or at any adjournment
thereof and after notification to the Secretary of the Association at said
Meeting of the member's decision to terminate this Proxy, then the power of said
attorney-in-fact or agents shall be deemed terminated and of no further force
and effect.
The undersigned acknowledges receipt of a Notice of Special Meeting of
Members and a Proxy Statement dated _________, 1998, prior to the execution of
this Proxy.
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Date
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Signature
NOTE: Only one signature is required
in the case of a joint account.
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PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN
THE ENCLOSED ENVELOPE.
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