AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 1998
REGISTRATION NO. 333-42951
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GASTON FEDERAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
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<CAPTION>
FEDERAL 6712 (TO BE APPLIED FOR)
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(State or other jurisdiction of (Primary standard (I.R.S. Employer
incorporation or organization) industrial classification) identification number)
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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
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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>
Common Stock, $1.00 par value per share 2,113,355 shares $10.00 $21,133,550 $6,234.40 (2)
Participation Interests(3) 185,000 shares - - -
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) $5,977 previously paid.
(3) The securities of Gaston Federal Bancorp, Inc. to be purchased by the
Gaston Federal Bancorp, Inc. and Gaston Federal Savings and Loan
Association Employees' Savings and Profit Sharing Plan are included in
the amount shown for Common Stock. Accordingly, pursuant to Rule 457(h)
of the Securities Act of 1933, as amended, no separate fee is required
for the participation interests. Pursuant to such rule, the amount
being registered has been calculated on the basis of the number of
shares of Common Stock that may be purchased with the current assets of
such Plan.
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.
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PROSPECTUS SUPPLEMENT
GASTON FEDERAL BANCORP, INC.
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN
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 interests in shares of common
stock, par value $1.00 per share, of Gaston Federal Bancorp, Inc. (the "Common
Stock") that may be purchased by the Plan at your direction.
Shares of Common Stock will be offered for sale to the Plan and other
eligible persons in a Subscription and Community Offering (collectively, the
"Offering") in connection with the conversion of Gaston Federal Savings and Loan
Association (the "Bank") from a federal mutual savings association to a federal
stock savings association, and the reorganization, of the Bank as a wholly-owned
subsidiary of the Company. As a Member, you may direct the trustee of the Plan
to purchase Common Stock in the Offering with amounts allocated to your account
under the Plan. The Plan would invest in Common Stock through the Gaston Federal
Bancorp, Inc. Stock Fund ("Employer Stock Fund"). Since the Plan actually
purchases the Common Stock, you would acquire only a "membership interest" in
the shares and would not own the shares directly. This Prospectus Supplement
relates to your initial election to direct that all or a portion of your account
be invested in the Employer Stock Fund in the Offering and also to your election
to direct such investment after the Offering is completed. You will be able to
provide alternative investment instructions to the trustee in the event that the
Offering is oversubscribed and the total amount or your account so allocated
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. For a discussion of certain
factors that should be considered by each Member, see "Risk Factors" beginning
on page __ of the Prospectus.
These securities have NOT been approved or disapproved by:
(bullet) the Federal Deposit Insurance Corporation
(bullet) the Securities and Exchange Commission
(bullet) the Office of Thrift Supervision
(bullet) any other federal agency, or
(bullet) any state securities bureau or other state agency.
No office, corporation, commission, bureau or other agency has passed
upon the accuracy or adequacy of this Prospectus Supplement. Any representation
to the contrary is a criminal offense.
The membership interests offered hereby are NOT (1) savings accounts or
deposits; (2) federally insured or guaranteed, or (3) guaranteed by the Company
or the Bank. The Plan's entire investment in Common Stock is subject to loss.
The date of this Prospectus Supplement is February __, 1998.
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TABLE OF CONTENTS
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
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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.
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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.
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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
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for a ruling from the Internal Revenue Service that the Plan is qualified under
Section 401(a) of the 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
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elect to modify the amount contributed to the Plan by filing a new elective
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.
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Limitation on Plan Contributions for Highly Compensated Employees.
Sections 401(k) and 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
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thereto, are distributed within 2-1/2 months following the close of the Plan
Year in which they arose.
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"):
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Net Investment Performance
November 30, 1997
as of 11-30-97 Annualized 5 Years
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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
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 a large flexible component to take advantage of market
opportunities.
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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:
Years of Service Vesting Percentage
---------------- ------------------
0 - 4 0%
5 or more 100%
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.
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
9
<PAGE>
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, ______________________ 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.
10
<PAGE>
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).
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
11
<PAGE>
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 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
12
<PAGE>
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 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
13
<PAGE>
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.
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.
14
<PAGE>
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.
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.
15
<PAGE>
PROSPECTUS
UP TO 2,113,355 SHARES OF COMMON STOCK
GASTON FEDERAL BANCORP, INC.
245 WEST MAIN AVENUE
GASTONIA, NORTH CAROLINA 28053-2249
(704) 868-5200
- --------------------------------------------------------------------------------
Gaston Federal Savings and Loan Association 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 . The shares of common stock of Gaston Federal
Bancorp, Inc. are being offered to the public under the terms of a plan of
reorganization and stock issuance plan 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 the pro forma market value of
the common stock of the Company to be between $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 the Company's 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 ,
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 may be issued in the
reorganization and in such event up to a total of 2,113,355 shares may be sold
in the offering. Based on these estimates, we are making the following offering
of shares of common stock.
<TABLE>
<CAPTION>
Adjusted
Minimum Midpoint Maximum Maximum
------- -------- ------- -------
<S> <C>
o Price per share.................................. $10.00 $10.00 $10.00 $10.00
o Number of shares................................. 1,358,300 1,598,000 1,837,700 2,113,355
o Reorganization expenses.......................... $722,000 $770,000 $818,000 $873,000
o Net Proceeds..................................... $12,861,000 $15,210,000 $17,559,000 $20,261,000
o Net Proceeds per share........................... $9.47 $9.52 $9.55 $9.59
</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. 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. The Company has received preliminary approval
to have the common stock quoted on the Nasdaq Stock Market under the symbol
"GBNK."
For information on how to subscribe, call the Stock Information Center at (704)
868-8155.
TRIDENT SECURITIES, INC.
Prospectus dated February ___, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
----
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
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" section 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, which will allow you to share indirectly in the future
of our bank. 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 for any
individual person, persons on a single account, or persons acting
together is 25,000 shares (or $250,000). 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, we will allocate shares based on the
purchase priorities that we have adopted in the plan of reorganization
and stock issuance plan. These purchase priorities are in accordance
with regulations of the Office of Thrift Supervision. If the offering
is oversubscribed in a particular category, then shares will be
allocated among all subscribers in that category based on a formula
that is described in detail in "The Reorganization and Offering." The
priorities are described in answer to the next question.
Q: WHO WILL BE PERMITTED TO PURCHASE STOCK?
A: The stock will be offered on a priority basis to the following persons:
o Persons who had deposit accounts of at least $50 with us on March
31, 1996. Any remaining shares will be offered to:
o The Company's employee stock ownership plan. Any remaining shares
will be offered to:
o Persons who had deposit accounts of at least $50 with us on
December 31, 1997. Any remaining shares will be offered to:
o 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: 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: 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, particularly the section titled "Risk Factors."
Q: WHO CAN HELP ANSWER ANY QUESTIONS I MAY HAVE ABOUT THE OFFERING?
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) 868-8155
2
<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 REORGANIZATION AND OFFERING
The reorganization involves a number of steps, including the following:
o The Bank will establish the Company and the Mutual Holding
Company, neither of which will have any assets prior to the
completion of the reorganization.
o The Bank will convert from the mutual form of organization to
the capital stock form of organization and issue 100% of its
capital stock to the Company.
o The Company will issue between 2,890,000 and 4,496,500 shares
of its common stock in the Reorganization; 53% of these shares
(or between 1,531,700 shares and 2,383,145 shares) will be
issued to the Mutual Holding Company, and 47% (or between
1,358,300 shares and 2,113,355 shares) will be sold to
depositors, and possibly the public.
o Membership interests that depositors had in Gaston Federal
will become membership interests in the Mutual Holding
Company. As a result, former members of Gaston Federal who
controlled 100% of the votes eligible to be cast by Gaston
Federal's members prior to the reorganization will, through
the Mutual Holding Company, control 53% of the votes eligible
to be cast by Gaston Federal's stockholders immediately
following the reorganization.
DESCRIPTION OF THE MUTUAL HOLDING COMPANY STRUCTURE
The mutual holding company structure differs in significant respects
from the savings and loan holding company structure that is used in a standard
mutual to stock conversion. A savings institution that converts from the mutual
to stock form of organization using the mutual holding company structure sells
only a minority of its shares at the time of the reorganization and offering. By
doing so, a converting institution will raise less than half the proceeds that
would be raised in a traditional mutual to stock conversion. Because less than
half the proceeds are raised, the Company and the Bank will not be as
overcapitalized as if the Bank had converted in a standard conversion. The
shares that are issued to the mutual holding company may be subsequently sold to
Gaston Federal's depositors
3
<PAGE>
if the mutual holding company converts from the mutual to the stock form of
organization. See "Conversion of the Mutual Holding Company to the Stock Form of
Organization." In addition, because the Mutual Holding Company controls a
majority of the Company's Common Stock, we believe that the Reorganization and
Offering will permit the Bank to achieve the benefits of a stock company without
a loss of control that often follows a standard conversion from mutual to stock
form. Sales of locally based, independent savings institutions to larger,
regional financial institutions can result in closed branches, fewer choices for
consumers, employee layoffs and the loss of community support for and
involvement by financial institutions.
Because the Mutual Holding Company is a mutual corporation, its actions
will not necessarily always be in the interests of Gaston Federal's
stockholders. In making business decisions, the Mutual Holding Company's Board
of Directors, will consider 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.
CONVERSION OF THE MUTUAL HOLDING COMPANY TO THE STOCK FORM OF ORGANIZATION
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 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.
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 the Bank'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. See page ____.
Gaston Federal Bank
245 West Main Avenue
4
<PAGE>
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_____.
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. If market or financial
conditions change , we may increase the Offering to up to 2,113,355 shares
without further notice to you. The number of shares that we sell in the Offering
is subject to OTS approval.
STOCK PURCHASE PRIORITIES
The Company will offer shares of its common stock on the basis of
purchase priorities. Certain depositors and the Bank's employee stock ownership
plan will receive subscription rights to purchase shares. Any shares not
purchased in this subscription offering may be offered to certain members of the
general public in a community offering. We have engaged Trident Securities, Inc.
to assist us on a best efforts basis in selling the common stock in the
Offering. See pages _____ to _____.
PROHIBITION ON TRANSFER OF SUBSCRIPTION RIGHTS
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
The Bank's board of directors set the offering price per share at
$10.00 (the "Subscription Price"), the price most commonly used in stock
offerings involving mutual to stock conversions of mutual savings institutions.
The number of shares of common stock issued in the Offering is based on the
independent valuation (the "Independent Valuation") prepared by Feldman
Financial Advisors, Inc., Washington, D.C. 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 (the "Estimated Valuation Range"). Based
on the Independent Valuation 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. The Bank has decided to offer 47% of such shares, or
between 1,350,300 shares and 1,837,700 shares (the "Offering Range"), to
depositors and the public pursuant to this Prospectus. The Board of Directors
determined to sell 47% of the stock in the offering in order to raise the
maximum amount of proceeds while permitting the Company to issue additional
shares of common stock in the future pursuant to the restricted stock plan and
stock option plan that the Company intends to adopt at least six months after
the reorganization and offering. 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.
Changes in the market and financial conditions and demand for the
common stock may result in an increase of up to 15% in the maximum of the
Estimated Valuation Range (to up to $44,965,000) and a corresponding increase in
the maximum of the Offering Range (to up to 2,113,355 shares), subject to OTS
approval. We will not notify
5
<PAGE>
subscribers if the maximum of the Estimated Valuation Range and the maximum of
the Offering Range are increased by 15% or less. We will, however, notify
subscribers if the maximum of the Estimated Valuation Range is increased by more
than 15% or if the minimum of the Estimated Valuation Range is decreased. THE
INDEPENDENT VALUATION IS NOT A RECOMMENDATION OF AS TO THE ADVISABILITY OF
PURCHASING SHARES, AND YOU SHOULD NOT BUY STOCK BASED ON THE INDEPENDENT
VALUATION.
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 Company may terminate any community
offering at any time prior to April ___, 1998, or later if permitted by the OTS.
BENEFITS TO MANAGEMENT FROM THE OFFERING
Our full-time employees will participate in our employee stock
ownership plan. We also intend to implement a restricted stock plan and a stock
option plan following completion of the Reorganization, which will benefit our
officers and directors. If we adopt the restricted stock plan, certain officers
and directors will be awarded shares of common stock at no cost to them.
However, the restricted stock 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 estimates:
o 50% will be used to buy all the capital stock of Gaston Federal.
o 8% will be loaned to the ESOP to fund its purchase of common
stock.
o 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 new branch openings or deposit
or branch 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 _____.
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.
MARKET FOR THE COMMON STOCK
We have received conditional approval to have the Company's common
stock quoted on the Nasdaq National Market System under the symbol "GBNK"
subject to compliance with certain conditions including a minimum market
capitalization, and a minimum number of market makers and record holders.
Trident Securities, Inc. has indicated its intention to make a market in the
common stock, and based on our analysis of the results of recent conversion
stock offerings we anticipate that the Company will satisfy the requirements
relating to the minimum market capitalization, number of market makers and
record holders. If we are unable, for any reason, to
6
<PAGE>
list the Common Stock on the Nasdaq National Market, or to continue to be
eligible for such listing, then we intend to list the Common Stock on the Nasdaq
SmallCap Market under the same symbol, or on the American Stock Exchange,
subject to the applicable listing criteria for such markets. See page _______.
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.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Years Ended
September 30,
1997 1996
------------- ------------
(Dollars in Thousands)
<S> <C>
Total assets...................................................................... $ 173,470 $ 171,953
Loans receivable, net ............................................................ 134,491 130,862
Mortgage-backed securities........................................................ 10,098 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
SUMMARY OF OPERATIONS
<CAPTION>
Years Ended September 30,
1997 1996
------------- -------------
(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>
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............................................................. 3.24 2.82
Net interest margin.................................................................. 3.50 3.03
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>
9
<PAGE>
RECENT DEVELOPMENTS
The following selected financial and other data is qualified in its
entirety by reference to the detailed information and financial statements and
accompanying notes thereto appearing elsewhere in this prospectus. Selected
financial condition data at December 31, 1997 and operating data for the three
months ended December 31, 1997 and 1996 have been derived from unaudited
financial statements. In the opinion of management, such information reflects
all adjustments (which consist only of normal recurring adjustments) necessary
for a fair presentation of the selected financial information and other data.
The results of operations for the three months ended December 31, 1997 are not
necessarily indicative of the results which may be expected for any other
period.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
At At
December 31, September 30,
1997 1996
------------ -------------
(Dollars in Thousands)
<S> <C>
Total assets.................................................................... $ 173,437 $ 173,470
Loans receivable, net .......................................................... 134,530 134,491
Mortgage-backed securities...................................................... 9,547 10,087
United States government and agency securities held to maturity................. 9,660 10,407
United States government and agency securities available for sale............... 3,016 2,009
Other investments available for sale............................................ 5,607 6,239
Other investments held to maturity.............................................. 370 --
Deposits........................................................................ 146,306 145,444
Borrowed funds.................................................................. 3,500 3,500
Total equity.................................................................... 21,423 20,868
SUMMARY OF OPERATIONS
<CAPTION>
Three Months
Ended December 31,
1997 1996
------------ -----------
(Dollars in Thousands)
Interest income................................................................. $ 3,234 $ 3,181
Interest expense................................................................ 1,738 1,770
Net interest income............................................................. 1,496 1,411
Provision for loan losses....................................................... 75 59
Net interest income after provision for loan losses............................. 1,421 1,352
Non-interest income............................................................. 204 288
Non-interest expense ........................................................... 1,028 1,008
Net operating income before income taxes........................................ 597 632
Income tax expense.............................................................. 219 258
Net income...................................................................... 378 374
</TABLE>
10
<PAGE>
KEY OPERATING RATIOS AND OTHER DATA
<TABLE>
<CAPTION>
At and For the Three
Months Ended December 31,
1997 1996
-----------------------------
<S> <C>
PERFORMANCE RATIOS:
Return on average assets (net income divided by average total assets)................. 0.87% 0.87%
Return on average equity (net income divided by average equity)....................... 7.18% 7.74%
Net interest rate spread.............................................................. 3.18% 2.83%
Net interest margin................................................................... 3.45% 3.34%
Average interest-earning assets to average interest-bearing liabilities............... 111.98% 111.94%
Non interest expenses to total assets................................................. 2.37% 2.23%
Non-interest expenses to average total assets......................................... 2.36% 2.21%
ASSET QUALITY RATIOS:
Nonperforming assets to total assets.................................................. 0.79% 0.78%
Nonperforming loans to total loans.................................................... 0.80% 0.78%
Nonperforming loans to total assets................................................... 0.65% 0.63%
Allowance for loan losses to total loans at the end of period......................... 0.84% 0.62%
Allowance for loan losses to nonperforming loans...................................... 105.25% 78.93%
Net interest income after provision for loan losses, to total non-interest expenses... 138.23% 134.13%
CAPITAL RATIOS:
Ratio of average equity to average total assets....................................... 12.10% 11.28%
Equity to assets at period end........................................................ 12.33% 11.49%
OTHER DATA:
Number of real estate loans outstanding............................................... 1,998 2,041
Number of deposit accounts............................................................ 14,369 14,414
Number of full service offices........................................................ 4 4
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997, AND SEPTEMBER 30, 1997
Assets. Total assets increased by $200,000, or 0.1%, from $173.5
million as of September 30, 1997, to $173.7 million as of December 31, 1997.
Cash and cash equivalents increased by $300,000, or 6.5%, from $4.6 million to
$4.9 million, while investment and mortgage-backed securities decreased by
$543,000, or 1.9%, from $28.7 million to $28.2 million. Total loans increased by
$39,000 to $134.5 million at December 31, 1997.
Total liabilities decreased by $445,000, or 0.3%, from $152.6 million
as of September 30, 1997 to $152.7 million as of December 31, 1997. Total
deposits increased by $862,000, or 0.6%, from $145.4 million to $146.3 million.
Borrowed money remained constant at $3.5 million. Other noninterest costing
liabilities decreased by $1.4 million, or 38.8%, from $3.6 million to $2.2
million. The primary reason for this change was a $968,000 decrease in advances
from borrowers for taxes and insurance (escrows) due to the payment of annual
property taxes in December 1997.
Total Equity. Total equity for the period ended December 31, 1997,
amounted to $21.4 million, as compared to $20.0 million for the period ended
September 30, 1997. This represents an increase of $555,000, or 2.7%. This
increase was due to current period earnings of approximately $378,000 and an
increase in unrealized gains on securities held as available for sale of
$177,000.
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED DECEMBER 31, 1997 AND
1996
11
<PAGE>
Net Income. Net income increased by $4,000, or 1.1%, from $374,000 for
the quarter ended December 31, 1996, to $378,000 for the quarter ended December
31, 1997.
Net Interest Income. Net interest income increased by $85,000, or 6.0%,
from $1.4 million to $1.5 million. Interest income increased $53,000, or 1.7%,
to $3.2 million. This change was primarily attributable to an increased mix of
higher yielding loans during the quarter ended December 31, 1997. Interest
expense decreased by $32,000, or 1.8%, to $1.7 million. This decrease was
primarily due to a lower cost of funds which was attributable to falling
interest rates and an increased level of lower costing deposits during the
quarter ended December 31, 1997.
Provisions for Loan Losses. The provision for loan losses during the
respective quarters increased by $16,000, or 27.1% from $59,000 to $75,000. The
Bank's allowance for possible loan losses increased from $839,000, or 0.62% of
total loans as of December 31, 1996, to $1,182,000, or 0.84% of total loans as
of December 31, 1997.
Noninterest Income. Noninterest income decreased from $288,000 to
$204,000. This represents a decrease of $84,000, or 29.2%. This decrease was
due, in part, to a $102,000 gain on sale of real estate owned and a $51,000 gain
on sale of stock, which occurred during the quarter ended December 31, 1996.
Realized gains from sale of investments held as available for sale amounted to
$80,000 during the quarter ended December 31, 1997.
Noninterest Expenses. Noninterest expenses increased by $69,000, or
5.1%, from $1.3 million to $1.4 million. This increase was primarily due to
higher compensation expenses associated with an increased number of employees.
Provision for Income Taxes. The provision for income taxes decreased by
$39,000, or 15.1% from $258,000 to $219,000. This was primarily due to a
reduction of income before income taxes and the effect of state tax exempt
interest income.
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 equity as a percentage of
assets was 12.03%, and for the fiscal year ended September 30, 1997 our return
on average equity (net income divided by average equity) was 7.38%. Our equity
as a percentage of assets 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 equity as a percentage of consolidated assets would be
approximately 20.1% at the adjusted maximum of the Offering Range. We currently
anticipate that it will take time to prudently deploy the capital that we will
raise in the Offering. As a result, until we have leveraged the capital we
receive in the Offering by increasing our interest-earning assets (and our
interest-bearing liabilities) and thereby reduced our equity as a percentage of
assets to industry averages, our return on average equity is expected to be
below the industry average . There can be no assurances that we will be able to
successfully leverage our capital, or that we will be successful in generating
future returns on equity equal to our historical returns or industry averages.
12
<PAGE>
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 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 $28.7 million,
including $8.2 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, and
the Mutual Holding Company will own 53.0% of the Common Stock outstanding at the
completion of the Reorganization and Offering. The Mutual Holding Company will
be controlled by its executive officers and directors, who initially will
consist of persons who are executive officers and directors of the Company.
Executive officers and directors of the Company will own 6.9% of the Common
Stock outstanding at the completion of the Reorganization and Offering (assuming
shares are sold at the midpoint of the Offering Range and that executive
officers and directors receive all the shares for which they are expected to
subscribe), and, based on such assumptions, the Mutual Holding Company and
executive officers and directors as a group would own 59.9% of the Common Stock
outstanding at the conclusion of the Reorganization and Offering. The Mutual
Holding Company will elect all members of the Board of Directors of the Company,
and , with certain exceptions, will control the outcome of matters presented to
the stockholders of the Company for resolution by vote. The situations in which
the Mutual Holding Company may not control the outcome of such vote include any
stockholder vote to approve a restricted stock plan or stock option plan
instituted within one year of the Reorganization and Offering (which would
require the approval of a majority of the shares other than shares held by the
Mutual Holding Company), any stockholder vote
13
<PAGE>
relating to the Mutual Holding Company's conversion from the mutual to the stock
form of organization (which would require the approval of a majority of shares
other than shares held by the Mutual Holding Company and two-thirds of shares
including shares held by the Mutual Holding Company), or any other stockholder
vote in which the OTS may impose such a requirement. 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).
POSSIBLE DILUTION IN OWNERSHIP INTEREST
Dividend Waivers 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 (a
"Conversion Transaction"), 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.
Terms of Any Conversion Transaction. If the Mutual Holding Company
conducts a Conversion Transaction, the plan of conversion or OTS policy may
require that shares of the resulting entity received by Minority Stockholders in
exchange for their shares of Common Stock be included in determining purchase
limitations applicable to the stock offering that would be conducted as part of
the Conversion Transaction. If this occurs, certain Minority Stockholders may
not be able to exercise subscription rights to purchase shares of common stock
in such stock offering, and in certain circumstances, may be required by the OTS
to divest shares of Common Stock.
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."
14
<PAGE>
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.
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.
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
We have received conditional approval to have the Company's common
stock quoted on the Nasdaq National Market System under the symbol "GBNK"
subject to compliance with certain conditions including a minimum market
capitalization, and a minimum number of market makers and record holders.
Trident Securities, Inc. has indicated its intention to make a market in the
common stock , and based on our analysis of the results of recent conversion
stock offerings we anticipate that the Company will satisfy the requirements
relating to the
15
<PAGE>
minimum market capitalization, number of market makers and record holders. If we
are unable, for any reason, to list the Common Stock on the Nasdaq National
Market, or to continue to be eligible for such listing, then we intend to list
the Common Stock on the Nasdaq SmallCap Market under the same symbol, or on the
American Stock Exchange, subject to the applicable listing criteria for such
markets. There is no assurance that an active and liquid trading market for the
Common Stock will develop. 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.
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 begun an assessment of the electronic systems,
programs, applications and other electronic components used in the operations of
the Bank, and believes that the Bank has either programmed its hardware and
software to be able to accurately recognize the year 2000, or implemented a plan
pursuant to which the hardware and software will be so programmed in the future.
Management believes that significant additional costs will not be incurred in
connection with the year 2000 issue, although there can be no assurances in this
regard. Management continues to test the Bank's hardware and software to
determine whether they will be able to function accurately in the year 2000.
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. The Bank is also a member
of the Federal Home Loan Bank System and is subject to certain limited
regulations promulgated by the Federal Home Loan Bank. As the holding company of
the Bank, the Company also will be subject to regulation and oversight by the
OTS. 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."
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
16
<PAGE>
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 Company will have all of the powers set forth in its federal charter and
federal law and OTS regulations. The Mutual Holding Company initially will not
conduct any active business other than activities relating to its investment in
a majority of the Common Stock and maintenance of books and records relating to
its members. The Mutual Holding Company does not intend to employ any persons
other than its officers, although it may utilize the Bank's support staff from
time to time. 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."
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, and intends to make such a
determination at the time the Company declares a dividend. OTS regulations
require the Mutual Holding Company to give the OTS prior written notice of any
such waiver, and the conditions pursuant to which the OTS generally approves
dividend waivers are described in "Regulation--Holding Company Regulation." The
Mutual Holding Company's Board of Directors will waive dividends paid by the
Company if the Board determines that such a waiver is in the Mutual Holding
Company's members' best interest because, among other reasons: (i) the Mutual
Holding Company has no need for the dividend considering its business
operations; (ii) the cash that would be received could be invested by the
Company or the Bank at a more favorable rate of return; (iii) such waiver may
increase the capital of the Bank and enhance its business so that members will
continue to have access to the offices and services of the Bank; and (iv) such
waiver preserves the net worth of the Mutual Holding Company through its
principal asset (the Company, and indirectly, the Bank), which would be
available for distribution in the unlikely event of a voluntary liquidation of
the Company and the Bank after satisfaction of claims of depositors and
creditors. The Board of Directors may consider other factors in determining
whether such waiver is consistent with its fiduciary duties to members of the
Mutual Holding Company. Any waiver of dividends by the Mutual Holding Company is
likely to result in an adjustment to the ratio pursuant to which shares of
Common Stock are exchanged for shares of the resulting company in a Conversion
Transaction.
The Mutual Holding Company's Board of Directors will accept dividends
paid by the Company in an amount necessary to pay the Mutual Holding Company's
expenses, and will accept additional dividends if it determines that accepting
such dividends is in the Mutual Holding Company's members' best interest
because, among other reasons: (i) the Mutual Holding Company may increase its
direct ownership of the Company, and indirect ownership of the Bank, by using
cash dividends to purchase additional shares of Common Stock in the open market
from time to time; and (ii) such dividends may be used to promote activities
that are in the interest of members and members' community of Gaston County. Any
purchases of Common Stock by the Mutual Holding Company will increase the
percentage of the Company's Common Stock held by the Mutual Holding Company and,
in a Conversion Transaction, will decrease the aggregate number of shares of the
resulting company issued to Minority Stockholders in exchange for their shares
of Common Stock.
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.
17
<PAGE>
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.
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."
18
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1997, BASED UPON THE SALE OF
----------------------------------------------------------------------------------
2,113,355 SHARES(1)
1,358,300 SHARES 1,598,000 SHARES 1,837,700 SHARES AT ADJUSTED
HISTORICAL AT AT MINIMUM OF AT MIDPOINT OF AT MAXIMUM OF MAXIMUM OF
SEPTEMBER 30, 1997 OFFERING RANGE OFFERING RANGE OFFERING RANGE OFFERING RANGE
------------------ ---------------- ----------------- ----------------- -------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS(2)
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C>
GAAP capital................ $ 20,868 12.03% $26,384 14.74% $27,414 15.23% $28,445 15.71% $29,729 16.31%
Tangible capital:
Tangible capital (3)...... 19,890 11.52% 25,406 14.26% 26,436 14.75% 27,467 15.24% 28,751 15.84%
Requirement............... 2,590 1.50 2,672 1.50 2,688 1.50 2,703 1.50 2,723 1.50
-------- ----- -------- ----- ------- ----- -------- ----- ------- -----
Excess.................. $ 17,300 10.02% $22,733 12.76% $23,748 13.25% $24,764 13.74% $26,029 14.34%
Core capital:
Core capital (3).......... 19,890 11.52% 25,406 14.19% 26,436 14.69% 27,467 15.17% 28,751 15.77%
Requirement(4)............ 5,179 3.00 5,345 3.00 5,376 3.00 5,407 3.00 5,445 3.00
-------- ----- -------- ----- ------- ----- -------- ----- ------- -----
Excess................ $ 14,711 8.52% $20,061 11.19% $21,061 11.69% $22,060 12.17% $23,306 12.77%
Risk-based capital:
Risk-based capital (3)(5). 20,800 21.37% 26,316 26.21% 27,346 27.08% 28,377 27.94% 29,661 29.00%
Requirement............. 7,786 8.00 8,033 8.00 8,079 8.00 8,126 8.00 8,183 8.00
-------- ----- -------- ----- ------- ----- -------- ----- ------- -----
Excess................ $ 13,014 13.37% $18,282 18.21% $19,267 19.08% $20,251 19.94% $21,478 21.00%
</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.
<TABLE>
<CAPTION>
NET OFFERING PROCEEDS
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
------------ ------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <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
========= ========= ========= =========
</TABLE>
19
<PAGE>
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 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
20
<PAGE>
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
We have received conditional approval to have the Company's common
stock quoted on the Nasdaq National Market System under the symbol "GBNK"
subject to compliance with certain conditions including a minimum market
capitalization, and a minimum number of market makers and record holders.
Trident Securities, Inc. has indicated its intention to make a market in the
common stock , and based on our analysis of the results of recent conversion
stock offerings we anticipate that the Company will satisfy the requirements
relating to the minimum market capitalization, number of market makers and
record holders. If we are unable, for any reason, to list the Common Stock on
the Nasdaq National Market, or to continue to be eligible for such listing, then
we intend to list the Common Stock on the Nasdaq SmallCap Market under the same
symbol, or on the American Stock Exchange , 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.
21
<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>
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)................. 20,868 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........ $ 20,868 $ 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."
Pro forma amounts are reduced by the $100,000 that will be used to
capitalize the Mutual Holding Company. Includes unrealized gains on
securities available for sale, net of tax, of $1.0 million.
(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." The Recognition Plan will not be
implemented for at least six months after the Offering and until it has
been approved by the Company's stockholders.
22
<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 U.S. Treasury
rate was used on the reinvestment of proceeds because it more appropriately
reflects a market rate of return than the arithmetic average of the average
yield of the Bank's interest-earning assets and cost of deposits. 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.
23
<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>
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)
24
<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 $0.60,
$0.52, $0.47 and $0.42 at the minimum, midpoint, maximum and adjusted
maximum of the Offering Range, respectively, and pro forma stockholders'
equity per share would be $11.05, $10.02, $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, existing stockholders' voting interest would be diluted by 4.5%,
and 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 $11.02, $10.02, $9.27 and $8.63, 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.
25
<PAGE>
(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."
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
Shares Issued
Position in the
Name With the Bank Total Shares(1) Aggregate Price Offering(2)
- ------------------ ----------------- ----------------- ----------------- ----------------
<S> <C>
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
Eugene R. Matthews, II 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 235,000 $2,350,000 14.7%
as a group (11 persons)
</TABLE>
- ----------------
*Less than 1%.
(1) The maximum number of shares for which any officer or director may subscribe
is 25,000 shares.
(2) At the midpoint of the Offering Range.
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;
26
<PAGE>
(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:
[Graphic appears here - wording below]
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 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
27
<PAGE>
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 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
28
<PAGE>
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.
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,
29
<PAGE>
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 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
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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
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.
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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 for the
Subscription Price of $10.00 per share. 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 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.
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SYNDICATED COMMUNITY OFFERING
Depending on market conditions, the common stock may be offered for
sale (for the Subscription Price of $10.00 per share) 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.
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
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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 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
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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.
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.
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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 1% 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 4 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 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
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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."
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.
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RESTRICTIONS ON SALE OF STOCK BY DIRECTORS AND OFFICERS
All shares of the common stock purchased by directors and officers 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.
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
38
<PAGE>
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.
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.
39
<PAGE>
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.
40
<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>
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>
41
<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 .83% of total 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.
42
<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 MARKET RISK
Generally. The Bank's most significant form of market risk is
interest-rate risk, as the majority of the Bank's assets and liabilities are
sensitive to changes in interest rate. 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.
43
<PAGE>
Percentage Change in Net Portfolio Value
Changes Board
in Market Projected Policy
Interest Rates Change (1) Limit (2)
-------------- ---------- -----------
(basis points)
+ 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)%
- ------------------------
(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 $3.6
million, or 2.8%, from $130.9 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. Total assets will
increase as a result of the Offering. See "Use of Proceeds" for a discussion of
the manner in which the Company intends to use the proceeds of the Offering.
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. The Offering will result in an increase
in the Company's equity (as compared to the Bank's equity prior to the Offering)
44
<PAGE>
in an amount equal to net Offering proceeds minus (i) the $100,000 used to
capitalize the Mutual Holding Company and (ii) the cost of the shares purchased
by the ESOP.
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>
Interest-earning assets:
Loans receivable (1).............. $134,491 8.05% $132,529 $10,826 8.17% $126,503 $10,218 8.08%
Investment securities (2)......... 18,655 6.60 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 7.82 163,416 12,936 7.92 160,349 12,518 7.81
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................. $ 5,984 $ 5,136
======== ========
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.
45
<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
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C>
Interest Income:
Securities and other interest earning assets...... $ (69) $ 31 $ (2) $ (40)
Mortgage-backed and related securities............ (133) (20) 3 (150)
Loan portfolio.................................... 486 116 6 608
------ ------ ------ -------
Total interest-income......................... 284 127 7 418
------ ------ ------ -------
Interest expense:
Deposits.......................................... (16) (474) 1 (489)
Borrowed funds.................................... 57 1 1 59
------ ------ ------ -------
Total interest-expense........................ 41 (473) 2 (430)
------ ------ ------ -------
Net interest income.................................... $ 243 $ 600 $ 5 $ 848
====== ====== ====== =======
</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. Management intends to initially invest the Offering
proceeds in interest earning assets and believes that the Bank and the Company
will derive additional interest income from such sources. However, there can be
no assurances that the overall amount of earnings of the Company will be higher
than the historical earnings of the Bank as a result of the Offering. See "Use
of Proceeds."
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.
46
<PAGE>
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 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.
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The Bank provided $293,000 and $47,000 in loan loss provisions during
the fiscal years ended September 30, 1997 and 1996, respectively. The increase
was primarily due to our intention to grow our portfolio of higher- yielding
construction, commercial and multifamily residential real estate, and commercial
business loans. Based on our own experience, and industry experience, we believe
that these types of loans expose our operations to greater risk of loss than the
one- to four-family residential real estate loans that we have traditionally
emphasized. 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, 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 effect of the decrease in deposit insurance was partially offset
by a $252,000, or 12.8%, increase in salaries and benefits to $2.2 million for
the fiscal year ended September 30, 1997 from $2.0 million for the prior fiscal
year. The SAIF 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.
Management believes that noninterest expenses are likely to increase
following the Reorganization and Offering due to the expenses of being a public
company. These expenses include costs of preparing financial reports and public
documents, and increased costs associated with communicating with stockholders
and investors. In addition, salaries and benefits expenses are likely to
increase 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,
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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. The Bank's effective tax
rate decreased to 36.4% for the fiscal year ended September 30, 1997 from 40.8%
for the fiscal year ended September 30, 1996 primarily due to the effects of
certain non-deductible expenses incurred in 1996.
CAPITAL RESOURCES AND LIQUIDITY
The Bank's liquidity management objective is to ensure the availability
of sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for expansion. Liquidity management addresses the ability to meet
deposit withdrawals on demand or at contractual maturity, to repay borrowings as
they mature, and to fund new loans and investments as opportunities arise. The
Bank's primary sources of internally generated funds are principal and interest
payments on loans receivable, cash flows generated from operation, and cash
flows generated by investments. External sources of funds include increases in
deposits and advances from the FHLB of Atlanta. Management believes that the
Bank's liquidity will be initially increased due to the proceeds received from
the Offering.
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Government, federal agency and other investments having maturities of five years
of less. Current OTS regulations require that a savings association maintain
liquid assets of not less than 4% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet applicable liquidity
requirements. At September 30, 1997, the Bank's liquidity, as measured for
regulatory purposes, was in excess of the minimum OTS requirement.
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. The Bank believes that it
has adequate resources to fund loan commitments as they arise. If the Bank
requires funds beyond its internal funding capabilities, additional advances
from the FHLB of Atlanta are available. At September 30, 1997, approximately
$87.7 million of time deposits scheduled to mature within a year, and the Bank
expects that a portion of these time deposits will not be renewed upon maturity.
Following the conversion, the Company will initially conduct no
business other than holding the capital stock of the Bank and the loan it will
make to the ESOP. In order to provide sufficient funds for its operations, the
Company expects to retain and invest 50% of the net proceeds of the offering
remaining after making the loan to the ESOP. In the future, the Company's
primary source of funds, other than income from its investments and principal
and interest payments received with respect to the ESOP loan, is expected to be
dividends from the Bank. As a stock savings bank, the Bank may not declare or
pay a cash dividend on its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal regulations. At September 30,
1997, the Bank complied with all applicable capital requirements.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related Notes have been
prepared in accordance with generally accepted accounting principles, which
generally require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations. Nearly all the assets
and liabilities of the Bank are financial, unlike most industrial companies. As
a result, the Bank's performance is
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directly impacted by changes in interest rates, which are indirectly influenced
by inflationary expectations. The Bank's ability to match the interest
sensitivity of its financial assets to the interest sensitivity of it financial
liabilities in its asset/liability management may tend to minimize the effect of
changes in interest rates on the Bank's performance. Changes in interest rates
do not necessarily move to the same extent as changes in the price of goods and
services. In the current interest rate environment, liquidity and the maturity
structure of the Bank's assets and liabilities are critical to the maintenance
of acceptable performance levels.
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 begun an assessment of the electronic systems,
programs, applications and other electronic components used in the operations of
the Bank, and believes that the Bank has either programmed its hardware and
software to be able to accurately recognize the year 2000, or implemented a plan
pursuant to which the hardware and software will be so programmed in the future.
Management believes that significant additional costs will not be incurred in
connection with the year 2000 issue, although there can be no assurances in this
regard. Management continues to test the Bank's hardware and software to
determine whether they will be able to function accurately in the year 2000.
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.
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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 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 total 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>
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 total
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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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
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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 $555,800.
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)
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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.
55
<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
56
<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>
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.
57
<PAGE>
<TABLE>
<CAPTION>
Fixed Rates Adjustable Rates Total
---------------- -------------------- ---------------
(Dollars in Thousands)
<S> <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.
58
<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
------------ -------------
(Dollars in Thousands)
<S> <C>
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
59
<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>
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
60
<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.
61
<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>
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:
Consumer loans.................................................... 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>
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........... $ 1,110 100.00% $ 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."
62
<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
--------- ---------- ------ --------- ----------- ------
(Dollars in Thousands)
<S> <C>
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 available for sale.
63
<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
-------------------- -------------------- --------------------- --------------------
Weighed Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield(1) Value Yield(1) Value Yield(1) Value Yield(1)
(Dollars in Thousands)
<S> <C>
U.S. Government securities...... $ 1,000 5.59% $ 2,503 6.33% $ -- --% $ -- --%
U.S. Agency securities.......... 1,049 5.63 7,617 6.38 -- -- 248 7.58
--------- -------- --------- --------- --------- --------- -------- --------
Total........................... $ 2,049 5.63% $ 10,120 6.38% $ -- --% $ 248 7.58%
========= ======== ========= ========= ========= ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
-------------------------------
Total Securities
-------------------------------
Weighted
Carrying Average Market
Value Yield(1) Value
<S> <C>
U.S. Government securities...... $ 3,502 6.12% $ 3,506
U.S. Agency securities.......... 8,914 6.34 8,928
--------- --------- ---------
Total........................... $ 12,416 6.28% $ 12,434
========= ========= =========
</TABLE>
- --------------------
(1) Yields on tax exempt obligations have been computed on a tax equivalent
basis.
64
<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.
65
<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
- -------- ------------- ------------- ----------- ------------- -----------
<S> <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.
Maturity Period Certificates of Deposit
- --------------- ------------------------
(Dollars in Thousands)
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
=========
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.
66
<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.
As of September 30,
----------------------------
1997 1996
------------ -----------
(Dollars in Thousands)
Interest Rate
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
========== ==========
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, Total
- ------------- ------------------ ------------------ ------------------ ------------- -----
(Dollars in Thousands)
<S> <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>
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.
67
<PAGE>
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>
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.
68
<PAGE>
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, 1988. 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 $4.8 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.
69
<PAGE>
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.
Status of Examinations. The Bank was last examined by the IRS for the
fiscal year ended September 30, 1994.
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.
70
<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. 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.
71
<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%,
72
<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. As federal corporations, the Company and the
Mutual Holding Company are generally not subject to state business organizations
law.
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<PAGE>
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
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<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.
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<PAGE>
MANAGEMENT OF THE COMPANY
DIRECTORS OF THE COMPANY
Generally. The Board of Directors of the Company will initially consist
of the nine persons who are currently directors of the Bank . 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.
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."
Name Age* Position
- ----------------------- ----- --------
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
- ---------------------------
*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 directors of
the Company will not initially receive fees for serving on the Company's Board
of Directors.
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 serving 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, 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 Beal. The Audit Committee is
expected to meet at least quarterly to examine and approve the audit report
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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>
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
Eugene R. Matthews, II 40 Director 1998 2001
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:
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.
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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.
Eugene R. Matthews, II was elected to the Bank's Board of Directors in
January 1998. Since 1980, Mr. Matthews has been a Senior Vice President and
Director of Matthews-Belk Company, a department store chain.
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 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 B. Frank Matthews, II. 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 beneficiaries. The DCA is an unfunded
plan for
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tax purposes and for purposes of ERISA. All obligations arising under the DCA
are payable from the general assets of the Bank. In October 1998, Mr. Matthews
will receive the first of what will be 120 monthly payments of $1,026 under the
DCA.
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. In November 1997
Mr. Matthews received the first of what will be 180 monthly payments of $425
under the SRA.
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
------------------------ -----------
OTHER
YEAR ANNUAL RESTRICTED OPTIONS/ ALL OTHER
ENDED COMPENSATION STOCK SARS LTIP COMPENSATION
NAME AND PRINCIPAL POSITION SEPTEMBER 30(1) SALARY(2) BONUS(3) (4) AWARDS(5) (#)(6) PAYOUTS (7)
- ----------------------------- -------------- ---------- --------- ------------- ----------- --------- ---------- -----------
<S> <C>
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, and the
information presented in this table relates to compensation from such date
through September 30, 1997.
(9) Mr. Williams resigned as Chief Executive Officer and was appointed Vice
Chairman in August 1997.
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
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<PAGE>
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.
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.
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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>
$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 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.
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<PAGE>
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 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 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
83
<PAGE>
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 ss. 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 nonvested shares will be distributed to the participant when paid,
and the participant will be entitled to vote the nonvested 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.
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
84
<PAGE>
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 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.
Restrictions on Acquisitions of Securities. The Company's Charter
provides that for a period of five years from the effective date of the charter,
no person other than the Mutual Holding Company may directly or indirectly offer
to acquire or acquire the beneficial ownership of more than 10% of any class of
equity security of the Company. In addition, for a period of five years
following the effective date of the Charter each share beneficially owned in
violation of the foregoing percentage limitation shall not be counted as shares
entitled to vote, shall not be voted by any person or counted as voting shares
in connection with any matter submitted to stockholders for a vote, and shall
not be counted as outstanding for purposes of determining a quorum or the
affirmative vote necessary to approve any matter submitted to the stockholders
for a vote.
85
<PAGE>
Special Meeting of Stockholders. The Company's Charter provides that
for five years after the effective date of the Charter, special meetings of
stockholders relating to changes in control of the Company or amendments to the
Charter may be called only by the Board of Directors.
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 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 30,000,000 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 10,000,000 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,
86
<PAGE>
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.
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 PLLC., 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.
87
<PAGE>
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 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.
88
<PAGE>
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION
AND SUBSIDIARY
Financial Statements
For Years Ended
September 30, 1997 and 1998
<PAGE>
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION
AND SUBSIDIARY
Contents
Page
Report of Independent Auditors F-1
Consolidated Statements of Condition F-2
Consolidation Statements of Operations 41
Consolidation Statements of Changes in Equity F-3
Consolidated Statements of Cash Flows F-4
Notes to Consolidated Financial Statements F-5 - F-14
Certain schedules required by OTS regulations and by Regulation S-X are not
included because they are not applicable or the required information has been
disclosed elsewhere.
Financial statement related to Gaston Federal Bancorp, Inc. and Gaston Federal
Holdings, MHC are not included as they have not begun operations.
<PAGE>
[CHERRY BEKAERT & HOLLAND LOGO APPEARS HERE]
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
F-1
<PAGE>
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Consolidated Statements of Condition
<TABLE>
<CAPTION>
September 30
1997 1996
------------ ------------
<S> <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
Equity
Retained earnings (substantially restricted) 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.
F-2
<PAGE>
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>
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.
F-3
<PAGE>
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended September 30
1997 1996
----------- ------------
<S> <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.
F-4
<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. Gaston Financial
Services, Inc. acts as an independent agent selling various financial products.
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.
F-5
<PAGE>
Note 1 - Summary of Significant Accounting Policies (continued)
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 (from 3 to 30 years)
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.
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
less estimated costs to sell 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>
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>
F-6
<PAGE>
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>
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 mutual fund investments are in funds that invest primarily in obligations of
the US government or its agencies.
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.
September 30, 1997
----------------------------
Book Fair
Value Value
----------------------------
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
============= =============
F-7
<PAGE>
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:
1997 1996
------------------------------
Real estate:
One-to-four family residential $106,422,243 $104,363,477
Multi-family residential 6,514,000 6,843,000
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
============== ==============
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:
1997 1996
-------------------------
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
Changes in the allowance for loan losses for the two years ended September 30,
1997 were as follows:
1997 1996
-------------------------
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
============ =========
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.
F-8
<PAGE>
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:
1997 1996
-------------------------
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
=========== ===========
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
------------------------------------- --------------------------------------
Balance Interest Paid Rate Balance Interest Paid Rate
------------- ------------- ---- ------------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $ 3,022,611 - - $ 2,087,904 - -
Interest-bearing demand 25,906,245 $ 672,000 2.8% 23,715,813 $ 685,000 2.9%
Passbook savings 14,196,836 387,000 2.8% 14,082,235 394,000 2.9%
Savings certificates 102,317,808 5,746,000 5.5% 106,089,140 6,215,000 5.8%
------------- ---------- ------------- ----------
$ 145,443,500 $6,805,000 4.6% $ 145,975,092 $7,294,000 5.0%
============= ========== === ============= ========== ===
</TABLE>
Contractual maturities of savings certificates as of September 30, 1997 are as
follows:
Under 1 year $ 87,758,157
1 to 2 years 10,680,176
2 to 3 years 3,879,475
-------------
$ 102,317,808
=============
Certificates of deposit in excess of $100,000 totaled $17,611,000 and
$17,465,000 at September 30, 1997 and 1996, respectively, and are not federally
insured. 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.
F-9
<PAGE>
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:
1997 1996
------------------------
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
=========== ===========
Note 7 - Income Taxes
The provision for income taxes is summarized below:
1997 1996
-----------------------
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
========== ===========
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:
1997 1996
----------------------
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
========== ==========
Effective tax rate 36.4% 40.8%
========== ==========
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:
F-10
<PAGE>
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
Note 7 - Income Taxes (continued)
1997 1996
---------------------------
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)
============ ============
Gaston Federal, in accordance with SFAS No. 109, has not recorded a deferred tax
liability of approximately $1,870,000 as of September 30, 1997 related to the
cumulative special bad debt deduction for savings and loan associations
recognized for income tax reporting prior to September 30, 1988, Gaston
Federal's base year.
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:
1997 1996
--------------------------
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
Loan commitments at September 30, 1997 include $1.6 million with fixed rates
ranging from 6.75% to 8.0%, and $3.4 million at variable rates based on the
prime rate or on the US treasury bill rates. Commitment periods are typically
60 days.
F-11
<PAGE>
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
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.
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, and
related capital ratios:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------
Amount Ratio Amount Ratio
--------------------------------------------------------
<S> <C>
Retained earnings per financial
statements $ 19,769,045 $ 18,337,197
Adjustments
Income taxes - (280,818)
Other 121,000 (38,379)
------------- ------------ ------------- -----------
Tangible capital (to total adjusted
assets) $ 19,890,045 11.5% $ 18,018,000 10.4%
============= ============ ============= ===========
Core Capital (to total adjusted
assets) $ 19,890,045 11.5% $ 18,018,000 10.4%
============= ============ ============= ===========
Plus qualified allowance for
loan losses $ 910,000 830,000
------------- -------------
Risk-based capital (to risk
weighted assets) $ 20,800,045 21.4% $ 18,848,000 22.3%
============= ============ ============= ===========
</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.
F-12
<PAGE>
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
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 meeting age and service requirements. 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.
Separate company information relating to Gaston Federal is not available.
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.
Note 11 - Other expenses
Other expenses in the statements of operations relate primarily to miscellaneous
operating expenses, such as postage and office supplies, and charitable
contributions.
Note 12 - 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.
F-13
<PAGE>
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION and SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
Note 12 - Fair Value of Financial Instruments (continued)
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>
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>
Note 13 - 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. The retained
earnings of Gaston Federal will be substantially restricted after the
reorganization by OTS regulations limiting capital distributions. Costs
incurred in the reorganization, which were immaterial at September 30, 1997,
will be offset against proceeds if the conversion is completed as planned, or
charged to expense in the event the reorganization is not completed.
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.
F-14
<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>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
G-4
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Amount
------
* Legal Fees and Expenses........................ $ 140,000
* Printing and Mailing............................. 142,600
* Accounting Fees and Expenses..................... 100,000
* Appraisal Fees and Expenses...................... 25,000
** Marketing Agent Fees............................. 360,000
** Marketing Agent Legal Fees and Expenses.......... 35,000
* Filing Fees (SEC, OTS and Blue Sky).............. 25,400
* Conversion Agent Fees and Expenses............... 20,000
* Transfer Agent Fees............................ 15,000
* Other Expenses................................... 10,000
-----------
* Total ........................................... $ 873,000
* 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 15. 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
<PAGE>
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.
(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 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 Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.
8.2 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
<PAGE>
10.3** Employee Stock Ownership Plan
10.4** Supplemental Executive 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.
**Previously filed.
(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.
<PAGE>
(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.
(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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Gastonia, state of North Carolina on February 2,
1998.
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.
Signatures Title Date
---------- ----- ----
/s/ Kim S. Price President and Chief Executive January 30, 1998
________________________ Officer (Principal Executive
Kim S. Price Officer)
/s/ Gary F. Hoskins Vice President, Treasurer and January 30, 1998
________________________ Chief Financial Officer
Gary F. Hoskins (Principal Financial and
Accounting Officer)
/s/ Eugene R. Matthews, II Director January 30, 1998
________________________
Eugene R. Matthews, II
/s/ David W. Hoyle Director January 30, 1998
________________________
David W. Hoyle
/s/ Robert W. Williams, Sr. Director January 30, 1998
________________________
Robert W. Williams, Sr.
<PAGE>
Signatures Title Date
---------- ----- ----
/s/ Martha B. Beal Director January 30, 1998
________________________
Martha B. Beal
/s/ James J. Fuller Director January 30, 1998
________________________
James J. Fuller
/s/ William Harvey Keith Director January 30, 1998
________________________
William Harvey Keith
/s/ Charles D. Massey Director January 30, 1998
________________________
Charles D. Massey
/s/ Ben R. Rudisill, II Director January 30, 1998
________________________
Ben R. Rudisill, II
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 1998
REGISTRATION NO. 333-42951
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO.1 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 Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.
8.2 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 Executive 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.
**Previously filed.
EXHIBIT 1.2
<PAGE>
GASTON FEDERAL BANCORP, INC.
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
UP TO 1,837,700 SHARES OF COMMON STOCK
($1.00 PAR VALUE PER SHARE)
PURCHASE PRICE $10.00 PER SHARE
AGENCY AGREEMENT
FEBRUARY , 1998
Trident Securities, Inc.
4601 Six Forks Road
Suite 400
Raleigh, North Carolina 27609
Gentlemen:
Gaston Federal Bancorp, Inc., a federal corporation (the
"Company") and Gaston Federal Savings and Loan Association, Gastonia, North
Carolina ("Association"), a federally-chartered, federally-insured savings and
loan association, hereby confirm as of the date hereof their respective
agreements with Trident Securities, Inc., Raleigh, North Carolina ("Trident"), a
broker-dealer registered with the Securities and Exchange Commission (the "SEC")
and a member of the NASD (as defined hereinafter), as follows:
1. Introduction.
The Association is reorganizing into the federal mutual
holding company structure according to the laws of the United States and the
regulations issued thereunder by the Office of Thrift Supervision ("OTS")
(collectively the "Reorganization Regulations"). A Notice of Mutual Holding
Company Reorganization on Form MHC-1, which includes the Association's Plan of
Reorganization and Stock Issuance, as subsequently amended ("Plan"), has been
filed with the OTS and all amendments required to the date hereof have also been
filed. Prior to the date hereof, the Plan has been adopted by the Board of
Directors of the Association (hereinafter referred to as "Directors") and prior
to the Closing Date (as defined hereinafter) the Plan will have been approved by
an order of the OTS or the OTS will have given written notice of its intent not
to disapprove the proposed reorganization; or sixty (60) days shall have passed
since the OTS received the notice and
<PAGE>
Trident Securities, Inc.
February , 1998
Page 2
deemed it sufficient and the OTS has not given written notice that the proposed
reorganization is disapproved or extended for an additional thirty (30) days the
period during which disapproval may be issued. Pursuant to the Plan, Association
will be reorganized into the federal mutual holding company structure, with its
mutual holding company to be named Gaston Federal Holdings, M.H.C. References
herein to the Association shall include the Association in its current mutual
form or post-reorganization stock form as a majority-owned subsidiary of the
Company, as indicated by the context. Each capitalized term not defined herein
shall have the meaning assigned to it in the Registration Statement on Form SB-2
(No. 333-_______) filed by the Company with the Securities and Exchange
Commission ("SEC") (said Registration Statement, including the prospectus
contained therein an all supplements and amendments thereto including the Rule
424(b) prospectus from and after the time it is filed with the SEC, is
hereinafter referred to as the "Registration Statement").
Upon consummation of the reorganization, the Company will have
authorized capital of 25,000,000 shares of capital stock, of which 20,000,000
shares shall be common stock, $ 1.00 par value per share, and 5,000,000 shares
shall be serial preferred stock. Pursuant to the Plan, the Company is offering
between 1,358,300 and 1,837,700 shares ("Shares") of common stock ("Common
Stock") for a purchase price of $10.00 per share ("Purchase Price"), in the
following order of priority: (i) depositors of the Bank whose accounts totaled
$50.00 or more as of March 31, 1996; (ii) the Bank's Employee Stock Ownership
Plan (the "ESOP") (for a total of up to 8.0% of the shares sold in the
Offering); (iii) depositors of the Bank whose accounts totaled $50.00 or more as
of December 31, 1997 ("Supplemental Account Holders"); (iv) depositors of the
Bank whose accounts totaled $50.00 or more as of February _, 1998 (the "Voting
Record Date"); and (v) members of the general public with preference given to
natural persons residing in Gaston County, North Carolina. The offering of
shares as described herein is hereinafter collectively referred to as the
"Offering." The transactions contemplated by the Plan, including the Offering,
are hereinafter collectively referred to as the "Reorganization."
The Company and the Association have been advised by Trident
that it desires to use its best efforts to assist the Company with its sale of
the Common Stock in the Offering. Prior to the execution of this Agreement, the
Company delivered to Trident the Registration Statement dated ,
1998 and all amendments and supplements thereto, if any, to be used in the
Offering, which contain information with respect to the Company, the Association
and the Common Stock.
2. Representations and Warranties.
A. The Company and the Association jointly and
severally represent and warrant to Trident that:
(a) The Association has filed with the OTS
a Notice of Mutual Holding Company Reorganization on Form MHC-1 and an
Application for Approval of a Minority
<PAGE>
Trident Securities, Inc.
February , 1998
Page 3
Stock Issuance by a Subsidiary Savings Association of a Mutual Holding Company
on Form MHC-2, including exhibits, and any amendment or amendments thereto
(collectively, the "MHC Application"). The prospectus contained in the
Registration Statement (the "Prospectus") was approved for use by the OTS on
, 1998. No order has been issued by the OTS preventing or
suspending the use of the Prospectus and no action by or before the OTS to
revoke such authorization is pending, or, to the knowledge of the Company or the
Association, threatened. The Plan has been adopted by the Directors. At the time
the Prospectus was approved for use, the Prospectus complied as to form in all
material respects with the requirements of the OTS and the Reorganization
Regulations, and the MHC Application.
(b) The Company has filed with the SEC the
Registration Statement, including exhibits and an amendment or amendments
thereto, for the registration of the Shares under the Securities Act of 1933, as
amended (the "Securities Act") and the Regulations promulgated thereunder (the
"Securities Act Regulations"); and such Registration Statement has been declared
effective under the Securities Act and no stop order has been issued with
respect thereto and no proceedings therefor have been initiated or, to the
Company's knowledge, threatened by the SEC. Except as the context may otherwise
require, such Registration Statement, as amended or supplemented, on file with
the SEC at the time the Registration Statement became effective, including the
Rule 424(b) Prospectus, financial statements, schedules, exhibits and all other
documents filed as part thereof, as amended and supplemented, is herein called
the "Registration Statement."
(c) As of the date hereof (i) the
Registration Statement complies with the Securities Act and the Securities Act
Regulations, and (ii) the Registration Statement does not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Representations or
warranties in this subsection shall not apply to statements or omissions made in
reliance upon and in conformity with written information furnished to the
Company or the Association by or on behalf of Trident relating to Trident
expressly for use in the Registration Statement or Prospectus.
(d) The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly and validly authorized by all necessary actions on the part of each of the
Company and the Association, and this Agreement is a valid and binding
obligation of each of the Company and the Association, enforceable in accordance
with its terms (except as the enforceability thereof may be limited by
bankruptcy, insolvency, moratorium, reorganization, conservatorship,
receivership or similar laws relating to or affecting the enforcement of
creditors' rights generally or the rights of creditors of insured financial
institutions and their holding companies, the accounts of whose subsidiaries are
insured by the FDIC, by general equity principles, regardless of whether such
enforceability is considered in a proceeding
<PAGE>
Trident Securities, Inc.
February , 1998
Page 4
in equity or at law, or laws relating to the safety and soundness of insured
depository institutions and their affiliates, and except to the extent that the
provisions of Sections 8 and 9 hereof may be unenforceable as against public
policy or by applicable law, including without limitation, Section 23A of the
Federal Reserve Act, 12 U.S.C. Section 371c ("Section 23A")).
(e) The Association has filed with the
Federal Deposit Insurance Corporation ("FDIC") an application pursuant to
12 C.F.R. ss.303.1 for the insurance of accounts of the New Association (the
"FDIC Application").
(f) No order has been issued by the FDIC,
the OTS, the SEC or any other state regulatory or blue sky authority preventing
or suspending the use of the Prospectus and no action by or before any such
government entity to revoke any approval, authorization or order of
effectiveness related to the Reorganization is pending or threatened.
(g) The Registration Statement complied in
all material respects with the Reorganization Regulations, at the time of the
approval of the Registration Statement by the OTS (including any amendments or
supplements thereto) and will so comply until the Closing Date, unless otherwise
expressly permitted in writing by the OTS.
(h) Feldman Financial Advisors, Inc.
("Feldman Financial"), which prepared the appraisal of the Association dated
December 11, 1997, (and to be updated at the time of the completion of the
Offering), is independent with respect to the Company and the Association within
the meaning of the OTS Regulations. The Company and the Association believe
Feldman Financial to be experienced and expert in rendering appraisals of thrift
institutions, and nothing has come to the attention of the Company or the
Association which has caused them to believe that the appraisal by Feldman
Financial was not prepared in accordance with the requirements of the OTS
Regulations.
(i) Cherry, Bekaert & Holland, L.L.P., the
firm which certified the financial statements filed as part of the MHC
Application and Prospectus is, with respect to the Company and the Association,
independent certified public accountants as required by the Securities Act, the
Securities Act Regulations, Rule 101 of the Rules of Conduct of the Code of
Ethics of the American Institute of Certified Public Accountants ("AICPA"), the
Reorganization Regulations and Title 12 of the Code of Federal Regulations.
(j) The consolidated financial statements,
together with the related schedules and notes thereto, included in the MHC
Application and which are part of the Prospectus present fairly the financial
condition, results of operations, retained earnings and cash flows of the
Association at and for the dates indicated and the periods specified and comply
as to form in all material respects with the applicable accounting requirements
of the Securities Act, the
<PAGE>
Trident Securities, Inc.
February , 1998
Page 5
Reorganization Regulations and generally accepted accounting principles
("GAAP"). The term "Association" shall include the Association and Gaston
Financial Services, Inc. ("Subsidiary"), a first tier subsidiary, except where
the context otherwise indicates. Said consolidated financial statements have
been prepared in conformity with GAAP applied on a consistent basis during the
periods involved, present fairly in all material respects the information
required to be stated therein and are consistent with the most recent
consolidated financial statements and other reports filed by the Association
with the OTS and FDIC, except that accounting principles employed in such
filings conform to requirements of such authorities and not necessarily to GAAP.
The other financial, statistical, and pro forma information and related notes
included in the Prospectus present fairly the information shown therein on a
basis consistent with the audited consolidated financial statements of the
Association included in the Prospectus, and as to the pro forma adjustments, the
adjustments made therein have been properly applied on the basis described
therein.
(k) Since the respective dates as of which
information is given in the MHC Application and the Prospectus, except as may
otherwise be stated therein: (i) there has not been any material adverse change
in the condition (financial or otherwise), earnings, capital or properties of
the Association, whether or not arising in the ordinary course of business; (ii)
there has not been any material increase in the long-term debt of the
Association or the Company and neither the Association nor the Company has
issued any securities or incurred any liability or obligation for borrowed money
other than in the ordinary course of business; (iii) there have not been any
material transactions entered into by Company or the Association, except those
transactions entered into in the ordinary course of business; (iv) the
capitalization, liabilities, earnings, assets, properties and business of the
Company and the Association conform in all material respects to the descriptions
thereof contained in the Prospectus; and (v) neither the Company nor the
Association has any material liability, contingent or otherwise, except as set
forth in the Prospectus.
(l) The Association is a
federally-chartered savings and loan association in mutual form of
organization and upon the Reorganization will reorganize into the federal mutual
holding company structure, in both instances duly authorized to conduct its
business and own its property as described in the MHC Application; the
Association has obtained all material licenses, permits and other governmental
authorizations currently required for the conduct of its business; all such
licenses, permits and governmental authorizations currently are in full force
and effect, and the Association is in all material respects complying with all
material laws, rules, regulations and orders applicable to the operation of its
businesses; the Association has not received notice of any proceeding or action
relating to the revocation or modification of any such license, permit or
governmental authorization which, singly or in the aggregate, if subject to an
unfavorable decision, ruling or finding, would materially and adversely affect
the conduct of the business, the condition, financial or otherwise, or the
earnings of the Association; the Association is in good standing with the OTS
and is duly qualified as a foreign corporation to transact business and is in
good standing in each jurisdiction in which its ownership of property or leasing
of properties or the
<PAGE>
Trident Securities, Inc.
February_, 1998
Page 6
conduct of its business requires such qualification, unless the failure to be so
qualified in one or more of such jurisdictions would not have a material adverse
effect on the condition, financial or otherwise, or the business, operations or
income of the Association. Other than the stock of the Subsidiary, the
Association does not own equity securities or any equity interest in any other
business enterprise except as described in the Prospectus. The Subsidiary has
been duly organized and is in good standing under the laws of its jurisdiction
of incorporation with full corporate power and authority to own property and to
conduct business as described in the MHC Application and all of the outstanding
stock of the Subsidiary has been duly authorized and is fully paid and
nonassessable, and such stock is owned directly or indirectly by the
Association, free and clear of any material liens or encumbrances. Except as
described in the Prospectus, the activities of the Subsidiary are permitted by
the rules, regulations, policies and practices of the OTS and the FDIC.
(m) The deposit accounts of the Association
are insured by the Savings Association Insurance Fund ("SAIF") as administered
by the FDIC up to the maximum amount allowed under law.
(n) Upon consumrnation of the Reorganization
and the Offering, (i) the authorized, issued and outstanding equity capital of
the Company and the Association will be as set forth in the MHC Application and
in the Prospectus, and no shares of Common Stock have been or will be issued and
outstanding prior to the Closing Date; (ii) the Shares will have been duly and
validly authorized for issuance and, when issued and delivered by the Company
pursuant to the Plan against payment of the consideration calculated as set
forth in the Plan and in the Registration Statement, will be duly and validly
issued, fully paid and nonassessable; (iii) the issuance of the Shares will not
violate any preemptive rights; and (iv) the terms and provisions of the Shares
will conforrn in all material respects to the description thereof contained in
the MHC Application and the Registration Statement; and (v) the certificates
representing the Shares will conform in all material respects with the
requirements of applicable laws and OTS Regulations. Upon the issuance of the
Shares, good title to the Shares will be transferred from the Company to the
purchasers thereof against payment therefor, subject to such claims as may be
asserted against the purchasers thereof by third-party claimants.
(o) Neither the Company nor the Association
is in violation of its respective charter or bylaws. The consummation of the
transactions herein contemplated will not (i) conflict with or constitute a
breach of, or default under, the charter or bylaws of the Company or the
Association, or, any material contract, lease or other instrument to which the
Company or the Association is a party or in which the Company or the Association
has a beneficial interest, or any applicable material law, rule, regulation or
order; (ii) violate any material authorization, approval, judgment, decree,
order, statute, rule or regulation applicable to the Company or the Association;
or (iii) result in the creation of any material lien, charge or encumbrance upon
any property of the
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Trident Securities, Inc.
February , 1998
Page 7
Company or the Association.
(p) The Company has or upon the Closing Date
will have all such power, authority, authorizations, approvals and orders as may
be required to enter into this Agreement, to carry out the provisions and
conditions hereof and to issue and sell the Shares as provided in the Plan and
as described in the Prospectus, subject to the satisfaction or waiver of the
conditions of the OTS, and the FDIC's approval or non-objection to the
Reorganization, where applicable, and except as may be required under the blue
sky laws of the various States referred to in Section 5(i) hereof.
(q) The Association has good and marketable
title to all properties and assets which are material to the business of the
Association and to those properties and assets described in the MHC Application
and the Prospectus as owned by it, free and clear of all liens, except such
liens as are described in the MHC Application and the Prospectus or are not
materially significant to the business of the Association and all of the leases
and subleases material to the business of the Association under which the
Association holds properties, including those described in the MHC Application
and the Prospectus, are in full force and effect.
(r) The Association is not in violation of
any directive from the FDIC, the OTS, or any other agency to make any material
change in the method of conducting its business so as to comply in all material
respects with all applicable statutes and regulations (including, without
limitation, regulations, decisions, directives and orders of the OTS and the
FDIC) and, to the best knowledge of the Association, there is no suit,
proceeding, charge, formal investigation or action before or by any court,
regulatory authority or governmental agency or body, domestic or foreign, now
pending or threatened, which could reasonably be expected to materially and
adversely affect the Reorganization, the performance of this Agreement or the
consummation of the transactions contemplated in the Plan and as described in
the MHC Application or the Prospectus, or which might result in any material
adverse change in the condition, earnings, capital or properties, of the
Association, or which would materially affect its properties and assets.
(s) The Association has received the
opinions of Luse Lehman Gorman Pomerenk & Schick, P.C. with respect to the
Federal income tax consequences of the Reorganization and the opinion of
_______________________ with respect to the North Carolina State income tax
consequences of the Reorganization; all material aspects of said opinions are
accurately summarized in the MHC Application and Prospectus; and the facts and
representations upon which such opinions are based are truthful, accurate and
complete, and neither the Company nor the Association will take any action
inconsistent therewith.
(t) No default exists, and no event has
occurred which with notice or lapse of time, or both, would constitute a
default on the part of the Company or the Association,
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Trident Securities, Inc.
February , 1998
Page 8
in the due performance and observance by the Company or the Association of any
term, covenant or condition of any indenture, mortgage, deed of trust, note,
bank loan or credit agreement or any other instrument or agreement to which the
Company or the Association is a party or by which it or its properties is bound
or affected in any respect which, in any such case, is material to the Company
or the Association; and no other party to any such agreement has instituted or,
to the knowledge of the Company or the Association, threatened any action or
proceeding wherein the Company or the Association would or might be alleged to
be in default thereunder.
(u) Subsequent to the date the MHC
Application and Prospectus are approved by the OTS and prior to the Closing
Date, except as otherwise may be indicated or contemplated in the MHC
Application and Prospectus, the Association will not: (i) issue any securities
or incur any material liability or obligation, direct or contingent, for
borrowed money, except borrowings from the same or similar sources indicated in
the Prospectus in the ordinary course of its business, or (ii) enter into any
transaction which is material in light of the business and properties of the
Company or the Association, taken as a whole, excluding origination, purchase
and sale of loans and other investments made in the ordinary course of its
business.
(v) The Association has filed all federal,
state and local tax returns required to be filed and has made timely payments of
all taxes due and payable with respect to such returns, have made adequate
reserves for accrued tax liability and no deficiency has been asserted with
respect thereto by any taxing authority.
(w) Neither the Company nor the Association
has made any payment of funds of the Company or the Association as a loan for
the purchase of the Shares.
(x) Neither the Company nor the
Association is in violation of any rule or regulation of the OTS or the FDIC
that could reasonably be expected to result in any enforcement action against
the Company or the Association, or their officers or directors, that could have
a material adverse effect on the financial condition, operations, businesses,
assets or properties of the Company and the Association, taken as a whole.
<PAGE>
Trident Securities, Inc.
February , 1998
Page 9
(y) Prior to the Reorganization, the
Association was not authorized to issue shares of capital stock. The Association
has not: (i) placed any securities within the last 18 months (except for notes
to evidence other bank loans and mortgage-backed securities in the ordinary
course of business); (ii) had any material dealings within the 12 months prior
to the date hereof with any member of the NASD, or any person related to or
associated with such member, other than discussions and meetings relating to the
proposed Offering and routine purchases and sales of securities for or from its
portfolio; (iii) except for the letter agreement entered into between the
Association and Trident dated July 1, 1997 and attached hereto as Exhibit A,
entered into a material financial or management consulting agreement, other than
in the ordinary course of business, except as contemplated hereunder; and (iv)
engaged any intermediary between Trident and the Company or the Association in
connection with the Offering of the Shares, and no person is being compensated
in any manner for such service.
(z) The Company has taken all necessary
action to qualify or register the Shares for offer and sale in the Offering
under the laws of the States wherein such Shares will be offered where such
States require qualification or registration.
(aa) Neither the Company nor the
Association has relied upon Trident or Trident's legal or other advisors for
any legal, tax or accounting advice in connection with the Reorganization or the
Offering.
(bb) All contracts and other documents
required to be filed as exhibits to the Registration Statement or the MHC
Application have been filed with the SEC or the OTS or both, as the case may be.
All Sales Information to be used by the Association in the Offering and required
by the Reorganization Regulations to be filed, has been filed with and approved
for use by the SEC and OTS.
(cc) All of the loans represented as
assets of the Association as of the most recent date for which financial
condition data is included in the Prospectus meet or are exempt from all
requirements of federal, state or local law pertaining to lending, including
without limitation truth in lending (including the requirements of Regulation Z
and 12 C.F.R. Part 226 and Section 563.99), real estate settlement procedures,
consumer credit protection, equal credit opportunity and all disclosure laws
applicable to such loans, except for violations which, if asserted, would not
have a material adverse effect on the Company and the Association, taken as a
whole.
(dd) Neither the Company nor the
Association has made any payment of funds of the Company or the Association
prohibited by law, and no funds of the Company or the Association have been set
aside to be used for any payment prohibited by law.
(ee) The Company and the Association are in
compliance with all
<PAGE>
Trident Securities, Inc.
February , 1998
Page 10
laws, rules and regulations relating to environmental protection and neither the
Company nor the Association is subject to liability under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, or
any similar law, except for violations which, if asserted, would not have a
material adverse effect on the Company and the Association, taken as a whole.
There are no actions, suits, regulatory investigations or other proceedings
pending or, to the knowledge of the Company or the Associaton, threatened
against the Company or the Association relating to environmental protection. No
disposal, release or discharge of hazardous or toxic substances, pollutants or
contaminants, including petroleum and gas products, as any of such terms may be
defined under federal, state or local law, has been caused by the Company or the
Association or, to the knowledge of the Company and the Association, and except
as already disclosed in the Prospectus, has occurred on, in or at any of the
facilities or properties owned or leased by the Company or the Association or in
which the Company or the Association has a security interest, except such
disposal, release or discharge which would not have a material adverse effect on
the financial condition, operations, business, assets or properties of the
Company, the Associaton or the Subsidiary, taken as a whole.
(ff) All documents delivered by the
Association or the Company or their representatives in connection with the
issuance and sale of the Common Stock, except for those documents that were
prepared by parties other than the Association, the Company or their
representatives, were, on the dates on which they were delivered, true, complete
and correct.
(gg) The records of account holders,
depositors, borrowers and other members of the Association delivered to Trident
by the Association or its agent for use during the Reorganization are believed
to be reliable and accurate and the Association is not aware of any inaccuracy
in such records. Trident shall have no liability to any person relating to the
reliability, accuracy or completeness of such records or for any denial or
allocation of a subscription to purchase Shares to any person based upon such
records.
Any certificate signed by an officer of the Company or the
Association and delivered to Trident or its counsel that refers to this
Agreement and is referred to therein as a "representation" or "warranty" shall
be deemed to be a representation and warranty by the Company or the Association
to Trident and its counsel as to the matters covered thereby with the same
effect as if such representation and warranty were set forth herein.
B. Trident represents and warrants as follows:
(a) Trident is registered as a broker-dealer
and is in good standing with the SEC and the NASD.
<PAGE>
Trident Securities, Inc.
February , 1998
Page 11
(b) There is not now pending or to its
knowledge threatened against Trident any action or proceeding before the SEC,
the NASD or any State securities commission concerning its activities as a
broker or dealer.
(c) Each of Trident and its employees,
agents and representatives who shall perform any of the services set forth
herein are duly authorized and empowered, and have all necessary licenses,
approvals and permits to perform such services and Trident is a registered
selling agent in the jurisdictions in which the Company is relying on such
registration for the sale of the Shares and will remain registered in such
jurisdictions in which the Company and the Association is relying on such
registration with respect to the sale of the Shares, until the Offering is
consummated or terminated.
(d) In the event that Trident, at the
request of the Association, assembles and manages a selling group of
broker-dealers which are members of the NASD to participate in the solicitation
of purchase orders for Shares under the Selected Dealers' Agreement, all funds
received by Trident to purchase Shares will be handled in accordance with Rule
15c2-4 under the Securities Exchange Act of 1934, as amended.
(e) The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly and validly authorized by all necessary action on the part of Trident, and
this Agreement is a legal, valid and binding obligation of Trident, enforceable
in accordance with its terms (except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium, reorganization or similar laws
relating to or affecting the enforcement of creditors' rights generally or the
rights of creditors of registered broker-dealers accounts of whose may be
protected by the Securities Investor Protection Corporation or by general equity
principles, regardless of whether such enforceability is considered in a
proceeding in equity or at law, and except to the extent that the provisions of
Sections 8 and 9 hereof may be unenforceable as against public policy).
3. Emplovment of Trident: Sale and Delivery of the Shares.
A. On the basis of the representations and warranties
herein but subject to the terms and conditions set forth in this Section 3, the
Company and the Association hereby employs Trident as its agent to use its best
efforts in assisting the Company with the Company's sale of the Shares in the
Subscription Offering and Community Offering. The employment of Trident
hereunder shall terminate (a) forty-five (45) days after the Subscription
Offering and Community Offering closes, unless the Company and the Association,
with the approval of the OTS, is permitted to extend such period of time, or (b)
upon consummation of the Offering, whichever date shall first occur.
<PAGE>
Trident Securities, Inc.
February , 1998
Page 12
<PAGE>
Trident Securities, Inc.
February , 1998
Page 13
If the Company is unable to sell a minimum of 1,358,300 Shares
(or such lesser amount as the OTS may permit) within the period herein provided,
this Agreement shall terminate and the Association shall refund promptly to any
persons who have subscribed for any Shares the full amount which it may have
received with interest from such persons; and neither party to this Agreement
shall have any obligation to the other party, except as set forth in Sections 8,
9 and 10 hereof. Appropriate arrangements for placing the funds received from
subscriptions for Shares in special interest-bearing accounts with the
Association until all Shares are sold and paid for were made prior to the
commencement of the Subscription Offering, with provision for prompt refund to
the purchasers as set forth above, or for delivery to the Company if all shares
are sold.
If all conditions precedent to the consummation of the
Reorganization are satisfied, including the sale of all Shares required by the
Plan to be sold, the Company agrees to issue or have issued such Shares and to
release for delivery certificates to subscribers thereof for such Shares as soon
as possible after the Closing Date. Such release for delivery shall be against
payment to the Company by any means authorized pursuant to the Prospectus, at
the offices of Luse Lehman Gorman Pomerenk & Schick, P.C. or at such other place
as shall be agreed upon among the parties hereto. The date upon which Trident is
paid the compensation due hereunder is herein called the "Closing Date."
B. Trident shall receive the following compensation
for its services hereunder:
(a) A commission equal to two percent (2.0%)
of the aggregate dollar amount of the Shares sold in the Subscription Offering
and the Community Offering (excluding any Shares sold to the Association's
directors, executive officers and their "associates," as such term is defined in
the Association's Plan of Reorganization and the Association's Employees'
Savings & Profit Sharing Plan), and (iii) a commission agreed upon jointly by
Trident and the Association to reflect market requirements at the time of the
stock allocation in a Syndicated Community Offering. All such fees are to be
payable in next day funds to Trident in Raleigh, North Carolina, on the Closing
Date.
(b) Trident shall be reimbursed for all
out-of-pocket expenses incurred by it or its counsel whether or not the Offering
is completed successfully. Full payment of Trident's allocable expenses,
including legal fees and reasonable out-of-pocket expenses, shall be made in
next day funds on the Closing Date or, if the Offering is not completed or is
terminated for any reason, within ten (10) calendar days of receipt by the
Association of the detailed listing from Trident of its allocable expenses.
Trident's out-of-pocket expenses will not exceed $7,500 and its legal fees will
not exceed $27,500. Trident acknowledges receipt of $7,500 advance payment from
the Association which shall be credited against the total reimbursement due
Trident hereunder.
Notwithstanding the limitations on reimbursement of Trident
for allocable expenses
<PAGE>
Trident Securities, Inc.
February , 1998
Page 14
provided in the immediately preceding paragraph, in the event that a
resolicitation or other event causes the Offering to be extended beyond its
original expiration date, Trident and the Association shall negotiate in good
faith an adjustment to the amount of reimbursement payable to Trident for its
reasonable and allocable expenses, including legal fees.
The Company or the Association shall pay all applicable stock
issue and transfer taxes with respect to the sale of the Shares. The Company or
the Association shall pay all expenses of the Offering, including, but not
limited to, their attorneys' fees, NASD filing fees, filing and registration
fees, attorneys' fees relating to any required "blue sky" or state securities
laws research and filings, telephone charges, air freight, rental equipment,
supplies, transfer agent charges, fees relating to auditing and accounting and
costs of printing all documents necessary in connection with the Offering.
4. Offering.
Subject to the provisions of Section 7 hereof, Trident is
assisting the Company on a best efforts basis in offering a minimum of 1,358,300
Shares and a maximum of 1,837,700 Shares with the possibility of increasing the
number of shares to 2,113,355, in a Subscription and Community Offering. The
Shares are to be initially offered to the public at the price set forth on the
cover page of the Prospectus and the first page of this Agreement.
5. Further Agreements.
The Company and the Association jointly and severally
covenant and agree that:
(a) Subsequent to the respective dates as
of which information is given in the Registration Statement and through and
including the Closing Date, except as otherwise may be indicated or contemplated
therein, neither the Company nor the Association will issue any securities which
will remain issued at the Closing Date or incur any liability or obligation,
direct or contingent, or borrow money, except borrowings or liabilities in the
ordinary course of business, or enter into any other transaction not in the
ordinary course of business and consistent with prior practices, which is
material in light of the financial condition, operations, business, properties
or assets of the Company and the Association, taken as a whole.
(b) If any Shares remain unsubscribed
following completion of the Subscription Offering and the Community Offering,
the Company (i) will, if deemed necessary, promptly file with the SEC a
post-effective amendment to such Registration Statement relating to the results
of the Subscription and the Community Offerings, any additional information with
respect to the proposed plan of distribution and any revised pricing information
or (ii) if no such post-effective amendment is required, will file with the SEC
a prospectus or prospectus supplement containing information relating to the
results of the Subscription and Community Offerings and
<PAGE>
Trident Securities, Inc.
February , 1998
Page 15
pricing information pursuant to Rule 424(c) of the Securities Act Regulations,
in either case in a form reasonably acceptable to the Company and Trident.
(c) The Association will not, at any time
before or after the MHC Application is approved by the OTS, file any amendment
or supplement to such Application without notifying Trident of its intention to
file or prepare an amendment or supplement to the Application and the
Association shall provide Trident and its counsel with the opportunity to review
such amendment or supplement.
(d) Subject to the right of the Company and
the Association to terminate the Offering at any time in its sole
discretion, the Company and the Association will use its respective best efforts
to cause the MHC Application to be approved by the OTS, and the FDIC Application
to be approved by the FDIC, if applicable, and will immediately upon receipt of
any information concerning the events listed below notify Trident in writing:
(i) approval of the MHC Application and the FDIC Application; (ii) receipt of
any comments from the OTS or the FDIC, or any other governmental entity, with
respect to the MHC Application and Registration Statement, the Reorganization or
the transactions contemplated by this Agreement; (iii) requests by the OTS, the
FDIC or any other governmental entity for any amendment or supplement to the MHC
Application and Registration Statement or the FDIC Application or for additional
information; (iv) issuance by the OTS, the FDIC, or any other governmental
entity of any order or other action suspending the Offering or the use of the
MHC Application or the Prospectus or any other filing of the Association under
the Reorganization Regulations or other applicable law, or the threat of any
such action; or (v) issuance by the OTS or any state authority of any stop order
suspending the effectiveness of the MHC Application or the Registration
Statement of the initiation or threat of initiation of any proceedings for that
purpose. The Association will make every reasonable effort to prevent the
issuance by the OTS, the FDIC or any state authority of any such order and, if
any such order shall at any time be issued, to obtain the lifting thereof at the
earliest possible time. The Company or the Association will provide copies of
the foregoing comments, requests and orders to Trident upon receipt of such
items by the Company or the Association.
(e) The Company or the Association will
deliver to Trident and to its counsel two conformed copies of the following
documents (including exhibits thereto): the MHC Application and the FDIC
Application, each as originally filed and of each amendment or supplement
thereto. In addition, the Company or the Association will deliver such
additional copies of the foregoing documents to you as may be required for any
NASD filings. Further, the Company or the Association will deliver to Trident
and its counsel such number of copies of the Prospectus, as amended or
supplemented, as Trident may reasonably request.
(f) The Company and the Association will
furnish to Trident, from time to time during the period when the Prospectus is
required to be delivered under the Securities
<PAGE>
Trident Securities, Inc.
February , 1998
Page 16
Exchange Act of 1934, as amended ("1934 Act"), such number of copies of such
Prospectus (as amended or supplemented) as Trident may reasonably request for
the purposes contemplated by the 1934 Act or the respective applicable rules and
regulations applicable thereunder ("1934 Act Regulations"). The Company and the
Association hereby authorize Trident to use the Prospectus (as amended or
supplemented, if amended or supplemented) for any lawful manner in connection
with the sale of the Shares by Trident.
(g) The Company and the Association will
comply with any and all terms, conditions, requirements and provisions with
respect to the Reorganization and the transactions contemplated thereby imposed
by the OTS or the Reorganization Regulations or any other governmental agency,
including the terms, conditions, requirements and provisions contained in the
Reorganization Regulations and the 1934 Act Regulations, to be complied with
prior and subsequent to the Closing Date and when the Prospectus is required to
be delivered, the Company and the Association will comply, at its own expense,
with all requirements imposed upon it by the OTS, or the Reorganization
Regulations, and by the 1934 Act and the 1934 Act Regulations, in each case as
from time to time in force, in accordance with the provisions thereof and the
Registration Statement.
(h) If, at any time during the period when
the Prospectus relating to the Shares is required to be delivered, any event
relating to or affecting the Company or the Association shall occur, as a result
of which it is necessary or appropriate, in the reasonable opinion of counsel
for the Company and the Association or, in your reasonable opinion, after
consultation with Trident's counsel, to amend or supplement the MHC Application
or Prospectus in order to make the MHC Application or Prospectus not misleading
in light of the circumstances existing at the time it is delivered to a
purchaser, the Association will, at its expense, forthwith prepare, file with
the OTS and furnish to Trident a reasonable number of copies of an amendment or
amendments of, or a supplement or supplements to, the MHC Application or
Prospectus (in form and substance reasonably satisfactory to Trident and its
counsel after a reasonable time for review) which will amend or supplement the
MHC Application or Prospectus so that as amended or supplemented it will not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the circumstances
existing at the time the Prospectus is delivered to a purchaser, not misleading.
(i) The Company and the Association will
take all necessary actions, in cooperation with Trident, as may be required to
qualify or register the Shares for offer and sale by the Company under the
applicable securities or blue sky laws of such jurisdictions as Trident may
reasonably designate; provided, however, that the Company shall not be obligated
to qualify as a foreign corporation to do business under the laws of any such
jurisdiction. In each jurisdiction where any of the Shares shall have been
qualified or registered as above provided, the Company will make and file,
subject to the provisions hereof, such statements and reports in each fiscal
period as are or may be required by the laws of such jurisdiction.
<PAGE>
Trident Securities, Inc.
February , 1998
Page 17
(j) Neither the Company nor the Association
will sell or issue, contract to sell or otherwise dispose of any shares of, or
securities convertible into or exercisable for, Common Stock for a period of 90
days after the Closing Date, excluding transactions related to stock options or
other stock based management compensation plans.
(k) During the period during which the
Shares are registered under the 1934 Act or for three years from the Closing
Date, whichever period is greater, the Company will furnish to its stockholders
as soon as practicable after the end of each fiscal year an annual report
(including consolidated statements of income, stockholders' equity and cash flow
of the Company as of the end of and for such year, certified by independent
public accountants in accordance with Regulation S-X under the 1934 Act) and, to
each stockholder who so requests, as soon as practicable after the end of the
first three quarters of the first full fiscal year (beginning with the fiscal
quarter ending after the Closing Date) consolidated financial information of the
Company for such quarter in reasonable detail. In addition, the Company shall
issue appropriate press releases at the same time or prior to the time of
furnishing such annual and quarterly report to stockholders of the Company. The
Company will deliver such press releases to Trident promptly after such releases
are issued.
(l) The Company will furnish to you during
the period of three years from the date hereof: (i) as soon as available, a copy
of each report of the Company furnished to or filed with the SEC under the 1934
Act (including, but not limited to, reports on Forms 10-KSB, 10-QSB and 8-K and
all proxy statements and annual reports to stockholders), a copy of each other
report of the Company mailed to its stockholders or filed with any national
securities exchange or system on which any class of securities of the Company is
listed or quoted, each press release and material news items and articles
released by the Company as you may reasonably request in writing, and (ii) from
time to time, such other nonconfidential information concerning the Company or
the Association as Trident may reasonably request in writing.
(m) At all times subsequent to the date of
the Prospectus through and including the Closing Date (i) the Registration
Statement and the Prospectus will comply with the Securities Act and the
Securities Act Regulations, (ii) the Registration Statement will not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and (iii) the
Prospectus will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. This subsection shall not apply to statements or omissions made
in reliance upon and in conformity with written information furnished to the
Company or the Association relating to Trident by or on behalf of Trident
expressly for use in the Registration Statement.
<PAGE>
Trident Securities, Inc.
February_, 1998
Page 18
(n) The Company will notify Trident
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement becomes effective or any supplement to
the Prospectus has been filed, (ii) of the issuance by the SEC of any stop order
relating to the Registration Statement or of the initiation or the threat of any
proceedings for that purpose, (ii) of the receipt of any notice with respect to
the suspension of the qualification of the Shares for offering or sale in any
jurisdiction and (iv) of the receipt of any comments from the staff of the SEC
relating to the Registration Statement. If the SEC enters a stop order relating
to the Registration Statement at any time, the Company will make every
reasonable effort to obtain the lifting of such order at the earliest possible
moment.
(o) During the time when a prospectus is
required to be delivered under the Securities Act, the Company will comply
with all requirements imposed upon it by the Securities Act and by the
Securities Act Regulations to perrnit the continuance of offers and sales of or
dealings in the Shares in accordance with the provisions hereof and the
Prospectus. If during the period when the Prospectus is required to be delivered
in connection with the offer and sale of the Shares any event relating to or
affecting the Company and the Association, taken as a whole, shall occur as a
result of which it is necessary, in the reasonable opinion of counsel for
Trident, to amend or supplement the Prospectus in order to make the Prospectus
not false or misleading in light of the circurnstances existing at the time it
is delivered to a purchaser of the Shares, the Company forthwith shall prepare
and furnish to Trident a reasonable number of copies of an amendment or
amendments or of a supplement or supplements to the Prospectus (in form and
substance reasonably satisfactory to counsel for Trident) which shall amend or
supplement the Prospectus so that, as amended or supplemented, the Prospectus
shall not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in light of the
circumstances existing at the time the Prospectus is delivered to a purchaser of
the Shares, not misleading. The Company will not file or use any amendment or
supplement to the Registration Statement or the Prospectus unless Trident has
been first furnished a copy or if Trident shall reasonably object after having
been furnished such copy. For the purposes of this subsection the Company and
the Association shall furnish such information with respect to themselves as
Trident from time to time may reasonably request.
(p) The Company will use the net proceeds
from the sale of the Shares substantially in the manner set forth in the
Prospectus.
(q) Other than as permitted by the
Reorganization Regulations, North Carolina law and the laws of any state in
which the Shares are qualified for sale, the Association will not distribute the
Prospectus in connection with the offer and sale of the Shares.
(r) The Association will file with the OTS
such post-Reorganization reports as may be required pursuant to the
Reorganization Regulations or the OTS approval of the
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Trident Securities, Inc.
February , 1998
Page 19
Reorganization and the Offering of the Shares.
(s) The Company will promptly register the
Shares with the SEC under Section 12(g) of the 1934 Act prior to the Closing
Date. The Company shall maintain the effectiveness of such registration for a
minimum period of three (3) years or for such shorter period as may be required
by applicable law.
(t) The Company or the Association will
maintain appropriate arrangements for depositing all funds received from persons
mailing orders to purchase Shares in the Offering in an interest-bearing account
at the rate described in the Prospectus or until refunds of such funds have been
made to the persons entitled thereto. The Company will maintain such records of
all funds received as are necessary to permit the funds of each purchaser to be
separately insured by the SAIF (to the maximum extent allowable) and to enable
the Company to make appropriate refunds of such funds in the event that such
refunds are required to be made.
(u) The Company and the Association will
take such actions and furnish such information as are reasonably requested in
writing by Trident in order for Trident to ensure compliance with the NASD's
"Interpretation on Free Riding and Withholding."
(v) Prior to the Closing Date, the Company,
the Association and the Subsidiary will conduct their respective businesses in
compliance in all material respects with all applicable federal and state laws,
rules, regulations, decisions, directives and orders including, all decisions,
directives and orders of the OTS and the FDIC.
(w) The Association will not amend the Plan
in any manner that would materially and adversely affect the sale of the Shares
or the terms of this Agreement without consent of Trident, which consent shall
not unreasonably be withheld, unless such amendment is required by the OTS.
(x) At the Closing Date, the Company and the
Association will have completed all conditions precedent to the Reorganization
and the offer and sale of the Shares in accordance with the Plan, the
Reorganization Regulations and all other applicable laws, regulations, decisions
and orders, including all terms, conditions, requirements and provisions
precedent to the Reorganization and Offering imposed upon Company or the
Association by the OTS or any other regulatory authority other than those which
the OTS or other regulatory authorities waive or expressly permit to be
completed after the Reorganization and Offering.
(y) The Reorganization will have been effected, in
all material respects, according to all applicable statutes, regulations,
decisions and orders; and, except with respect to the filing of certain
post-sale, post-reorganization reports, and documents in compliance with the
OTS's
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Trident Securities, Inc.
February , 1998
Page 20
resolutions or letters of approval, all terms, conditions, requirements and
provisions with respect to the Reorganization imposed by the OTS and the FDIC,
if any, will have been complied with by the Association in all material
respects, or appropriate waivers will have been obtained, and all material
notice and waiting periods will have been satisfied, waived or elapsed.
(z) The Company will not deliver the Shares
until each and every condition set forth in Section 7 hereof has been
satisfied, unless such condition is waived in writing by Trident.
(aa) At the time of the approval of the MHC
Application by the OTS (including any amendment or supplement thereto) and at
all times subsequent thereto until the Closing Date, the MHC Application will
comply as to form in all material respects with the Reorganization Regulations.
(bb) Pursuant to the Plan, on the Closing
Date, the Association will reorganize into the federal mutual holding company
structure.
(cc) If necessary, the Association shall
advise Trident as to the allocation of deposits, in the case of Community
Account Holders, Other Account Holders and Supplemental Account Holders each (as
defined in the Plan), and of the Shares in the event of an oversubscription and
shall provide Trident final instructions as to the allocation of the Shares in
such event, and such instructions shall be accurate, reliable and complete.
Trident, under the direction of the Company, shall use its best efforts to
provide assistance in the Stock Information Center during the Company's
oversubscription allocation process. Trident shall be entitled to rely
exclusively on such instructions and shall have no liability to any person as a
result of its reliance thereon, including without limitation, no liability to
any person for or related to any denial or grant of a subscription of Shares.
The Company and the Association shall indemnify and hold Trident harmless for
any liability arising out of such instructions or any records of account
holders, depositors, borrowers and other members of the Association delivered to
Trident by the Company or the Association or their agents for use during the
Offering.
(dd) The Company will use its best efforts
to obtain approval for and maintain quotation of its Shares on the NASDAQ Stock
Market or the American Stock Exchange effective on or prior to the Closing Date.
6. Payment of Expenses.
Whether or not the Reorganization is consummated, the
Company and the Association shall pay the following expenses: (a) all
regulatory filing fees, including but not limited to those payable to the SEC,
OTS, "blue sky" authorities and the NASD (including fees payable to
<PAGE>
Trident Securities, Inc.
February , 1998
Page 21
the NASD for Trident's filing pursuant to the NASD Corporate Finance Rule), (b)
all stock issue and transfer taxes which may be payable with respect to the sale
of the Shares, (c) attorneys' fees of the Company and the Association, (d)
attorneys' fees relating to any required "blue sky" laws research and filings,
(e) telephone charges, (f) air freight, (g) rental equipment, (h) supplies, (i)
transfer agent and registrar fees and expenses, (1) auditing and accounting fees
and expenses, (k) costs of printing and mailing all documents necessary in
connection with the Reorganization, and (1) slide production expenses in
connection with any community investor meetings to be held by Trident.
7. Conditions.
A. Conditions of Trident's Obligations. Except as may be
waived by Trident, the obligations of Trident as provided herein shall be
subject to the accuracy of the representations and warranties contained in
Section 2 hereof as of the date hereof and as of the Closing Date, to the
accuracy of the statements of officers and directors of the Company and the
Association made pursuant to the provisions hereof, to the performance by the
Company and the Association of its obligations hereunder and to the following
conditions:
(a) The Registration Statement shall have been declared
effective by the SEC not later than ____ p.m. on the date of this Agreement, or
with Trident's consent at a later time and date; and at the Closing Date no
order suspending the effectiveness of the Registration Statement shall have been
issued or proceedings therefor initiated or, to the knowledge of the Company or
the Association knowledge, threatened by any state authority, and no order or
other action suspending the effectiveness of the Registration Statement or the
consummation of the Reorganization shall have been issued or proceedings
therefor initiated or to the knowledge of the Company or the Association
threatened by the SEC or any state or other governmental authority.
(b) At the Closing Date Trident shall have received the
opinion, dated the Closing Date, addressed to Trident and for its benefit, of
Luse Lehman Gorman Pomerenk & Schick, P.C., special counsel for the Company and
the Association, and satisfactory in form and substance to counsel for Trident
to the effect that:
i. Upon consummation of the Reorganization, the
Association will become a federally chartered mutual holding company and the
Company's majority owned subsidiary will become a federally-chartered capital
stock savings and loan association, both duly authorized to conduct business and
own properties as described in the MHC Application and the Registration
Statement.
ii. The Association is duly organized and validly
existing as a savings and loan association in good standing with the OTS. The
Association is not in violation of its Charter. The consummation of the
Reorganization will not result in any material violation of the
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Trident Securities, Inc.
February , 1998
Page 22
provisions of the charter or bylaws of the Association or regulation or order of
the OTS.
iii. The Company and the Association are duly qualified
as foreign corporations to transact business in each jurisdiction in which their
respective ownership of property or leasing of properties or the conduct of its
business requires such qualification, unless the failure to be so qualified in
one or more such jurisdictions would not have a material adverse effect on the
condition, financial or otherwise, or the business, operations, income or
prospects of the Company or the Association. The Subsidiary is a validly
existing North Carolina corporation in good standing with full corporate
authority to own properties and, except as described in the Prospectus, the
activities of the Subsidiary are permitted by the rules, regulations,
resolutions and practices of the OTS and any other federal authorities having
jurisdiction over such matters; and all of the outstanding stock of the
Subsidiary has been duly authorized and validly issued, fully paid and
nonassessable, and such stock is owned directly or indirectly by the Association
and is free and clear of any material liens, encumbrances, claims or other
restrictions.
iv. The Company has authorized the Shares as set forth
in the Registration Statement and the Registration Statement is accurate and
complete in all material respects. The issuance and sale of the Shares has been
duly and validly authorized by all necessary corporate action on the part of the
Company; the Shares, upon receipt of consideration and issuance in accordance
with the terms of the Plan and this Agreement, will be validly issued, fully
paid, nonassessable and, except as disclosed in the Registration Statement, free
of preemptive rights, and good title thereto shall be transferred by the Company
free and clear of all claims, encumbrances, security interests and liens created
by the Company.
v. The certificates for the Shares are in due and
proper form and comply in all material respects with applicable OTS Regulations.
vi. The issuance and sale of the capital stock of the
Association to the Company have been duly authorized by all necessary corporate
action of the Company and the Association and the Association has received the
approval of the OTS, and such capital stock, upon receipt of payment and
issuance in accordance with the terms of the Plan, will be validly issued, fully
paid and nonassessable and good title thereto shall be transferred by the
Association free and clear of all claims, encumbrances, security interests and
liens created by the Association.
vii. Subject to the satisfaction of the conditions to
the OTS approval of the MHC Application, no further approval, authorization,
consent or other order of any regulatory agency is required in connection with
the execution and delivery of this Agreement, the issuance and sale of the
Shares and the consummation of the Reorganization except as may be required
under the "blue sky" securities laws of various jurisdictions and the
regulations of the NASD (as to which no opinion need be rendered).
<PAGE>
Trident Securities, Inc.
February , 1998
Page 23
viii. There are no pending legal and governmental
proceedings to which the Company or the Association is a party or to which any
of their properties are subject which are not described in the MHC Application
and the Registration Statement, including ordinary routine litigation incidental
to the business.
ix. The Association is a member of the Federal Home
Loan Bank of Richmond. The Association is an insured depository institution
under the Federal Deposit Insurance Act and the Association has received
approval of the FDIC Application from the FDIC if such FDIC Application has not
been withdrawn by the Association. No action or proceeding to suspend or revoke
such membership or insurance coverage is pending or to such counsel's knowledge,
threatened.
x. Upon consummation of the Reorganization, the
authorized, issued and outstanding capital stock of the Company and the
Association will be as set forth in the MHC Application and the Registration
Statement, and, no shares of common stock, or securities exercisable into or
exchangeable for common stock, have been issued prior to the Closing Date; at
the time of the Reorganization, the Shares issued in the Offering will have been
duly and validly authorized for issuance, and when issued and delivered by the
Company pursuant to the Plan against payment of the consideration calculated as
set forth in the Plan, will be duly and validly issued and fully paid and
nonassessable and at such time, all such capital stock shall be free and clear
of any material mortgage, pledge, lien, encumbrance or claim (legal or
equitable); and the issuance of the Shares is not subject to statutory
preemptive rights.
xi. This Agreement has been duly authorized, executed
and delivered by the Company and the Association and is the legal, valid and
binding agreement of the Company and the Association and subject to, as to
enforceability, bankruptcy, insolvency, reorganization, moratorium and other
laws of general applicability relating to or affecting creditors' rights, to
general principles of equity and to laws to the safety and soundness of insured
depository institutions, and except to the extent that the provisions of
Sections 8 and 9 hereof may be unenforceable as against public policy or
applicable law, including but not limited to, Section 23A of the Federal Reserve
Act, as amended.
xii. The OTS and the FDIC, where applicable, have
authorized the Reorganization and no action has been taken, or, to such
counsel's knowledge, is pending or threatened to revoke such authorization.
xiii. The Plan has been duly adopted by the required
vote of the Directors and members of the Association and complies in all
material respects with the Reorganization Regulations.
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Trident Securities, Inc.
February , 1998
Page 24
xiv. Subject to the satisfaction of the conditions to
the approval of the Reorganization and MHC Application by the OTS and the FDIC
Application by the FDIC, if such FDIC Application has not been withdrawn by the
Association, no further approval, registration, authorization, consent or other
order of any regulatory agency, public board or body is required in connection
with the execution and delivery of this Agreement, the issuance of the Shares
and the consummation of the Reorganization, except as may be required under the
securities or "blue sky" laws of various jurisdictions and under the rules and
regulations of the NASD. The Reorganization has been consummated in all material
respects according to all applicable provisions of the Reorganization
Regulations.
xv. The MHC Application has been approved under the
Reorganization Regulations and no order suspending the approval has been issued
under the Reorganization Regulations or proceedings therefore initiated or, to
the best of such counsel's knowledge, threatened by the OTS or any state
authority. The Registration Statement has been declared effective by SEC and no
proceedings are pending before the SEC seeking to revoke or rescind the order
declaring the Registration Statement effective, or to such counsel's knowledge,
are contemplated or threatened.
xvi. At such time as the MHC Application and FDIC
Application, if such FDIC Application has not been withdrawn by the
Association, were approved and the Registration Statement declared effective (i)
the MHC Application and any amendment or supplement thereto (other than
consolidated financial statements and other financial and statistical data
included therein and the Independent Valuation, as to which no opinion need be
rendered), complied as to form in all material respects with the requirements of
the Reorganization Regulations; (ii) the Registration Statement (other than the
consolidated financial statements and other financial and statistical data
included therein, as to which no opinion need be rendered) complied as to form
in all material respects with the requirements of the Securities Act and the
Securities Act Regulations, and (iii) to such counsel's knowledge, all documents
and exhibits required to be filed with the MHC Application and the Registration
Statement have been so filed; and the descriptions in the MHC Application and
the Registration Statement of such documents and exhibits are accurate and
complete in all material respects.
xvii. The information in the MHC Application and the
Registration Statement, under the captions "REGULATION," "THE REORGANIZATION
AND OFFERING," "RESTRICTIONS ON ACQUISITION OF THE COMPANY," "DIVIDEND POLICY"
and "DESCRIPTION OF CAPITAL STOCK OF THE COMPANY," to the extent that it
constitutes matters of law, summaries of legal matters, or proceedings, or legal
conclusions, fairly present the information called for with respect to such
legal matters.
xviii. There are no legal or governmental proceedings
pending or to
<PAGE>
Trident Securities, Inc.
February , 1998
Page 25
such counsel's knowledge, threatened, individually or in the aggregate, against
the Company or the Association which are required to be disclosed in the MHC
Application and the Registration Statement, other than those disclosed therein;
provided that for this purpose, any litigation or governmental proceeding is not
considered to be "threatened" unless the potential litigant or governmental
authority has manifested to counsel a present intention to initiate such
litigation or proceeding.
xix. There are no contracts, indentures, mortgages,
loan agreements, notes, leases or other instruments required to be described or
referred to in the MHC Application and the Registration Statement or required to
be filed as exhibits thereto other than those described or referred to therein
or filed as exhibits thereto, and the descriptions thereof or references thereto
are correct in all material respects.
xx. No order has been issued by the SEC, OTS or the
FDIC to suspend the Offering and no action for such purpose has been
instituted or to such counsel's knowledge, threatened by the SEC, OTS or the
FDIC; no person has sought to obtain review of the final action of the OTS in
approving the Reorganization.
xxi. The Company will not be in violation of its mutual
holding company charter upon consummation of the Reorganization.
xxii. The Association is not in violation of any
directive from the OTS or the FDIC to make any material change in the method of
conducting its business, except as described in the MHC Application and
Registration Statement.
xxiii. The Association has good and marketable title to
all properties and assets which are material to the business of the Association
and to those properties and assets described in the MHC Application and
Prospectus as owned by it, free and clear of all liens, charges, encumbrances or
restrictions, except such as are described in the MHC Application and Prospectus
or are not material in relation to the business of the Association; and all of
the leases and subleases material to the business under which the Association
holds properties, as described in the MHC Application and Prospectus, are in
full force and effect.
xxiv. To such counsel's knowledge, the Company and the
Association has obtained all licenses, permits and other governmental
authorizations required for the conduct of their businesses as described in the
Registration Statement, except where the failure to obtain such licenses,
permits or governmental authorizations would not have a material adverse effect
on the financial condition, operations, business, properties or assets of the
Company and the Association, taken as a whole; to such counsel's knowledge, all
of the leases and subleases material to the business of the Company and the
Association under which the Company or the Association
<PAGE>
Trident Securities, Inc.
February , 1998
Page 26
holds properties are in full force and effect; neither the Company nor the
Association is in violation of its charter or, to such counsel's knowledge, its
bylaws;
xxv. To such counsel's knowledge, the descriptions of
contracts, indentures, mortgages, loan agreements, notes, leases or other
instruments required to be described or referred to in the MHC Application and
the Registration Statement are correct, and no default exists in the due
performance or observance of any material obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan agreement, note
or lease or other instrument so described or referred to.
xxvi. The execution and delivery of this Agreement and
the consummation of the Reorganization do not conflict with or result in a
breach of the charter, certificate of incorporation or bylaws of the Company or
the Association, or, to such counsel's knowledge, constitute a breach of or
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, give rise to any right of termination, cancellation
or acceleration contained in, or result in the creation or imposition of any
lien, charge or other encumbrance upon any of the properties or assets of the
Company or the Association pursuant to any of the terms, provisions or
conditions of, any material agreement, contract, indenture, bond, debenture,
note, instrument or obligation to which the Company or the Association is a
party or violate any governmental license or permit or any law administrative
regulation or order or court order, writ, injunction or decree (subject to the
satisfaction of certain conditions imposed by the OTS in connection with its
approval of the MHC Application), which breach, default, encumbrance or
violation would have a material adverse effect on the financial condition,
operations, business, assets or properties of the Company and the Association,
taken as a whole.
xxvii. To such counsel's knowledge, there has been no
breach of any provision of the Company's or the Association's charter, bylaws or
breach or default (or the occurrence of any event which, with notice or lapse of
time or both, would constitute a default) by the Company or the Association
under any agreement, contract, indenture, bond, debenture, note, instrument or
obligation to which the Company or the Association is a party or by which any of
them or any of their respective assets or properties may be bound, which breach
or default would have a material adverse effect on the financial condition,
operations, business, assets or properties of the Company and the Association,
taken as a whole.
xviii. In rendering such opinion, such counsel may rely
as to matters of fact, to the extent such counsel deems proper, on certificates
of responsible officers of the Company and the Association and public officials;
provided copies of any such certificates are delivered to Trident together with
the opinion to be rendered hereunder by counsel to the Company and the
Association. Such counsel may assume that any agreement is the valid and binding
obligation of any parties to such agreement other than the Association. Such
opinion may also
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Trident Securities, Inc.
February_, 1998
Page 27
contain such customary assumptions and qualifications and shall be governed by
the Legal Opinion Accord ("Accord") of the American Bar Association Section of
Business Law (1991).
xxix. The opinion of Luse Lehman Gorman Pomerenk &
Schick, P.C. shall cover matters of federal law and the laws of the State of
North Carolina. With respect to matters of North Carolina law, such counsel may
rely upon the opinion of , ,
North Carolina, which opinion shall be in form and substance satisfactory to
Trident and its counsel. For purposes of such opinion, no proceeding shall be
deemed to be pending, no order or stop order shall be deemed to be issued, and
no action shall be deemed to be instituted unless, in each case, a director or
executive officer of the Company or the Association, or its counsel, shall have
received a copy of such proceeding, order, stop order or action. Such opinion
may be limited to statutes, regulations and judicial interpretations and to
facts as they exist as of the date of such opinions. In rendering such opinion,
such counsel need assume no obligation to revise or supplement it should such
statutes, regulations and judicial interpretations be changed by legislative or
regulatory action, judicial decision or otherwise. Such counsel need express no
view, opinion or belief with respect to whether any proposed or pending
legislation, if enacted, or any proposed or pending regulations or policy
statements issued by any regulatory agency, whether or not promulgated pursuant
to any such legislation, would affect the validity of the execution and delivery
by the Company and the Association of this Agreement or the issuance of the
Shares.
(c) The Letter of Luse Lehman Gorman Pomerenk & Schick, P.C.,
special counsel for the Company and the Association, addressed to Trident, dated
the Closing Date and in form and substance satisfactory to special counsel for
Trident to the effect that, nothing has come to such counsel's attention that
would lead it to believe that, the MHC Application, as amended or supplemented,
if amended or supplemented (except as to financial statements, notes to
financial statements, financial tables and other financial and statistical data,
including the appraisal contained therein, with respect to which such counsel
need express no opinion), at the time it was approved and at the time any
amendment thereto was approved, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements made therein in light of the circumstances
under which they were made not misleading, or that the Registration Statement,
as amended or supplemented, if amended or supplemented (except as to financial
statements, notes to financial statements, financial tables and other financial
and statistical data contained therein, with respect to which counsel need
express no opinion), as of the Closing Date, contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) At the Closing Date, Trident shall have received the
opinion of its counsel, Womble Carlyle Sandridge & Rice, PLLC, dated as of the
Closing Date, with respect to
<PAGE>
Trident Securities, Inc.
February , 1998
Page 28
such matters as Trident may reasonably require. Such opinion may rely upon the
opinions of counsel to the Association, and as to matters of fact, upon
certificates of offficers and directors of the Company and the Association
delivered pursuant hereto or as such counsel shall reasonably request.
(e) At the Closing Date, Trident shall receive a certificate of
the Chief Executive Officer and the Chief Financial Offficer of each of the
Company and the Association, dated the Closing Date, to the effect that: (i)
they have examined the Registration Statement and the Registration Statement
does not contain an untrue statement of material fact or omit to state a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading with respect to the
Company or the Association; (ii) since the respective dates as of which
information is given in the MHC Application and the Registration Statement,
there has been no material adverse change in the condition, financial or
otherwise, or in the earnings, capital or properties, of the Company and the
Association, whether or not arising in the ordinary course of business; (iii)
the representations and warranties in Section 2 are true and correct with the
same force and effect as though expressly made at and as of the Closing Date;
(iv) the Company and the Association have complied with all agreements and
satisfied all conditions on their respective parts to be performed or satisfied
at or prior to the Closing Date under the Agreement and the Plan and will comply
with all obligations under this Agreement and the Plan to be satisfied by it
after the Reorganization; (v) no stop order revoking or suspending the approval
of the MHC Application has been initiated or to the knowledge of such officers
threatened by the SEC, OTS, the FDIC or any state authority; and (vi) no order
suspending the Offering, the Reorganization, or the effectiveness of the
Registration Statement has been issued by the SEC and no proceedings for that
purpose have been initiated or to the knowledge of such officers threatened by
any state authority or the SEC.
(f) At the Closing Date, Trident shall receive, among other
documents, (i) copies of the letters from the OTS authorizing the use of the
Prospectus, (ii) a copy of the order of the SEC declaring the Registration
Statement effective; (iii) copies of the certificates from the OTS evidencing
the corporate existence of the Company and the Association; (iv) copy of the
certificate from the FDIC evidencing the insured status of the Association, and
(v) a copy of the letter from the OTS approving the Association's Federal Stock
Charter.
(g) Prior to and at the Closing Date: (i) in the reasonable
opinion of Trident, there shall have been no material adverse change in the
condition, financial or otherwise, in the earnings, affairs or prospects of the
Company and the Association from that as of the latest dates as of which such
condition is set forth in the Prospectus, except as referred to therein; (ii)
there shall have been no material transaction entered into by the Company or the
Association from the latest date as of which the financial condition of the
Company or the Association is set forth in the Prospectus other than
transactions as contemplated by and disclosed in the Prospectus or transactions
specifically referred to or contemplated therein; (iii) neither the Company nor
the Association has
<PAGE>
Trident Securities, Inc.
February , 1998
Page 29
received from the OTS or the FDIC any direction (oral or written) to make any
material change in the method of conducting their business with which it has not
complied (which direction, if any, shall have been disclosed to Trident) or
which materially and adversely would affect the business, operations or
financial condition or income of the Company or the Association; (iv) the
Association shall not have been in default (nor shall an event have occurred
which, with notice or lapse of time or both, would constitute a default) under
any provision of any agreement or instrument relating to any material
outstanding indebtedness; (v) no action, suit or proceedings, at law or in
equity or before or by any federal or state commission, board or other
administrative agency, shall be pending or, to the knowledge of the Company or
the Association, threatened against the Company or the Association or affecting
any of its properties wherein an unfavorable decision, ruling or finding would
materially and adversely affect the business, operations, financial condition or
income of the Company or the Association; and (vi) the Shares shall have been
qualified or registered for offering and sale under the securities or blue sky
laws of the jurisdiction as set forth in the blue sky survey, dated
____________, 1998 of Luse Lehman Gorman Pomerenk & Schick, P.C.
(h) Concurrently with the execution of this Agreement, Trident
shall receive a letter from Cherry, Bekaert & Holland, L.L.P., dated the date
hereof and addressed to Trident: (i) confirming that Cherry, Bekaert & Holland,
L.L.P., is a firm of independent public accountants within the meaning of Rule
101 of the Code of Professional Conduct of the AICPA and Title 12 of the Code of
Federal Regulations and stating in effect that in its opinion the consolidated
financial statements of the Association for the years ended September 30, 1997
and 1996, as are included in the Prospectus and covered by their opinion
included therein, comply as to form in all material respects with the applicable
accounting requirements of the OTS and the published rules and regulations of
the OTS under 12 CFR Part 563.c and the applicable requirements of the SEC
Regulations specifically Regulation X, (ii) stating in effect that, on the basis
of certain agreed upon procedures (but not an examination in accordance
with generally accepted auditing standards) consisting of a reading of the
latest available unaudited interim consolidated financial statements of the
Association prepared by the Association, a reading of the minutes of the
meetings of the Board of Directors and members of the Association and
consultations with officers of the Association responsible for financial and
accounting matters, nothing came to its attention which caused it to believe
that: (A) during the period from the date of the latest audited consolidated
financial statements included in the Prospectus to a specified date not more
than five business days prior to the date hereof, there was any material
increase in borrowings by the Association (increases in borrowings shall not be
deemed material if such increases in total borrowings do not exceed $1,000,000);
or (B) there was any decrease in consolidated retained earnings of the
Association at the date of such letter from the amounts shown in the latest
audited consolidated statement of condition included in the Prospectus or there
was any decrease in consolidated net income or net interest income of the
Association for the number of full months commencing immediately after the
period covered by the latest audited consolidated income statement included in
the Prospectus and ended on the latest month end prior to the date of the
Prospectus or in such letter as compared to the
<PAGE>
Trident Securities, Inc.
February , 1998
Page 30
corresponding period in the preceding year; and (iii) stating that, in addition
to the examination referred to in its opinion included in the Prospectus and the
performance of the procedures referred to in clause (ii) of this subsection (h),
it has compared with the general accounting records of the Association, as
applicable, which are subject to the internal controls of the Association's
accounting system and other data prepared by the Association directly from such
accounting records, to the extent specified in such letter, such amounts and/or
percentages set forth in the Prospectus as Trident may reasonably request; and
they have found such amounts and percentages to be in agreement therewith
(subject to rounding).
(i) At the Closing Date, Trident shall receive a letter from
Cherry, Beckert, & Holland, L.L.P. dated the Closing Date, addressed to Trident,
confirming the statements made by it in the letter delivered by it pursuant to
subsection (h) of this Section 7, the "specified date" referred to in clause
(ii) (A) thereof to be a date specified in such letter, which shall not be more
than five business days prior to the Closing Date.
(j) At the Closing Date, Trident shall have received a letter
from Feldman Financial, dated the Closing Date, confirming its appraisal. Such
appraisal shall be in form and substance reasonably satisfactory to Trident and
shall be consistent with the terms of the Plan.
(k) At the Closing Date, Trident's counsel shall have been
furnished with such documents and opinions as they may reasonably require for
the purpose of enabling them to pass upon the sale of the Shares as herein
contemplated and related proceedings or in order to evidence the occurrence or
completeness of any of the representations or warranties, or the fulfillment of
any of the conditions, herein contained; and all proceedings taken by the
Company and the Association in connection with the Reorganization and the sale
of the Shares as herein contemplated shall be satisfactory in form and substance
to Trident and its counsel.
(l) The Association shall not have sustained since the date of
the latest audited consolidated financial statements included in the MHC
Application and Registration Statement any loss or interference with its
business from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as set forth or contemplated in the MHC Application
and Registration Statement, and since the respective dates as of which
information is given in the MHC Application and Registration Statement, there
shall not have been any material change in the consolidated long-term debt of
the Association, or any change, or any development involving a prospective
change, in or affecting the general affairs of management, financial position,
retained earnings, cash flow or results of operation of the Company or the
Association, otherwise than as set forth or contemplated in the MHC Application
and Registration Statement, the effect of which, in any such case described
above, is in Trident's reasonable judgment suffficiently material and adverse as
to make it impracticable or inadvisable to proceed with the Offering or the
delivery of the Shares
<PAGE>
Trident Securities, Inc.
February , 1998
Page 31
on the terms and in the manner contemplated in the Prospectus.
(m) Subsequent to the date hereof, there shall not have
occurred any of the following: (i) a suspension or limitation in trading in
securities generally on the New York Stock Exchange or American Stock Exchange
or in the over-the-counter market, or quotations halted generally on NASDAQ, or
minimum or maximum prices for trading fixed, or maximum ranges for prices for
securities required by either of such exchanges or the NASDAQ or by order of the
SEC or any other governmental authority; (ii) a general moratorium on the
operation of commercial banks, federal or state savings and loan associations or
savings banks in North Carolina or a general moratorium on the withdrawal of
deposits from commercial banks, federal savings and loan associations or savings
banks in North Carolina declared by either federal or North Carolina
authorities; (iii) the engagement by the United States in hostilities which have
resulted in the declaration, on or after the date hereof, of a national
emergency or war; or (iv) a material decline in the price of equity or debt
securities if the effect of such a decline, in Trident's reasonable judgment, is
sufficiently material and adverse as to make it impracticable or inadvisable to
proceed with the Offering or the delivery of the Shares on the terms and in the
manner contemplated in the MHC Application and Prospectus.
All such opinions, certificates, letters and documents shall
be in compliance with the provisions hereof only if they are, in the reasonable
opinion of Trident and its counsel, satisfactory to Trident and its counsel. Any
certificates signed by an officer or director of the Company or the Association
and delivered to Trident or to counsel for Trident shall be deemed a
representation and warranty by the Company and the Association to Trident as to
the statements made therein. If any condition to Trident's obligations hereunder
to be fulfilled prior to or at the Closing Date is not so fulfilled, Trident, in
its sole discretion, may terminate this Agreement or, if Trident, in its sole
discretion so elects, may waive any such conditions which have not been
fulfilled, or may extend the time of their fulfillment. If Trident terminates
this Agreement as aforesaid, the Company or the Association shall reimburse
Trident for its allocable expenses as provided in Section 3.B. hereof.
B. Conditions of the Company's and the Association's
Obligations. Except as may be waived by the Company or the Association, the
obligations of the Company and the Association as provided herein shall be
subject to the accuracy of the representations and warranties contained in
Section 2.B hereof as of the date hereof an as of the Closing Date and to the
performance by Trident of its obligations hereunder.
8. Indemnification.
(a) The Company and the Association jointly and severally
agree to indemnify and hold harmless Trident, its officers, directors and
employees and all persons who control Trident within the meaning of Section 15
of the Securities Act or Section 20(a) of the 1934
<PAGE>
Trident Securities, Inc.
February , 1998
Page 32
Act, against any and all loss, liability, claim, damage and expense whatsoever
that such indemnified persons shall suffer and shall further reimburse promptly
such persons for any legal or other expenses reasonably incurred by each or any
of them investigating, preparing to defend or defending against any such action,
proceeding or claim (whether commenced or threatened) arising out of any
misrepresentation by the Company or the Association in this Agreement, or any
breach of warranty by the Company or the Association with respect to this
Agreement or arising out of or based upon any untrue or alleged untrue statement
of a material fact or the omission or alleged omission of a material fact
necessary to make not misleading in light of the circumstances under which it
was made, any statements contained in (i) the MHC Application, the Registration
Statement or (ii) any application (including the MHC Application) or other
document or communication (in this Section 8 collectively called "Application")
prepared or executed by or on behalf of the Company or the Association or based
upon written information furnished by or on behalf of the Company or the
Association, whether or nor filed in any jurisdiction, to effect the
Reorganization or qualify the Shares under the Blue Sky Laws thereof or filed
with the OTS, unless such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company or the Association
with respect to Trident by or on behalf of Trident expressly for use in the
Registration Statement or any amendment or supplement thereof or in any
Application, or (iii) any unwritten statement made with the Company's or the
Association's consent to a purchaser of the Shares by any director or officer or
any person employed by or associated with the Company or the Association other
than Trident, its officers, directors or employees. This indemnity shall be in
addition to any other liability the Company or the Association may have to
Trident.
(b) The Company and the Association shall indemnify and
hold Trident harmless for any liability whatsoever arising out of (i) the
Allocation Instructions or (ii) any records of Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members (as those terms are
defined in the Plan) delivered to Trident by the Company or the Association or
their agents for use during the Reorganization and the Offering.
(c) Trident agrees to indemnify and hold harmless the
Company and the Association, their respective officers, directors and employees
and all persons who control the Company and the Association within the meaning
of Section 15 of the Securities Act or Section 20(a) of the 1934 Act, to the
same extent as the foregoing indemnity from the Company and the Association to
Trident, but only with respect to any statements or omissions made in the
Prospectus or any amendment or supplement thereof or in any Application in
reliance upon, and in conformity with, information furnished to the Company or
the Association with respect to Trident by or on behalf of Trident expressly for
use in the Registration Statement or in the Application.
(d) Promptly after receipt by an indemnified party under
this Section 8 of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying
<PAGE>
Trident Securities, Inc.
February_, 1998
Page 33
party of the commencement thereof, but the omission to so notify the
indemnifying party shall not relieve the indemnifying party from any liability
which it may have to any indemnified party otherwise than under this Section 8.
In case any such action is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it may
wish, jointly with the other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under this Section 8 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than the reasonable cost of investigation except as
otherwise provided herein. In the event the indemnifying party elects to assume
the defense of any such action and retain counsel acceptable to the indemnified
party, the indemnified party may retain additional counsel, but shall bear the
fees and expenses of such counsel unless (i) the indemnifying party shall have
specifically authorized the indemnified party to retain such counsel or (ii) the
parties to such suit include such indemnifying party and the indemnified party,
and such indemnified party shall have been advised by counsel that one or more
material legal defenses may be available to the indemnified party which may not
be available to the indemnifying party, in which case the indemnifying party
shall not be entitled to assume the defense of such suit notwithstanding the
indemnifying party's obligation to bear the fees and expenses of such counsel.
An indemnifying party against who indemnity may be sought shall not be liable to
indemnify an indemnified party under this Section 8 if any settlement of any
such action is effected without such indemnifying party's consent.
9. Contribution.
In order to provide for just and equitable contribution
in circumstances in which the indemnity agreement provided for in Section 8
above is for any reason held to be unavailable to the Company, the Association
or Trident other than in accordance with its terms, the Company, the Association
and Trident shall contribute to the aggregate losses, liabilities, claims,
damages, and expenses of the nature contemplated by said indemnity agreement
incurred by the Company, the Association and Trident (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company and the
Association on the one hand and Trident on the other from the offering of the
Shares or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above, but also the relative fault
of the Company and the Association on the one hand and Trident on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Association on the one hand and Trident on the other shall be deemed to be in
the same proportion as the total proceeds from the Reorganization (before
deducting expenses) received by the Company and the Association bear to
<PAGE>
Trident Securities, Inc.
February , 1998
Page 34
the total fees received by Trident under this Agreement. The relative fault of
the Company and the Association on the one hand and Trident on the other shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company and the
Association or by Trident and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Association and Trident agree that it
would not be just and equitable if contribution pursuant to this Section 9 were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in the
immediately preceding paragraph. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, liabilities or judgments
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 9, Trident shall not be required to contribute any amount in excess of
the amount by which fees owed Trident pursuant to this Agreement exceeds the
amount of any damages which Trident has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission for
which Trident would be provided indemnification under Section 8 hereof. No
person guilty of fraudulent misrepresentation (within the meaning of Section
1l(f) of the Act) shall be entitled to contribution from any person who is
innocent of such fraudulent misrepresentation.
10. Survival of Agreements. Representations and Indemnities.
The respective indemnities of the Company, the
Association and Trident and the representations and warranties of the Company
and the Association set forth in or made pursuant to this Agreement shall remain
in full force and effect, regardless of any termination or cancellation of this
Agreement or any investigation made by or on behalf of Trident or the Company or
the Association or any controlling person or indemnified party referred to in
Section 8 hereof, and shall survive any terrnination or consummation of this
Agreement and/or the issuance of the Shares, and any legal representative of
Trident, the Company, the Association and any such controlling persons shall be
entitled to the benefit of the respective agreements, indemnities, warranties
and representations.
11. Termination.
The Company, the Association or Trident may terminate
this Agreement by giving the notice indicated in subsection (b) below at any
time after this Agreement becomes effective as follows:
<PAGE>
Trident Securities, Inc.
February , 1998
Page 35
(a) If any domestic or international event or act or
occurrence has materially disrupted the United States securities markets such as
to make it, in Trident's reasonable opinion, impracticable to proceed with the
offering of the Shares; or if trading on the New York Stock Exchange shall have
been suspended; or if the United States shall have become involved in a war or
major hostilities; or if a general banking moratorium has been declared by a
state or federal authority; or if a moratorium in foreign exchange trading by
major international banks or persons has been declared; or if there shall have
been a material adverse change in the capitalization, condition or business of
the Company or the Association; or if the Company or the Association shall have
sustained a material or substantial loss by fire, flood, accident, hurricane,
earthquake, theft, sabotage or other calamity or malicious act, whether or not
said loss shall have been insured; or if there shall have been a material
adverse change in condition or prospects of the Company or the Association.
(b) If any party hereto elects to terminate this
Agreement as provided in this Section, such party shall notify the other parties
hereto promptly by telephone or telegram, confirmed by letter and delivered by
an ovemight courier service the same day.
(c) If this Agreement is terminated for any of the
reasons set forth in subsection (a) above and to fulfill its obligations
pursuant to Sections 3, 6, 8(a) and 9 of this Agreement and upon demand, the
Company or the Association shall pay Trident the full amount owing thereunder.
12. Notices.
All Communications hereunder, except as herein otherwise
specifically provided, shall be in writing and if sent to Trident shall be
mailed, delivered or telegraphed and confirmed to Trident Securities, Inc., 4601
Six Forks Road, Suite 400, Raleigh, North Carolina 27609, Attention: R. Lee
Burrows, Jr., Managing Director (with a copy to Womble Carlyle Sandridge & Rice,
PLLC, 1275 Peachtree Street, N.E., Atlanta, Georgia 30309, Attention: Steven S.
Dunlevie, Esquire), or if sent to the Company or the Association, shall be
mailed, delivered or telegraphed and confirmed to the Company or the Association
at 245 West Main Avenue, P. O. Box 2249, Gastonia, North Carolina 28053-2249,
Attention: Kim S. Price, President (with a copy to Luse Lehman Gomman Pomerenk &
Schick, P.C., 1300 I Street, N.W., Suite 220 East, Washington, D.C. 20005,
Attention: John J. Gomman, Esquire).
13. Governing Law.
This Agreement shall be govemed by the laws of the State
of North Carolina unless Federal law shall be deemed to apply.
<PAGE>
Trident Securities, Inc.
February , 1998
Page 36
14. Severability.
Any provision of this Agreement found to be invalid,
unenforceable, or otherwise limited by law or regulation shall not effect the
validity or enforceability of the remaining temms of this Agreement.
<PAGE>
Trident Securities, Inc.
February , 1998
Page 37
15. Miscellaneous.
(a) Time shall be of the essence of this Agreement.
(b) This Agreement is made solely for the benefit of
and will be binding upon the parties hereto and their respective successors and
the controlling persons, directors and officers, and no other person will have
any right or obligation hereunder. The temm "successors" shall not include any
purchaser of any of the Shares.
(c) This Agreement sets forth the entire
understanding and agreement among the parties hereto representing the subject
matter hereof and supersedes and cancels all prior agreements and understanding,
written or oral, including the Letter Agreement between Trident and the
Association dated July 1, 1997.
(d) This Agreement may be signed in various
counterparts which together will constitute one agreement.
If the foregoing correctly sets forth the arrangement among
the Company, the Association and Trident, please indicate acceptance thereof in
the spaces provided below for that purpose, whereupon this letter and your
acceptance shall constitute a binding agreement.
Please acknowledge your agreement to the foregoing by signing
below and returning to the Company and the Association one copy of this letter.
Yours very truly,
GASTON FEDERAL SAVINGS AND
LOAN ASSOCIATION
By:
_______________________________
Kim S. Price, President
Agreed to and accepted
this th day of , 1998.
TRIDENT SECURITIES, INC. GASTON FEDERAL BANCORP, INC.
By: By:
________________________ _______________________________
R. Lee Burrows, Jr. Kim S. Price, President
Managing Director
EXHIBIT 5
<PAGE>
[LUSE LEHMAN GORMAN POMERENK & SCHICK LETTERHEAD APPEARS HERE]
FORM OF LEGAL OPINION
February 2, 1998
The Board of Directors
Gaston Federal Savings and Loan Association
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: /s/ Kenneth R. Lehman
___________________________
Kenneth R. Lehman, Esq.
EXHIBIT 8.1
<PAGE>
January 27, 1998
Boards of Directors
Gaston Federal Savings and Loan Association
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 to express our opinion concerning certain Federal income tax
consequences relating to the proposed conversion of the Bank from a federally
chartered mutual savings and loan association (the "Bank") to a federally
chartered stock association ("Stock Bank") and the formation of Gaston Federal
Holdings, MHC, a federal mutual holding company ("Mutual Holding Company") which
will acquire the outstanding stock of Stock Bank and subsequently contribute
Stock Bank's stock to Gaston Federal Bancorp, Inc. ("Stock Holding Company").
In connection therewith, we have examined the Plan of Reorganization
(as defined below) 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
<PAGE>
Boards of Directors
Gaston Federal Savings and Loan Association
January 27, 1998
Page 2
tax matters 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:
WITH RESPECT TO THE EXCHANGE OF THE BANK'S CHARTER FOR A STOCK CHARTER
("BANK CONVERSION"):
<PAGE>
Boards of Directors
Gaston Federal Savings and Loan Association
January 27, 1998
Page 3
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
January 27, 1998
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)).
17. Stock Bank depositors will recognize no gain or loss solely by
reason of the transaction.
<PAGE>
Boards of Directors
Gaston Federal Savings and Loan Association
January 27, 1998
Page 5
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 July 14, 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
(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:
<PAGE>
Boards of Directors
Gaston Federal Savings and Loan Association
January 27, 1998
Page 6
(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 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
<PAGE>
Boards of Directors
Gaston Federal Savings and Loan Association
January 27, 1998
Page 7
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.
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.
<PAGE>
Boards of Directors
Gaston Federal Savings and Loan Association
January 27, 1998
Page 8
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 solely for the benefit of the Mutual Holding Company, the Stock
Holding Company, the Association and prospective investors in connection with
the proposed transactions described herein and is not to be relied upon by any
other person or entity without our express written consent.
Very truly yours,
/s/ Luse Lehman Gorman Pomerenk & Schick
________________________________________
LUSE LEHMAN GORMAN POMERENK & SCHICK
A Professional Corporation
[Cherry Bekaert & Holland Logo]
January 27, 1998
Board of Directors
Gaston Federal Savings and Loan Association
1535 Burtonwood Drive
Gastonia, North Carolina 28054
Re: Mutual Holding Company Formation and Stock Issuance
Ladies and Gentlemen:
We have been requested to express our opinion concerning the North
Carolina income tax consequences relating to the proposed conversion of Gaston
Federal Savings and Loan Association (the "Association") from a federally
chartered mutual savings and loan association to a federally chartered stock
savings association ("Stock Bank"), and the formation of a mutual holding
company ("Mutual Holding Company") which will acquire the outstanding stock
of Stock Bank and subsequently contribute Stock Bank's stock to a Stock Holding
Company.
You have submitted to us a copy of the federal income tax opinion
("Federal Opinion") relating to the federal income tax consequences of the
proposed transaction prepared by your counsel, Luse, Lehman, Gorman, Pomerenk, &
Schick, Washington, D.C.
Our opinion regarding the North Carolina income tax consequences of the
proposed transaction is based on the same facts and conditions contained in the
Federal Opinion dated January 27, 1998. It is also based on existing North
Carolina tax law which is subject to change. We have not reviewed the legal
documents necessary to effectuate the steps to be undertaken, and we assume that
all steps will be properly effectuated under state and federal law and will be
consistent with the legal documentation.
In our opinion, the North Carolina income tax consequences of the
proposed transaction are the same as the federal income tax consequences of the
proposed transaction identified in the Federal Opinion.
The State of North Carolina has adopted federal taxable income, as
currently amended, as the starting point for computing North Carolina taxable
income. Income tax terms are defined in relation to the Internal Revenue Code of
1986, as amended [G. S. 105-130.2(5d)]. Taxpayers are required to use the same
taxable year and accounting methods as are used in computing federal taxable
income [G.S. 105-130.2(5)] .
Cherry, Bekaert & Holland, L.L.P.
2020 Remount Road (28054) (bullet) PO. Box 1064 (bullet) Gastonia, NC 28053
(bullet) (704)865-2396 (bullet) Fax (704) 865-2758
Offices Throughout The Southeast (bullet) Represented Internationally Through
Summit International Associates, Inc.
<PAGE>
Board of Directors
Gaston Federal Savings and Loan Association
January 27, 1998
Page 2
Several specific modifications to federal taxable income are enumerated
in the North Carolina Statutes in determining taxable income for North Carolina
purposes, however, there are no specific modifications which apply to the
proposed transaction.
Our opinion as expressed above is rendered only with respect to the
North Carolina income tax consequences of the specific matters discussed herein,
and we express no opinion with respect to any other North Carolina income tax
matter or any other federal, state, local or foreign tax matter relating to the
proposed transaction. Our opinion is based on the facts and conditions as stated
herein, whether directly or by reference to the Federal Opinion. If any of the
foregoing is not entirely complete or accurate, it is imperative that we be
informed immediately, as the inaccuracy or incompleteness could have a material
effect on our conclusions. In rendering our opinion, we are relying upon the
relevant provisions of the Internal Revenue Code of 1986, as amended, and North
Carolina Statutes, as amended, the regulations and rules thereunder and judicial
and administrative interpretations thereof, which are subject to change or
modifications by subsequent legislative, regulatory, administrative, or judicial
decisions. Any such changes could also have an effect on the validity of our
opinion. We undertake no responsibility to update or supplement our opinion. Our
opinion is not binding on the Internal Revenue Service or the North Carolina
Department of Revenue, nor can any assurance be given that any of the foregoing
parties will not take a contrary position or that our opinion will be upheld if
challenged by such parties.
This opinion is rendered solely for the benefit of the Mutual Holding
Company, the Stock Holding Company, the Association and prospective investors in
connection with the proposed transactions described herein and is not to be
relied upon by any other person or entity without our express written consent.
CHERRY, BEKAERT & HOLLAND, L.L.P.
/s/ CHERRY, BEKAERT & HOLLAND, L.L.P.
EXHIBIT 10.1
<PAGE>
GASTON FEDERAL SAVINGS BANK
EMPLOYMENT AGREEMENT
This Agreement is made effective as of ______________, 1998 by and
between Gaston Federal Savings Bank (the "Bank"), a federally-chartered stock
savings bank, with its principal executive office at 245 West Main Avenue,
Gaston, North Carolina 28053-5200 and Kim S. Price (the "Executive"). Any
reference to "Company" herein shall mean Gaston Federal Bancorp, Inc., the stock
holding company parent of the Bank or any successor thereto.
WHEREAS, the Bank wishes to assure itself of the continued services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to continue to serve in the employ of the
Bank on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES
During the period of his employment hereunder, Executive agrees to
serve as President and Chief Executive Officer of the Bank and the Company.
During said period, Executive also agrees to serve, if elected, as an officer
and director of any subsidiary or affiliate of the Bank. Failure to reelect
Executive as President and Chief Executive Officer without the consent of the
Executive during the term of this Agreement shall constitute a breach of this
Agreement.
2. TERMS AND DUTIES
(a) The period of Executive's employment under this Agreement shall
begin as of the date first above written and shall continue for a period of
thirty-six (36) full calendar months thereafter. Commencing on the first
anniversary date of this Agreement, and continuing at each anniversary date
thereafter, the Agreement shall renew for an additional year such that the
remaining term shall be three (3) years unless written notice is provided to
Executive at least ten (10) days and not more than thirty (30) days prior to any
such anniversary date, that his employment shall cease at the end of thirty-six
(36) months following such anniversary date. Each year, prior to the notice
period for non-renewal, the disinterested members of the Board of Directors of
the Bank ("Board") will conduct a comprehensive performance evaluation and
review of the Executive for purposes of determining whether to extend the
Agreement, and the results thereof shall be included in the minutes of the
Board's meeting.
<PAGE>
(b) During the period of his employment hereunder, except for periods
of absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Bank; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
Executive may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, business companies or business
organizations, which, in such Board's judgment, will not present any conflict of
interest with the Bank, or materially affect the performance of Executive's
duties pursuant to this Agreement (it being understood that membership in
social, religious, charitable or similar organizations does not require Board
approval pursuant to this Section 2(b)).
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute
the salary and benefits paid for the duties described in Section 2(b). The Bank
shall pay Executive as compensation a salary of not less than $_________ per
year ("Base Salary"). Such Base Salary shall be payable biweekly. During the
period of this Agreement, Executive's Base Salary shall be reviewed at least
annually; the first such review will be made no later than December 31, 1998.
Such review shall be conducted by a Committee designated by the Board, and the
Board may increase, but not decrease, Executive's Base Salary (any increase in
Base Salary shall become the "Base Salary" for purposes of this Agreement). In
addition to the Base Salary provided in this Section 3(a), the Bank shall
provide Executive at no cost to Executive with all such other benefits as are
provided uniformly to permanent full-time employees of the Bank.
(b) The Bank will provide Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would adversely affect Executive's rights or benefits
thereunder. Without limiting the generality of the foregoing provisions of this
Subsection (b), Executive will be entitled to participate in or receive benefits
under any employee benefit plans including but not limited to, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plans, medical coverage or any other employee benefit plan
or arrangement made available by the Bank in the future to its senior executives
and key management employees, subject to and on a basis consistent with the
terms, conditions and overall administration of such plans and arrangements.
Executive will be entitled to incentive compensation and bonuses as provided in
any plan of the Bank in which Executive is eligible to participate (and he shall
be entitled to a pro rata distribution under any incentive compensation or bonus
plan as to any year in which a termination of employment occurs, other than
termination for Cause). Nothing paid to the Executive under any such plan or
arrangement will be deemed to be in lieu of other compensation to which the
Executive is entitled under this Agreement.
2
<PAGE>
(c) In addition to the Base Salary provided for by paragraph (a) of
this Section 3, the Bank shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses incurred by Executive performing his
obligations under this Agreement (including but not limited to rotary club dues)
and may provide such additional compensation in such form and such amounts as
the Board may from time to time determine.
(d) Compensation and reimbursement to be paid pursuant to paragraphs
(a), (b) and (c) of this Section 3 shall be paid by the Bank and the Company,
respectively on a pro rata basis based upon the amount of service the Executive
devotes to the Bank and Company, respectively.
(e) In addition to the foregoing, Executive shall be entitled to
receive fees for serving as a director of the Bank in the same amount and on the
same terms as fees are paid to other directors of the Bank.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION
The provisions of this Section shall in all respects be subject to the
terms and conditions stated in Sections 7 and 14.
(a) The provisions of this Section shall apply upon the occurrence of
an Event of Termination (as herein defined) during the Executive's term of
employment under this Agreement. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following:
(i) the termination by the Bank or the Company of Executive's full-time
employment hereunder for any reason other than (A) Disability or Retirement, as
defined in Section 5 below, or (B) Termination for Cause as defined in Section 6
hereof; or
(ii) Executive's resignation from the Bank's employ, upon any
(A) failure to elect or reelect or to appoint or reappoint
Executive as President and Chief Executive Officer of the
Bank,
(B) material change in Executive's function, duties, or
responsibilities, which change would cause Executive's
position to become one of lesser responsibility, importance,
or scope from the position and attributes thereof described in
Section 1, above,
(C) a relocation of Executive's principal place of employment
by more than 30 miles from its location at the effective date
of this Agreement, or a material reduction in the benefits and
perquisites to the Executive from those being provided as of
the effective date of this Agreement,
3
<PAGE>
(D) liquidation or dissolution of the Bank or Company other
than liquidations or dissolutions that are caused by
reorganizations that do not affect the status of Executive; or
(E) breach of this Agreement by the Bank.
Upon the occurrence of any event described in clauses (ii) (A), (B), (C), (D) or
(E), above, Executive shall have the right to elect to terminate his employment
under this Agreement by resignation upon sixty (60) days prior written notice
given within a reasonable period of time not to exceed four calendar months
after the initial event giving rise to said right to elect. Notwithstanding the
preceding sentence, in the event of a continuing breach of this Agreement by the
Bank, the Executive, after giving due notice within the prescribed time frame of
an initial event specified above, shall not waive any of his rights solely under
this Agreement and this Section 4 by virtue of the fact that Executive has
submitted his resignation but has remained in the employment of the Bank and is
engaged in good faith discussions to resolve any occurrence of an event
described in clauses (A), (B), (C), (D) and (E) above.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 7, the Bank shall pay Executive, or, in the
event of his subsequent death, his beneficiary or beneficiaries, or his estate,
as the case may be, as severance pay or liquidated damages, or both, a cash
payment equal to three (3) times the sum of: (i) the highest annual rate of Base
Salary (which shall include any salary deferred at the election of Executive)
paid to Executive at any time under this Agreement, and (ii) the highest annual
cash bonus paid to Executive with respect to the three completed fiscal years
prior to the Event of Termination; provided however, that if the Bank is not in
compliance with its minimum capital requirements or if such payments would cause
the Bank's capital to be reduced below its minimum capital requirements, such
payments shall be deferred until such time as the Bank is in capital compliance,
and provided further, that in no event shall total severance compensation from
all sources exceed three times the Executive's average annual compensation over
the five fiscal years preceding the fiscal year in which the termination of
employment occurs (except, in the case of Section 5, as to payments are being
made pursuant to disability insurance previously obtained by the Bank)(for
purposes of this provision and only for purposes of this provision, compensation
shall mean any payment of money or provision of any other thing of value in
consideration of employment, including, without limitation, base salary,
commissions, bonuses, pension and profit sharing plans, severance payments,
retirement, director or committee fees, fringe benefits, and the payment of
expense items without accountability or business purpose or that do not meet the
IRS requirements for deductibility by the Bank). At the election of the
Executive, which election is to be made within thirty (30) days of an Event of
Termination, such payments shall be made in a lump sum or paid monthly during
the remaining term of the agreement following the Executive's termination. In
the event that no election is made, payment to the Executive will be made on a
monthly basis during the remaining term of the agreement. Such payments shall
not be reduced in the event the Executive obtains other employment following
termination of employment.
4
<PAGE>
(c) Upon the occurrence of an Event of Termination, the Bank will cause
to be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for Executive prior to his
termination, provided that such benefits shall not be provided in the event they
should constitute an unsafe or unsound banking practice relating to executive
compensation and employment contracts pursuant to 12 C.F.R. ss.ss. 63.39 and
563.161, as is now or hereafter in effect. Such coverage shall cease upon the
expiration of the remaining term of this Agreement.
(d) In the event that the Executive is receiving monthly payments
pursuant to Section 4(b) or (c) hereof, on an annual basis, thereafter, between
the dates of January 1 and January 31 of each year, Executive shall elect
whether the balance of the amount payable under the Agreement at that time shall
be paid in a lump sum or on a pro rata basis. Such election shall be irrevocable
for the year for which such election is made.
(e) Notwithstanding the preceding paragraphs of this Section 4, in the
event that:
(i) the aggregate payments or benefits to be made or
afforded to Executive under said paragraphs (the
"Termination Benefits") would be deemed to include an
"excess parachute payment" under Section 280G of the
Code or any successor thereto, and
(ii) if such Termination Benefits were reduced to an
amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal
to the total amount of payments permissible under
Section 280G of the Code or any successor thereto.
then the Termination Benefits to be paid to Executive shall be
so reduced so as to be a Non-Triggering Amount.
5. TERMINATION UPON RETIREMENT, DISABILITY OR DEATH
Termination by the Bank of the Executive based on "Retirement" shall
mean termination of Executive's employment at age 65 or in accordance with any
retirement policy established with Executive's consent with respect to him. Upon
termination of Executive upon Retirement, Executive shall be entitled to all
benefits under any retirement plan of the Bank and other plans to which
Executive is a party.
In the event Executive is unable to perform his duties under this
Agreement on a full-time basis for a period of six (6) consecutive months by
reason of illness or other physical or mental disability, the Employer may
terminate this Agreement, provided that the Employer shall continue to be
obligated to pay the Executive his Base Salary for the remaining term of the
Agreement, or one year, whichever is the longer period of time, and provided
further that any amounts actually paid to Executive pursuant to any disability
insurance or other similar such program which the Employer
5
<PAGE>
has provided or may provide on behalf of its employees or pursuant to any
workman's or social security disability program shall reduce the compensation to
be paid to the Executive pursuant to this paragraph.
In the event of Executive's death during the term of the Agreement, his
estate, legal representatives or named beneficiaries (as directed by Executive
in writing) shall be paid Executive's Base Salary as defined in Paragraph 3(a)
at the rate in effect at the time Executive's death for a period of one (1) year
from the date of the Executive's death, and the Employers will continue to
provide medical, dental, family and other benefits normally provided for an
Executive's family for one (1) year after the Executive's death.
6. TERMINATION FOR CAUSE
The term "Termination for Cause' shall mean termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. In determining incompetence, the acts
or omissions shall be measured against standards generally prevailing in the
savings institutions industry. For purposes of this paragraph, no act or failure
to act on the part of Executive shall be considered "willful" unless done, or
omitted to be done, by the Executive not in good faith and without reasonable
belief that the Executive's action or omission was in the best interest of the
Bank. Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. The
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause. Any stock options granted to Executive
under any stock option plan of the Bank, the Company or any subsidiary or
affiliate thereof, shall become null and void effective upon Executive's receipt
of Notice of Termination for Cause pursuant to Section 7 hereof, and shall not
be exercisable by Executive at any time subsequent to such Termination for
Cause.
7. NOTICE
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
6
<PAGE>
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the voluntary
termination by the Executive in which case the Date of Termination shall be the
date specified in the Notice, the Date of Termination shall be the date on which
the dispute is finally determined, either by mutual written agreement of the
parties, by a binding arbitration award, or by a final judgment, order or decree
of a court of competent jurisdiction (the time for appeal having expired and no
appeal having been perfected) and provided further that the Date of Termination
shall be extended by a notice of dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence. Notwithstanding the pendency of any such dispute, the
Bank will continue to pay Executive his full compensation in effect when the
notice giving rise to the dispute was given (including, but not limited to, Base
Salary) and continue Executive as a participant in all compensation, benefit and
insurance plans in which he was participating when the notice of dispute was
given, until the dispute is finally resolved in accordance with this Agreement,
provided such dispute is resolved within nine months after the Date of
Termination specified in the Notice or Termination; notwithstanding the
foregoing, no compensation or benefits shall be paid to Executive in the event
the Executive is Terminated for Cause. In the event that such Termination for
Cause is found to have been wrongful or such dispute is otherwise decided in
Executive's favor, the Executive shall be entitled to receive all compensation
and benefits which accrued for up to a period of nine months after Termination
for Cause. If such dispute is not resolved within such nine- month period, the
Bank shall not be obligated, upon final resolution of such dispute, to pay
Executive compensation and other payments accruing more than nine months from
the Date of the Termination specified in the Notice of Termination. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
8. POST-TERMINATION OBLIGATIONS
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive's compliance with paragraph (b) of this Section 8 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information
and assistance to the Bank as may reasonably be required by the Bank in
connection with any litigation in which it or any of its subsidiaries or
affiliates is, or may become, a party.
7
<PAGE>
9. NON-COMPETITION
(a) Upon any termination of Executive's employment hereunder as a
result of which the Association is paying Executive benefits under Section 4 of
this Agreement, Executive agrees not to compete with the Bank and/or the Company
for a period of one (1) year following such termination in any city, town or
county in which the Bank and/or the Company has an office or has filed an
application for regulatory approval to establish an office, determined as of the
effective date of such termination, except as agreed to pursuant to a resolution
duly adopted by the Board. Executive agrees that during such period and within
said cities, towns and counties, Executive shall not work for or advise, consult
or otherwise serve with, directly or indirectly, any entity whose business
materially competes with the depository, lending or other business activities of
the Bank and/or the Company. The parties hereto, recognizing that irreparable
injury will result to the Bank and/or the Company, its business and property in
the event of Executive's breach of this Subsection 9(a) agree that in the event
of any such breach by Executive, the Bank and/or the Company will be entitled,
in addition to any other remedies and damages available, to an injunction to
restrain the violation hereof by Executive, Executive's partners, agents,
servants, employers, employees and all persons acting for or with Executive.
Executive represents and admits that Executive's experience and capabilities are
such that Executive can obtain employment in a business engaged in other lines
and/or of a different nature than the Bank and/or the Company, and that the
enforcement of a remedy by way of injunction will not prevent Executive from
earning a livelihood. Nothing herein will be construed as prohibiting the Bank
and/or the Company from pursuing any other remedies available to the Bank and/or
the Company for such breach or threatened breach, including the recovery of
damages from Executive. This paragraph (a) shall not apply if an termination of
Executive's employment occurs in connection with a change in control of the
Bank, within the meaning of the Home Owners' Loan Act and the Rules and
Regulations promulgated by the Office of Thrift Supervision (or its predecessor
agency) thereunder.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever (except
for such disclosure as may be required to be provided to the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation, or other federal banking
agency with jurisdiction over the Bank or Executive). Notwithstanding the
foregoing, Executive may disclose any knowledge of banking, financial and/or
economic principles, concepts or ideas which are not solely and exclusively
derived from the business plans and activities of the Bank, and Executive may
disclose any information regarding the Bank or the Company which is otherwise
publicly available. In the event of a breach or threatened breach by the
Executive of the Provisions of this Section 9, the Bank will be entitled to an
injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Bank or affiliates thereof, or from rendering any services to any person, firm,
corporation, other entity to whom such knowledge, in whole or in part, has been
disclosed or is
8
<PAGE>
threatened to be disclosed. Nothing herein will be construed as prohibiting the
Bank from pursuing any other remedies available to the Bank for such breach or
threatened breach, including the recovery of damages from Executive.
10. SOURCE OF PAYMENTS
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Company, however, guarantees
payment and provision of all amounts and benefits due hereunder to Executive
and, if such amounts and benefits due from the Bank are not timely paid or
provided by the Bank, such amounts and benefits shall be paid or provided by the
Company.
11. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to the Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
12. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
13. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
9
<PAGE>
14. REQUIRED PROVISIONS
(a) The Bank's Board of Directors may terminate the Executive's
employment at any time, but any termination by the Bank's Board of Directors,
other than Termination for Cause, shall not prejudice Executive's right to
compensation or other benefits under this Agreement. Executive shall not have
the right to receive compensation or other benefits for any period after
Termination for Cause as defined in Section 7 herein above.
(b) If the Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under Section 8(e)(3) (12 U.S.C. ss.ss. 1818(e)(3)) or 8(g) (12 U.S.C.
ss. 1818(g)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, the Bank's
obligations under this contract shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion (i) pay the Executive all or part of
the compensation withheld while their contract obligations were suspended and
(ii) reinstate (in whole or in part) any of the obligations which were
suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 U.S.C. ss.ss. 1818(e)) or 8(g) (12 U.S.C. ss. 1818(g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, all obligations of the Bank under this
contract shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x) (12 U.S.C. ss.
1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be
terminated, except to the extent determined that continuation of the contract is
necessary for the continued operation of the institution, (i) by the Director,
at the time Federal Deposit Insurance Corporation ("FDIC") or the Resolution
Trust Corporation enters into an agreement to provide assistance to or on behalf
of the Bank; or (ii) by the Office of Thrift Supervision ("OTS") at the time the
OTS or its District Director approves a supervisory merger to resolve problems
related to the operations of the Bank or when the Bank is determined by the OTS
or FDIC to be in an unsafe or unsound condition. Any rights of the parties that
have already vested, however, shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 USC
Section 1828(k) and any regulations promulgated thereunder.
10
<PAGE>
15. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
16. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
17. GOVERNING LAW
This Agreement shall be governed by the laws of the State of North
Carolina but only to the extent not superseded by federal law. In the event that
any discrepancies arise between the contract and laws or regulations which are
effective with respect to the contract, the laws and regulations will prevail.
18. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within
thirty (30) miles from the location of the Bank, in accordance with the rules of
the American Arbitration Association then in effect. Judgment may be entered on
the arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
19. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank, provided that the dispute or interpretation has been
settled by Executive and the Bank or resolved in the Executive's favor.
20. INDEMNIFICATION
The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, and shall indemnify Executive (and
his heirs, executors and administrators) to the fullest extent permitted under
federal law against all expenses and liabilities reasonably incurred by him in
connection with
11
<PAGE>
or arising out of any action, suit or proceeding in which he may be involved by
reason of his having been a director or officer of the Bank (whether or not he
continues to be a director or officer at the time of incurring such expenses or
liabilities), such expenses and liabilities to include, but not be limited to,
judgments, court costs and attorneys' fees and the cost of reasonable
settlements (such settlements must be approved by the Board of Directors of the
Bank). If such action, suit or proceeding is brought against Executive in his
capacity as an officer or director of the Bank, however, such indemnification
shall not extend to matters as to which Executive is finally adjudged to be
liable for willful misconduct in the performance of his duties. No
Indemnification shall be paid that would violate 12 U.S.C. 1828(K) or any
regulations promulgated thereunder, or 12 C.F.R. 545.121.
21. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Bank's obligations under
this Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
12
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement
to be executed and their seals to be affixed hereunto by their duly authorized
officers, and Executives have signed this Agreement, on the day and date first
above written.
ATTEST: GASTON FEDERAL SAVINGS BANK
_____________________________ By: __________________________
Secretary Chairman of the Board
WITNESS: EXECUTIVE:
______________________________ By: __________________________
13
The Board of Directors
Gaston Federal Savings and Loan Association
We consent to the use in this Amendment No. 1 to the registration statement
(No. 333-42951) on Form SB-2 of Gaston Federal Bancorp, Inc. of our report
dated October 24, 1997 with respect to the financial statements of Gaston
Federal Savings and Loan Association as of September 30, 1997 and 1996 and
for the years then ended included herein, the use of our opinion as to the
North Carolina income tax consequences of the offering as described therein
and 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
January 30, 1998
EXHIBIT 99.2
<PAGE>
Feldman Financial Advisors, Inc.
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1725 K STREET, NW o SUITE 205
WASHINGTON, DC 20006
(202) 467-6862 o FAX (202) 467-6963
================================================================================
Gaston Federal Savings and Loan Association
Gastonia, North Carolina
Conversion Valuation Appraisal Report
Valued as of December 11, 1997
Prepared By
Feldman Financial Advisors, Inc.
Washington, D.C.
================================================================================
<PAGE>
[LETTERHEAD OF FELDMAN FINANCIAL ADVISORS, INC. APPEARS HERE]
December 11, 1997
Board of Directors
Gaston Federal Savings and Loan Association
245 West Main Avenue
Gastonia, North Carolina 28053
Gentlemen:
At your request, we have completed and hereby provide an independent
appraisal of the aggregate estimated pro forma market value of Gaston Federal
Savings and Loan Association ("Gaston" or the "Association") in connection with
its mutual holding company reorganization (the "Reorganization"). The
transaction structure will include the formation of a federally-chartered stock
savings bank as the successor to the Association in its mutual form, and
concurrent formation of Gaston Federal Bancorp, Inc. (the "Stock Company") as a
majority-owned subsidiary of Gaston Federal Holdings, MHC (the "Mutual
Company"). The Stock Company will offer shares of its common stock for sale to
eligible depositors and to the Association's and Stock Company's employee stock
benefit plans in a Subscription Offering. Shares not subscribed for in the
Subscription Offering will be offered for sale to certain members of the general
public in a Community Offering.
This appraisal report is being furnished pursuant to the filing of
regulatory applications for the Reorganization by the Association with the
Office of Thrift Supervision ("OTS"). Feldman Financial Advisors, Inc. ("Feldman
Financial") is a financial consulting and economic research firm that
specializes in financial valuations and analyses of business enterprises and
securities in the thrift, banking, and mortgage industries. The background of
Feldman Financial is presented in Exhibit I.
In preparing our appraisal, we conducted an analysis of the Association
that included discussions with the Association's management, the Association's
independent auditors, Cherry, Bekeart & Holland, LLP, the Association's offering
manager, Trident Securities, and the Association's Reorganization counsel, Luse
Lehman Gorman Pomerenk & Schick, P.C. In addition, where appropriate, we
considered information based on other available published sources that we
believe are reliable; however, we cannot guarantee the accuracy and completeness
of such information
We also reviewed, among other factors, the economy in the Association's
primary market area and compared the Association's financial condition and
operating performance with that of selected publicly traded financial
institutions. We reviewed conditions in the securities markets in general and in
the market for thrift institution common stocks in particular.
Our appraisal is based on the Association's representation that the
information contained in the regulatory applications and additional evidence
furnished to us by the Association and its independent auditors are truthful,
accurate, and complete. We did not independently verify the financial statements
and other information provided by the Association and its independent auditors,
nor did we independently value the assets or liabilities of the
<PAGE>
FELDMAN FINANCIAL ADVISORS, INC.
Board of Directors
Gaston Federal Savings and Loan Association
December 11, 1997
Page 2
Association. The valuation considers the Association only as a going concern
and should not be considered as an indication of the liquidation value of the
Association.
It is our opinion that, as of December 11, 1997, the aggregate estimated
pro forma market value of the Association was within the valuation range of
$28,900,000 to $39,100,000 with a midpoint of $34,000,000. The valuation range
was based upon a 15 percent decrease from the midpoint to determine the minimum
and a 15 percent increase to establish the maximum. Assuming an additional 15
percent increase above the maximum value results in a adjusted maximum of
$44,965,000.
The Board of Directors has determined to offer for sale in the
Reorganization a minority ownership interest equal to 47% of all the common
stock to be issued and outstanding. Therefore, the total amount of common stock
to be sold in the Reorganization will be equal to $13,583,000 at the minimum
valuation, $15,980,000 at the midpoint valuation, $18,377,000 at the maximum
valuation, and $21,133,550 at the adjusted maximum.
Our valuation is not intended, and must not be construed, 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, no assurance can be given that persons who
purchase shares of stock in the Reorganization will thereafter be able to sell
such shares at prices related to the foregoing estimate of the Association's pro
forma market value. Feldman Financial is not a seller of securities with in the
meaning of any federal or state securities laws and any report prepared by
Feldman Financial shall not be used as an offer or solicitation with respect to
the purchase or sale of any securities.
The valuation reported herein, will be updated as appropriate. These
updates will consider, among other factors, any developments or changes in the
Association's operating performance, financial condition, or management
policies, and current conditions in the securities markets for thrift
institution common stocks. Should any such new developments or changes be
material, in our opinion, to the valuation of the Association, appropriate
adjustments to the estimated pro forma market value will be made. The reasons
for any such adjustments will be explained in detail at that time.
Respectfully,
Feldman Financial Advisors, Inc.
By: /s/ Trent R. Feldman
----------------------------
Trent R. Feldman
President
<PAGE>
Feldman Financial Advisors, Inc.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
TAB PAGE
- --- ----
<S> <C> <C>
INTRODUCTION ................................................... 1
I. Chapter One - BUSINESS OF GASTON FEDERAL
General......................................................... 4
Financial Condition............................................. 10
Income and Expense Trends....................................... 19
Asset and Liability Management.................................. 24
Asset Quality................................................... 27
Properties...................................................... 30
Subsidiaries.................................................... 31
Market Area..................................................... 32
Summary......................................................... 37
II. Chapter Two - COMPARISONS WITH PUBLICLY HELD COMPANIES
General ........................................................ 38
Selection Criteria ............................................. 39
Recent Financial Comparisons ................................... 43
III. Chapter Three - MARKET VALUE ADJUSTMENTS
Earnings Prospects ............................................. 56
Market Area .................................................... 58
Management ..................................................... 58
Dividend Capacity............................................... 59
Liquidity of the Issue ......................................... 59
Subscription Interest .......................................... 60
Stock Market Conditions ........................................ 61
Recent Acquisition Activity .................................... 65
New Issue Discount ............................................. 67
Mutual Holding Company Issues................................... 69
Adjustments Conclusion ......................................... 70
Valuation Approach ............................................. 71
Valuation Conclusion ........................................... 72
IV. Appendix - EXHIBITS
I Background of Feldman Financial Advisors, Inc........ I-1
II-1 Statement of Financial Condition..................... II-1
II-2 Statement of Income.................................. II-2
II-3 Loan Portfolio Composition........................... II-3
II-4 Net Lending Activity................................. II-4
II-5 Investment Portfolio Composition..................... II-5
II-6 Deposit Account Distribution......................... II-6
II-7 Borrowed Funds Activity.............................. II-7
II-8 Office Facilities.................................... II-8
III Market Valuation and Financial Data for All
Public Thrifts...................................... III-1
IV-1 Pro Forma Conversion Assumptions..................... IV-1
IV-2 Pro Forma Valuation Range: Full Conversion.......... IV-2
IV-3 Pro Forma Valuation Range: MHC Offering............. IV-3
IV-4 Comparative Valuation Ratios......................... IV-4
IV-5 Pro Forma Full Conversion Analysis at Maximum Value.. IV-5
</TABLE>
<PAGE>
Feldman Financial Advisors, Inc.
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LIST OF TABLES
<TABLE>
<CAPTION>
TAB PAGE
- --- ----
<S> <C> <C>
I. Chapter One - BUSINESS OF GASTON FS&LA
Table 1 - Selected Financial Condition Data .................. 10
Table 2 - Selected Operating Ratios and Other Data............ 11
Table 3 - Income Statement Summary............................ 20
Table 4 - Average Balances and Yield/Cost..................... 21
Table 5 - NPV Calculation..................................... 26
Table 6 - Non-performing Asset Summary........................ 28
Table 7 - Allowance for Loan and Lease Losses................. 29
Table 8 - Key Economic Indicators............................. 34
Table 9 - Deposit Market Share Analysis for Gaston County..... 35
Table 10 - Deposit Market Share Analysis for Charlotte-
Gastonia-Rock Hill MSA............................. 36
II. Chapter Two - COMPARISONS WITH PUBLICLY HELD COMPANIES
Table 11 - Comparative Group Operating Summary................. 42
Table 12 - Key Financial Comparisons........................... 45
Table 13 - General Financial Performance Ratios................ 50
Table 14 - Income and Expense Analysis......................... 51
Table 15 - Yield-Cost Structure and Growth Rates............... 52
Table 16 - Balance Sheet Composition........................... 53
Table 17 - Capital Ratios, Asset Quality, and Loan Composition. 54
III. Chapter Three - MARKET VALUE ADJUSTMENTS
Table 18 - Comparative Stock Market Performance................ 63
Table 19 - Selected Interest Rate Benchmarks................... 64
Table 20 - Recent North Carolina Acquisition Activity.......... 66
Table 21 - Recent Thrift Conversion Activity................... 68
Table 22 - Comparative Market Valuation Analysis .............. 74
</TABLE>
<PAGE>
Feldman Financial Advisors, Inc.
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INTRODUCTION
As requested, Feldman Financial Advisors, Inc. ("Feldman Financial")
has prepared an independent appraisal of the aggregate estimated pro forma
market value of Gaston Federal Savings and Loan Association ("Gaston" or the
"Association") in connection with its mutual holding company reorganization (the
"Reorganization"). The transaction structure will include the formation of the
federally-chartered stock savings bank, Gaston Federal Bank, as the successor to
the Association in its mutual form, and concurrent formation of Gaston Federal
Bancorp, Inc. (the "Stock Company") as a majority-owned subsidiary of Gaston
Federal Holdings, MHC (the "Mutual Company"). The Stock Company will offer
shares of its common stock for sale to eligible depositors and to the
Association's and Stock Company's employee stock benefit plans in a Subscription
Offering. Shares not subscribed for in the Subscription Offering will be offered
for sale to certain members of the general public in a Community Offering.
The Association will organize the Mutual Company as a
federally-chartered mutual holding company, which will own at least 51% of the
common shares of the Stock Company for so long as the Mutual Company remain in
existence. The Association will be a wholly-owned subsidiary of the Stock
Company. The Stock Company expects to sell in the Stock Offering a minority
ownership interest equal to 47% of its common stock. The remaining issued and
outstanding shares of the Stock Company will be owned by the Mutual Company.
In the course of preparing this appraisal report, we reviewed and
discussed with the Association's management, and with the Association's
independent auditors, Cherry, Bekaert & Holland, LLP, and the audited financial
statements of the Association's operations for the
-1-
<PAGE>
Feldman Financial Advisors, Inc.
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years ended September 30, 1996 and 1997. We also discussed matters related to
the Reorganization with the Association's legal counsel, Luse Lehman Gorman
Pomerenk & Schick, P.C., and with the Association's offering manager, Trident
Securities. We also reviewed and discussed with management other financial
matters of the Association.
Where appropriate, we considered information based upon other available
public sources, which we believe to be reliable; however, we cannot guarantee
the accuracy or completeness of such information. We visited the Association's
primary market area and examined the prevailing economic conditions. We also
examined the competitive environment within which the Association operates and
assessed the Association's relative strengths and weaknesses.
We examined and compared the Association's financial performance with
selected segments of the thrift industry and selected publicly traded thrifts.
We reviewed conditions in the securities markets in general and the market for
thrift institution common stocks in particular. We included in our analysis an
examination of the potential effects of the Reorganization on the Association's
operating characteristics and financial performance as they relate to the
estimated pro forma market value of the Association.
In preparing our valuation, we have relied upon and assumed the
accuracy and completeness of financial and statistical information provided by
the Association and its independent auditors. We did not independently verify
the financial statements and other information provided by the Association and
its independent auditors, nor did we independently value the assets or
liabilities of the Association. The valuation considers the Association only as
a going concern and should not be considered as an indication of the liquidation
value of the Association.
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<PAGE>
Feldman Financial Advisors, Inc.
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Our valuation is not intended, and must not be construed, to be a
recommendation of any kind as to the advisability of purchasing shares of common
stock in the Reorganization. Moreover, because such valuation is necessarily
based on 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 who
purchase shares of common stock in the Reorganization will thereafter be able to
sell such shares at prices related to the foregoing valuation of the pro forma
market value thereof. Feldman Financial is not a seller of securities within the
meaning of any federal and state securities laws and any report prepared by
Feldman Financial shall not be used as an offer or solicitation with respect to
the purchase or sale of any securities.
The valuation reported herein will be updated as appropriate. These
updates will consider, among other factors, any developments or changes in the
Association's financial performance or management policies, and current
conditions in the securities market for thrift institution common stocks. Should
any such developments or changes be material, in our opinion, to the
Reorganization valuation of the Association, appropriate adjustments to the
estimated pro forma market value will be made. The reasons for any such
adjustments will be explained in detail at that time.
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<PAGE>
I
<PAGE>
Feldman Financial Advisors, Inc.
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I. BUSINESS OF GASTON FEDERAL SAVINGS AND LOAN
General
Gaston was organized in 1904 as a North Carolina-chartered mutual
savings association. The Association conducts business from its home office in
Gastonia, North Carolina and its three other offices, two located in Gastonia
and one in Mount Holly, North Carolina. The Association is subject to regulation
by the Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance
Corporation ("FDIC"), the insurer of its deposit accounts up to applicable
limits through the Savings Association Insurance Fund. The Association is a
member of the Federal Home Loan Association ("FHLB") of Atlanta. As of September
30, 1997, Gaston had total assets of $173.5 million, total deposits of $145.4
million, and total equity of $20.9 million or 12.03% of total assets.
Gaston emphasizes the origination of residential mortgage loans, which
constituted 76.5% of gross loans at September 30, 1997. The Association also
offers traditional deposit accounts, commercial real estate, construction,
commercial and home equity loan products and, to a lesser extent, consumer
loans. Of the Association's total loan portfolio at September 30, 1997, 76.5%
consisted of loans secured by one-to-four family residential properties, 5.3%
were secured by commercial real estate, 4.2% were construction loans secured by
one-to-four family residential properties, 4.0% were commercial loans to small
businesses and professionals, 4.7% were loans secured by multi-family residences
and 5.4% consisted of home equity loans and consumer loans. The Association also
invests in securities and other short-term investments. At September 30, 1997,
investment securities and short-term investments amounted to $30.9 million or
17.9% of the Association's assets.
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Feldman Financial Advisors, Inc.
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The Association operates three full-service banking offices in Gastonia
and one in Mount Holly. The majority of the Association's deposits are gathered
from the general public of Gaston County. The Association's primary lending area
extends throughout Gaston County. Since a significant concentration of Gaston'
assets are secured by residential real estate located in its primary lending
territory, the asset quality of the Association is highly dependent upon the
real estate market conditions in the local economy and general economic
conditions in its lending market. As the economic environment of Gaston County
has improved through the 1990's, aided by the growth of neighboring Mecklenburg
County, the Association's level of nonperforming assets has continued to improve
and now stands at 0.75% of total assets as of September 30, 1997.
Gaston has reported consistent profitability over the years. The
Association's earnings results can be attributed to a high level of capital,
controlled operating expenses, prudent underwriting standards, and solid asset
quality. The Association's high level of capital provides it with a significant
interest-free source of funding that strengthens its net interest margin
potential. The Association's lending strength in one-to-four family residential
real estate mortgage loans provides the Association with a consistent yield. The
Association's emphasis on efficiency and basic thrift operations has resulted in
low expense ratios. Finally, the Association believes that its conservatively
administered loan portfolio and experienced track record in its one-to-four
family residential real estate mortgage lending has helped it to maintain
non-performing assets at low levels.
The Association's historical success is related to its ability to
maintain strong asset and to operate efficiently. The Association believes that
its basic management philosophy aimed at simplicity of operations is a key to
achieving efficiency and well-focused business goals.
-5-
<PAGE>
Feldman Financial Advisors, Inc.
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Throughout its history, the Association has emphasized residential real estate
mortgage lending. Management plans on transforming the Association into a more
retail bank-like institution after the conversion.
The senior management of Gaston, specifically the CEO and CFO, have
been at the institution for approximately six months. It is the intent of the
new management team to build upon Gaston's core strength of one-to-four family
residential real estate mortgage lending and also expand the Association's
operations into more retail bank-like operations.
The basic operating strategy of Gaston is focused on the following
goals:
o Continue to build and strengthen the Association's core business of
one-to-four family residential real mortgage lending.
o Expand lending into commercial an consumer products.
o Strengthen, expand, and refine the Association's sources of funds.
o Continue to improve the Association's financial management and its
ability to produce operating results.
o Continue to cultivate the Association's effectiveness through
management development and the introduction of improved systems and
procedures.
o Maintain the Association's commitment to its community by remaining
active and increasing its participation in various community
programs, and providing funds to meet community credit and economic
development needs.
Gaston generated impressive returns on average assets of 0.30% and
0.84% over the fiscal years ended September 30, 1996 and 1997. Earnings for 1996
were constrained by the one-time SAIF assessment. As a result of its consistent
earnings accompanied by controlled asset growth, the Association's ratio of
total equity to assets was elevated from 10.12% at September 30, 1993 to 12.03%
at September 30, 1997. Included in the Association's equity at
-6-
<PAGE>
Feldman Financial Advisors, Inc.
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September 30, 1997 was $1.1 million of net unrealized gain on securities
available for sale, net of taxes. This component measured 5.3% of the
Association's total equity at such date.
The Association seeks to generate future earnings growth through
continued emphasis on one-to-four family residential real estate lending, and as
market conditions permit, increased commercial real estate and consumer lending.
Management intends to monitor economic conditions in the Association's market
area and adjust the mix of its lending activities in response to changing
conditions in order to maintain sound asset quality and profitability.
Management believes opportunities for growth exist in its market area and plans
to manage growth to ensure compliance with regulatory capital requirements and
to achieve overall strategic objectives, without unduly increasing the risk
profile of the balance sheet.
The Board of Directors of Gaston has determined that the Reorganization
is in the best interest of the Association and its customers, and has discerned
several business purposes for effecting the proposed Reorganization. The
Reorganization will structure the Association in the stock form, which is used
by commercial banks, most major business corporations, and an increasing
majority of savings institutions. Formation of the stock company will permit the
Association to issue common stock, which is a source of capital not available to
mutual institutions.
At the same time, the Association's mutual form of ownership will be
preserved in the mutual holding company ("MHC") structure, which will permit the
Mutual Company to control at least a majority of the common stock issued in the
Reorganization. The MHC structure will enable the Association to raise
significantly less capital than the extraordinary amount of funds that otherwise
would result from a full conversion in today's stock market. The Reorganization
will not foreclose the opportunity for the resulting Mutual Company to
-7-
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Feldman Financial Advisors, Inc.
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convert from mutual to stock form in the future. Additionally, the middle-tier
Stock Company allows greater flexibility to structure mergers and acquisitions,
diversify business operations, and to repurchase shares of common stock, thereby
affording the MHC structure some of the advantages that were previously
available only to thrifts that opted for fully-converted stock companies.
The Stock Company will offer for sale 47% of its common shares in the
Stock Offering. The sale of common stock will provide the Association with new
equity capital to support future growth and expanded operations. Management
believes that the sale of common stock in selected proportions and at
appropriate intervals facilitates the orderly and manageable expansion of the
Association's capital base. The ability to issue common stock also will enable
the Association to establish stock benefit plans for management and employees,
thereby improving the Association's capacity to attract and retain qualified
personnel. The additional capital, along with the holding company organizational
structure, will help to facilitate expansion through mergers and acquisitions.
The increased capital resulting from the Stock Offering will enable the
Association to take advantage of additional lending opportunities within its
market area. Based on the Association's expanded capital base, the Association
will be able to increase its lending limits and borrower concentrations without
jeopardizing credit risk management.
The Association may also explore other means of expanding loan
originations through loan participations. In addition, adjacent geographic
markets may be considered for new business development opportunities consistent
with the Association's current lines of business. The Association intends to
implement any such growth and expansion plans with the disciplined and
deliberate approach it has traditionally followed.
-8-
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Feldman Financial Advisors, Inc.
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The remainder of Chapter I examines in more detail the trends addressed
in this section, including the impact of changes in the Association's economic
and competitive environment, and recent management initiatives. The discussion
is supplemented by the exhibits in the Appendix. Exhibit II-1 summarizes the
Association's statements of financial condition at fiscal year-ends September
30, 1996 and 1997. Exhibit II-2 presents the Association's statements of income
for the fiscal years ended September 30, 1995 to 1997.
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Feldman Financial Advisors, Inc.
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Financial Condition
Table 1 presents selected data concerning Gaston' financial position as of
the year-end periods September 30, 1996 and 1997. Table 2 certain performance
and capital ratios for the Association over the same period.
Table 1
Selected Financial Condition Data
As of September 30, 1996 to 1997
(Dollars in Thousands)
================================================================================
September 30,
----------------
1997 1996
- --------------------------------------------------------------------------------
Total Assets $173,470 $171,953
Loans receivable, net 134,491 130,862
Mortgage-backed securities 10,087 12,918
US Gov't and agency securities HTM 10,407 14,751
US Gov't and agency securities AFS 2,009 --
Other investments available for sale 6,239 5,515
Deposits 145,444 145,975
Borrowed funds 3,500 2,500
Total equity 20,868 19,084
SUMMARY OF OPERATIONS
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 provisions 5,691 5,090
Non-interest income 516 417
Non-interest expense 3,956 4,646
----- -----
Income before income taxes 2,251 861
Income tax expense 819 351
--- ---
Net income $1,432 $ 510
====== =====
================================================================================
Source: Gaston, preliminary prospectus.
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Table 2
Selected Operating Ratios and Other Data
As of September 30, 1996 to 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
========================================================================================================
At and For the Years
Ended September 30,
1997 1996
--------------- ---------------
<S> <C> <C>
PERFORMANCE RATIOS:
Return on average assets 0.84% 0.30%
Return on average equity 7.77% 2.66%
Net interest rate spread 3.23% 2.68%
Net interest margin 3.45% 2.99%
Average interest-earnings assets to average interest-bearing 109.92% 108.30%
liabilities
Non-interest expenses to total assets 2.28% 2.70%
Non-interest expenses to average total assets 2.31% 2.80%
ASSET QUALITY RATIOS:
Nonperforming loans to total assets 0.61% 0.69%
Nonperforming assets to total assets 0.75% 0.84%
Nonperforming loans to total loans 0.76% 0.88%
Allowance for loan losses to total loans at end of period 0.80% 0.61%
Allowance for loan losses to nonperforming loans 104.82% 69.51%
Net interest income after provisions to total non-interest 143.82% 109.58%
expense
CAPITAL RATIOS:
Ratio of average equity to total average assets 10.77% 10.52%
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>
Asset Composition
- -----------------
The Association's asset base remained relatively level between
September 30, 1996 and September 30, 1997. The Association's growth over the
years has been generated without augmentation from mergers or acquisitions of
other company operations. The ratio of total loans to assets was 76.1% at
year-end 1996 to 77.5% at September 30, 1997.
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The Association's loan portfolio is predominantly secured by single
family real estate properties. As displayed in Exhibit II-3, the Association's
gross loan portfolio at September 30, 1997 totaled $139.1 million, of which
76.5% ($106.4 million) were one-to-four family residential mortgage loans, 5.2%
($7.3 million) were commercial real estate loans, and 4.7% ($6.5 million) were
multi-family residential mortgage loans.
Between year-end 1996 and September 30, 1997, the Association's gross
loan portfolio expanded by $3.1 million. Over this period, one-to-four family
residential mortgage loans increased by $2.1 million. The Association 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. Exhibit
II-4 summarizes the Association's net lending activity during recent periods.
The most significant segment of the Association's lending activity
involves the origination of loans secured by one-to-four family residential
properties. Generally, the Association's fixed-rate one-to-four family
residential 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 period. Generally, they are originated
under terms, conditions and documentation which permit them to be sold to the
U.S. Government sponsored agencies such as Fannie Mae, although the Association
rarely sells fixed-rate loans. The Association's fixed-rate loans customarily
include "due on sale" clauses. Which gives the Association 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.
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The Association offers ARM loans which generally meet the underwriting
standards of Fannie Mae even though the Association generally originated ARM
loans for the purpose of portfolio retention. The Association's ARM loans adjust
yearly based on the one year Treasury constant maturity index and are typically
based upon a 30-year amortization schedule. For loans with a loan to value ratio
of 80% or less, the Association qualifies the borrowers on its Arm loans based
upon the initial rate. For loans with a loan to value ratio of more than 80%,
the Association qualifies the borrowers on its ARM loans based on the initial
rate plus 2%. Demand for ARM loans is a function of the level of interest rates
at the time and the expectations of changes in the level of interest rates. At
September 30, 1997, ARM loans accounted for $38.0 million, or 29.9%, of the
total of $113.7 million on one-to-four family residential real estate mortgage
loans.
Based upon guidelines adopted by the Association's Board of Directors,
The Association can lend up to 95% of the appraised value of the property
securing a one-to-four family residential loan. For loans of more than 80% up to
95% of the appraise value, the Association requires private mortgage insurance
for between 20% and 30% of the loan amount.
The Association originates residential construction loans to local home
builders, generally with whom it has an established relationship and generally
secured by property located in the Association's primary lending market.
Construction loans amounted to $5.9 million, or 4.2% of the Association's total
loan portfolio at September 30, 1997. Construction loans convert to a
fully-amortizing adjustable- or fixed-rate loan at the end of the six month
construction term. Construction loans are generally originated with a maximum
loan to value
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of 80%. Construction loan are made on either a pre-sold or speculative basis and
an appraisal is required prior to making a commitment to fund a construction
loan.
At September 30, 1997, the Association had commercial real estate loans
totaling $7.3 million, or 5.2% of the total loan portfolio. These loans are used
primarily for the acquisition and refinancing of commercial real estate
properties. The majority of the loans are secured by office buildings, churches
and retail shops located in the Association's primary lending area. The
portfolio also includes residential acquisition and development loans ("A&D
loans") and land loans. Commercial real estate loans generally have interest
rates that adjust every three to five years based upon the constant maturity
Treasury index, and are originated to amortize over 20 years. The Association
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. The
Association's A&D loans are originated to local developers for the purpose of
developing land for sale and are secured by a lien on the property, are made for
a period of three years with interest rates tied to the Wall Street Journal
prime lending rate.
At September 30, 1997, the Association had $6.5 million, or 4.7% of the
total loan portfolio, of multi-family residential real estate loans outstanding.
The majority of these loans are secured by apartment building located in the
Association's primary lending market. Interest rates on multi-family residential
real estate loans typically reset every three to five years based upon the
constant maturity Treasury index, and are originated to amortize over 20 years.
Loan-to-values are generally limited to 80% and the Association requires a debt
coverage ratio of 1.25.
The Association originated a variety of consumer loans primarily on a
secured basis including home equity lines of credit, loans secured by savings
accounts, automobiles,
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recreational vehicles and second mortgages, and unsecured personal loans.
Consumer loans totaled $7.4 million, or 5.3% of the total loan portfolio at
September 30, 1997. Home equity lines of credit account for $5.7 million (76.1%)
of the total consumer loan portfolio and are secured by a first or second
mortgage on residential property. The Association views consumer lending as an
important part of its business as consume loans generally have higher yields and
shorter maturities, reducing exposure to interest rate changes. The Association
plans in increasing its level of consumer lending after the conversion subject
to market conditions. Consumer loans entail greater risk than residential
mortgage loans as they are secured by rapidly depreciating assets and any
repossessed collateral for defaulted customer may not adequately cover the
outstanding loan balance.
The Association originated commercial business loans, generally 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. Commercial loans totaled $5.6 million, or 4.0% of the total loan
portfolio as of September 30, 1997. The Association generally requires annual
financial statements from the borrower and any guarantors. Commercial business
loans generally involve greater risk than residential mortgage lending and
involves risks different from those associated with residential and commercial
real estate lending. Real estate lending is generally considered to be
collateral based, commercial business loans depend primarily on the
creditworthiness of the borrower.
Exhibit II-5 displays the composition of the Association's investment
portfolio. Investment securities totaled $30.9 million or 17.9% of total assets
at September 30, 1997,
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consisting primarily of U.S. Government and Agency obligations ($12.4 million),
mortgage-backed securities ($10.1 million), and other investments held-for-sale
($6.2 million).
The Association views its investment portfolio as an alternative
interest-earning asset vehicle into which to deploy excess funds during periods
of weak loan demand or perceived higher risks. The investment portfolio provides
asset diversification and the opportunity to achieve capital appreciation
through long-term investment in equity securities. The Association's current
investment strategy has emphasized the purchase of U.S. Government and Agency
obligations generally with contractual maturities of between one and five years.
The Association's investment policy does not allow engaging directly in hedging
activities or purchasing high risk mortgage derivative products or
non-investment grade corporate bonds. Investments are made upon certain
criteria, which includes interest rate, yield, settlement and maturity of the
investment, the Association's liquidity position and anticipated cash needs and
sources.
At September 30, 1997, the Association's investment portfolio included
a $1.5 unrealized gain of FHLMC stock owned by the Association. The Association
has no intention of selling the stock at the present time.
Liability Composition
- ---------------------
Deposits, repayments and prepayments of loans, proceeds from sales of
loans and securities, proceeds from maturing securities, and cash flows from
operations are the primary sources of the Association's funds for use in
lending, borrowing, and other general purposes. The Association's deposits at
September 30, 1997 totaled $145.4 million, representing 83.8% of total
liabilities. The Association's deposit accounts consist of transaction accounts
(non-
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Feldman Financial Advisors, Inc.
- --------------------------------
interest NOW accounts, interest-bearing NOW accounts, Super Now accounts,
passbook accounts, and money market savings accounts) and certificate of deposit
accounts. Exhibit II-6 presents a summary of the Association's deposit portfolio
as of September 30, 1997.
Transaction accounts amounted to $43.1 million or 29.7% of the
Association's total deposits at September 30, 1997. Certificate of deposit
accounts amounted to $102.3 million or 70.3% of deposits at that date. The
proportion of certificates of deposit has increased in recent years due to
depositor emphasis on higher-yielding certificate accounts as opposed to certain
transaction accounts. Of the Association's $102.3 million of certificate
accounts, $87.7 million or 85.7% were scheduled to mature within one year. The
Association had outstanding $17.6 million in certificate accounts with balances
of $100,000 or more. These jumbo certificates constituted 17.2% of total
certificate accounts and 12.1% of total deposits.
The Association's deposit base increased at a compound annual rate of
2.7% between September 30, 1993 and September 30, 1997. During the past few
years, the strength of the stock market has affected deposit flows as some
customers have opted to place their funds in instruments such as mutual funds
rather in deposit products perceived to have less attractive returns. The
Association obtains deposits predominantly from the areas in which its branch
offices are located. Gaston relies mainly on competitive pricing of its deposit
products, customer service, and long-standing relationships with customers to
attract and retain deposits.
The Association utilizes borrowed funds from the FHLB primarily in
connection with its management of the interest rate sensitivity of its assets
and liabilities. As of September 30, 1997, the Association had outstanding FHLB
advances of $3.5 million, measuring 2.0% of total liabilities. The advances are
collateralized primarily by certain of the Association's mortgage loans and
secondarily by the Association's investment in the stock of the FHLB. As
-17-
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shown in Exhibit II-7, the Association's utilization of FHLB borrowings has
remained relatively low over the years.
Equity Capital
- --------------
The Association's equity capital amounted to $20.9 million or 12.03% of
total assets at September 30, 1997. As a result of the Association's consistent
profitability, the Association's equity has increased significantly from $15.0
million or 10.1% of total assets at September 30, 1993. For regulatory purposes
at September 30, 1997, the Association's Tangible capital ratio measured 12.03%,
its Core capital ratio was 11.46%, and its total risk-based capital ratio was
21.52%. The Association not only met its minimum regulatory capital requirements
but also far surpassed the levels necessary to qualify for the designation of
well capitalized.
-18-
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Income and Expense Trends
Table 3 displays the main components of the Association's earnings
performance from 1996 to 1997. Table 4 displays the average balances for
interest-earning assets and interest-bearing liabilities and their related
yields/costs at September 30, 1997 and for the years ended September 30, 1997
and 1996.
The Association's return on average assets measured 0.84% for the fiscal
year ended September 30, 1997 and 0.30% for 1996. The Association's return on
average equity measured 7.77% for the fiscal year ended September 30, 1997, and
2.66% for 1996.
-19-
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Table 3
Income Statement Summary
For the Years Ended September 30, 1996 to 1997
(Dollars in Thousands)
==============================================================================
Year Ended September 30,
---------------------------
1997 1996
------------------------------------------------------------------------------
Total interest income $12,936 $12,518
Total interest expense 6,952 7,381
------ ------
Net interest income 5,984 5,137
Provision for loan losses 293 47
------ ------
Net int. income after prov. 5,691 5,137
Service charges on deposit accounts 209 189
Gain on sale of securities 52 --
Other income 255 228
------ ------
Total non-interest income 516 417
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 non-interest expense 3,956 4,646
Income before taxes 2,251 861
Income tax provision 819 351
------ ------
Net income $ 1,432 $ 510
====== ======
==============================================================================
Source: Gaston, preliminary prospectus.
-20-
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Table 4
Average Balances and Yield/Cost
As of and for the Periods Ended September 30, 1996 and 1997
<TABLE>
<CAPTION>
For the Years Ended September 30,
---------------------------------------
At September 30, 1997 1997
------------------------- ---------------------------------------
Average Interest
Outstanding Yield/ Outstanding Earned/ Yield/
Balance Rate Balance Paid Rate
------- ---- ------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 134,491 8.01% $ 132,529 $ 10,776 9.13%
Investment securities (2) 18,655 5.93 18,226 1,107 6.07
Interest-earning deposits 2,203 4.04 1,049 89 8.48
Mortgage-backed securities 10,407 7.58 11,612 789 6.79
----------- ----- ---------- --------- ------
Total interest-earning assets 165,756 7.70 163,416 12,761 7.81
Non-interest-earning assets 7,714 7,751
----------- ----------
Total assets $ 15,428 $ 15,502
Interest-bearing liabilities
Demand deposit and money
market demand accounts $ 28,929 2.32 $ 27,201 $ 672 2.47
Passbook savings 14,197 2.73 14,037 387 2.76
Certificates of deposit 102,318 5.62 105,119 5,746 5.47
Borrowed funds 3,500 4.20 2,309 147 6.37
----------- ----- ---------- --------- ------
Total interest-bearing liabilities 148,944 4.67% 148,666 6,952 4.68%
===== ======
Non-interest-bearing liabilities 3,658 3,098
----------- ----------
Total liabilities $ 152,602 $ 151,764
Total equity 20,868 19,403
----------- ----------
Total liabilities and retained earnings $ 173,470 $ 171,167
=========== ==========
Net interest income $ 5,809
=========
Interest rate spread (2) 3.13%
======
Net yield on interest-earning assets (3) 3.55%
======
Ratio of average interest-earning assets
to interest bearing liabilities 109.92%
======
<CAPTION>
For the Years Ended September 30,
---------------------------------------
1996
---------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------- ---- ----
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 126,503 $ 10,178 8.05%
Investment securities (2) 18,501 1,169 6.32
Interest-earning deposits 1,817 96 5.28
Mortgage-backed securities 13,528 939 6.94
--------- -------- ------
Total interest-earning assets 160,349 12,382 7.72
Non-interest-earning assets 9,144
---------
Total assets $ 18,288
Interest-bearing liabilities
Demand deposit and money
market demand accounts $ 25,773 $ 685 2.66
Passbook savings 13,695 394 2.88
Certificates of deposit 107,196 6,215 5.80
Borrowed funds 1,403 88 6.27
--------- -------- ------
Total interest-bearing liabilities 148,067 7,382 4.99%
======
Non-interest-bearing liabilities 2,912
---------
Total liabilities $ 150,979
Total equity 18,514
---------
Total liabilities and retained earnings $ 169,493
=========
Net interest income $ 5,000
=======
Interest rate spread (2) 2.73%
======
Net yield on interest-earning assets (3) 3.12%
======
Ratio of average interest-earning assets
to interest bearing liabilities 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.
Source: Gaston, Prospectus
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Earnings Results for 1997 versus 1996
- -------------------------------------
The Association's earnings improved from $510,000 million in 1996 to
$1.4 million in 1997, and increase of $922,000. The increase in net income was
attributable to a $847,000 increase in net interest income, a $99,000 increase
in non-interest income, and a $690,000 decrease in non-interest expense. The
effects of these increases were partially offset by a $246,000 increase in loan
loss provisions and a $468,000 increase in provisions for income taxes. The
Association's 1996 earnings included the one-time SAIF assessment of $867,000
million, pre-tax.
The Association's average interest-earning assets increased by $1.7
million in 1997. However, this expansion of balance sheet earnings potential was
aided by an increase in the Association's yield on earning assets to 7.81% for
year ended September 30, 1997 from 7.72% in 1996. The increase in yield was
driven primarily by the increase in loan yield to 8.13% for 1997 from 8.05% in
1996. The Association's net interest rate spread increased from 2.74% to 3.13.
The Association's cost of funds fell from 4.99% to 4.68%, chiefly due to the
decreased cost of certificates of deposit from 5.80% in 1996 to 5.47% in 1997.
Provisions for loan losses increased to $147,000 for 1997 from $88,000
for 1996. At September 30, 997 and 1996 the Association's allowance for possible
loan losses was $1.1 million and $830,000, respectively. The allowance for loan
losses as a percentage of nonperforming loans increased to 104.8% for 1997 as
compared to 69.5% for 1996.
Total non-interest income increased by 23.7% from $417,000 to $516,000.
Non-interest operating income (excluding gains on sales along with income or
losses on real estate) increased by $99,000, mainly due to increased service
charges on deposit accounts of $20,000 gain on sale of securities of $52,000 and
an increase in other income of $27,000.
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Feldman Financial Advisors, Inc.
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The Association's total non-interest expense decreased by 14.9% from
$4.6 million in 1996 to $4.0 million in 1997. In relation to average assets, the
Association's non-interest expense ratio declined from 2.80% to 2.31%. Deposit
insurance premiums declined by $1.0 million in 1997 as a result of the
elimination of the SAIF assessment. Excluding deposit insurance premiums, the
Association' non-interest expense increased by $370,000 in 1997. This increase
was attributable chiefly to an increase in salaries and benefits of $252,000.
The Association's earnings before income taxes was $819,000 for 1997,
as compared to $351,000 for 1996. Principally as a result of the higher net
interest margin, the Association's after-tax return on average assets increased
from 0.30% in 1996 to 0.84% in 1997. The Association's effective tax rate
decreased slightly from 36.4% in 1995 to 40.8% in 1996.
-23-
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Feldman Financial Advisors, Inc.
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Asset and Liability Management
The Association's principal financial objective is to sustain long-term
profitability while reducing its exposure to fluctuating interest rates. Gaston
has sought to reduce exposure of its earnings to market interest rates by
managing the mismatch between asset and liability rates, maturities and
repricings. The focus of the Association's asset/liability management is to
evaluate the overall interest rate risk inherent in the Association's assets and
liabilities, determine the level of risk appropriate given the Association's
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 Association
seeks to reduce the vulnerability of its operations to changes in interest
rates. The Association's Asset/Liability Committee comprises the Association's
senior management under the direction of the Board of Directors.
The Association seeks to manage interest rate risk with the continued
objective of balancing the contrasting strategies of minimizing exposure to
interest rate sensitivity versus maximizing net interest margins. In order to
manage interest rate risk consistent with performance objectives, the
Association 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
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
-24-
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Feldman Financial Advisors, Inc.
- --------------------------------
generally bear lower yields as compared to longer term investments, but which
better position the Association for increases in market rates.
In recent years, the Association has measured interest rate risk
sensitivity by computing the "gap" between the assets and liabilities which were
expected to mature or reprice within certain time periods, based upon
assumptions regarding loan prepayment and deposit decay rates formerly provided
by the OTS. The OTS now requires the computation of amounts by which the net
present value of the Association's cash flows from assets, liabilities and off
balance sheet items (the Association's net portfolio value "NPV") would change
in the event of a range of assumed changes in market interest rates. These
computations estimate the effect on the Association's NPV from instantaneous and
permanent 1% to 4% (100 to 400 basis points) increases and decreases in market
interest rates.
Table 5 presents the Association's NPV at September 30, 1997 as
calculated by the OTS and the limits as established by the Board of Directors.
As shown by the table, the Association's current NPV position is more sensitive
to increases in interest rates than to decreases in interest rates due to the
shorter maturities of its liability portfolio.
-25-
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Feldman Financial Advisors, Inc.
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Table 5
NPV Calculation
at September 30, 1997
Percentage Change in Net Portfolio Value
Changes in Board
Market Projected Policy
Interest Rates Change (1) Limit (2)
-------------- ---------- ---------
(basis points)
+400 (53.00)% (50.00)%
+300 (39.00)% (35.00)%
+200 (25.00)% (25.00)%
+100 (12.00)% (15.00)%
0 0.00% 0.00%
(100) 8.00% 15.00%
(200) 12.00% 25.00%
(300) 16.00% 35.00%
(400) 22.00% 50.00%
(1) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no changes in interest rates.
(2) Limits established by the Association's Board of Directors.
Source: Gaston, preliminary Prospectus
-26-
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Feldman Financial Advisors, Inc.
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Asset Quality
The Association has continued to improve asset quality since the early
1990's. Management believes the Association's improved asset quality is
primarily attributable to a better economic environment, utilization of
comprehensive loan underwriting policies, application of a risk rating
methodology, systematic loan reviews, active monitoring of loan concentrations,
conservative collateralizaton practices, and consistent and forceful collection
and workout efforts.
During the 1990's, a region has benefited from growth in both the
financial services and high-tech sectors of the economy. The Association
experienced lower levels of non-performing assets in part due to the growth of
the economy. Gaston County has still not fully benefited from the growth in the
Charlotte MSA.
In order to effectively monitor problem loans, the Board of Directors
in 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 Association.
The Association's ratio of non-performing assets to total assets
decreased from 0.84% at September 30, 1996 to 0.75% at September 30, 1997. Total
non-performing assets declined from $1,452,000 to $1,306,000 over the same
period. Non-performing assets at September 30, 1997 consisted of $1.1 million in
non-accrual loans and $247,000 of other real estate owned ("OREO").
The Association's allowance for loan losses totaled $1.1 million at
September 30, 1997. The balance of loan loss allowance has increased by $270,00
over the past fiscal year as the
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Feldman Financial Advisors, Inc.
- --------------------------------
Association has begun to raise its level of loan loss provisions to total loans
to a goal of 1.0%. The allowance measured 103.9% of total non-performing loans
and 0.79% of gross loans at September 30, 1997.
Pursuant to its internal asset quality rating system, the Association
had designated as of September 30, 1997 outstanding loans of $2.3 million as
substandard and $0.3 million as special mention.
Table 6
Non-performing Asset Summary
As of September 30, 1996 and 1997
(Dollars in Thousands)
================================================================================
September 30,
-----------------
1997 1996
- --------------------------------------------------------------------------------
Loans accounted for on a non-accrual basis:
Real estate loans:
One- to four-family residential $ 876 $ 736
5 or more residential 183 --
Nonresidential 0 --
Consumer 0 0
Commercial 0 0
- -
Total non-performing loans 1,059 1,194
Accruing loans which are 90 days or more past due 0 0
- -
Total nonperforming loans 1,059 1,194
Troubled debt restructurings 0 0
Real estate owned, net 247 258
--- ---
Total non-performing assets $1,306 $1,154
===== =====
Nonaccrual and 90 days past due/net loan 0.79% 0.91%
Nonaccrual and 90 days past due/total loans 0.76% 0.88%
Total nonperforming assets/total assets 0.75% 0.84%
================================================================================
Source: Gaston, preliminary prospectus
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Feldman Financial Advisors, Inc.
- --------------------------------
Table 7
Allowance for Loan and Lease Losses
For the Years Ended September 30, 1996 and 1997
(Dollars in Thousands)
================================================================================
Year Ended
September 30,
-------------------
1997 1996
- --------------------------------------------------------------------------------
Balance at beginning of period $830 $786
Provision for loan losses 293 47
Recoveries: 0 0
Charge-offs: 13 3
Balance at end of period $1,110 $830
====== ===
Allowance as a % of total loans 0.82% 0.63%
Net loans charged off/Avg. loans outstanding 0.01% 0.00%
Allowance as a % of non-performing loans 104.82% 69.51%
MEMO:
Nonperforming loans $1,059 $1,194
================================================================================
Source: Gaston, preliminary prospectus
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Feldman Financial Advisors, Inc.
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Properties
The Association conducts its business through four full-service banking
offices located in the Gaston County, with three branches located in the town of
Gastonia and one in Mount Holly. Exhibit II-8 provides a general summary of the
Association's offices. The Association owns all of its office facilities. The
net book value of the Association's premises and equipment at September 30, 1997
totaled $1.5 million or 0.9% of total assets. The Association also owns three
acres of land acquired in 1978 as a prospective branch site with a current book
value of approximately $90,000. It is the intent of the Association to sell the
land as there are no plans to use the site for future branch expansion.
Gaston operates an automated teller machine at each branch location.
The Association expects to continue its ongoing analysis to determine the
efficiency and effectiveness of its branches in delivering services and products
to the local community. The Association's branch network generally comprises
modest but efficient office facilities with favorable locational convenience.
The Association currently has no plans to add additional branch facilities, but
will monitor feasible expansion opportunities.
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Feldman Financial Advisors, Inc.
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Subsidiaries
The Association operates one subsidiary, Gaston Financial Services,
Inc. ("Gaston Financial"), which sells annuities, mutual funds, and insurance
and also offers discount brokerage services. Gaston Financial is a wholly-owned
subsidiary of the Association. Gaston Financial derives its income from its
securities portfolio and generally contributes approximately 1.0% of the
Association's consolidated net income.
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Feldman Financial Advisors, Inc.
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Market Area
The Association's four offices are located in Gaston County, three in
the town of Gastonia and one in the town of Mounty Holly. Gaston County is
located just west of Charlotte and Mecklenburg County, an area that is quickly
becoming the banking capital of the United States and home to the headquarters
of NationsBank, First Union, and Wachovia. Gaston County has a population of
approximately 175,000 and is the largest manufacturing county in the state of
North Carolina. The town of Gastonia is the largest city in the county with a
population of approximately 55,000 and is the county seat.
Both Gastonia and Gaston County offer a diverse mix of housing with a
mix of single-family residences, multi-family properties and condominiums. The
community places a high value on the preservation of historic buildings,
neighborhoods and green spaces. The largest employment sectors within the county
are manufacturing, wholesale/retail and services. Twenty-one Fortune 500
companies have operations in Gaston County and the county is one of the largest
textile producers in the country. Among the largest employers in the county are
Freightliner, Firestone, Parkdale Mills, Pharr Yarns, Dana Corporation, Gaston
Memorial Hospital, and Gaston College. In addition, due to the growth of
neighboring Mecklenburg County, Gaston County is becoming a bedroom community
for Charlotte, with many residents of Gaston County working in Mecklenburg
County.
The majority of the Association's deposits are gathered from the
general public of Gaston County. The Association's lending area is Gaston
County. Gaston County benefits from its close proximity to Charlotte and
Mecklenburg County. As Charlotte and the surrounding area continues to grow led
by growth in the financial services and high tech sectors, demand for
residential housing will continue to flourish.
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Feldman Financial Advisors, Inc.
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Table 8 displays selected demographic data for the United States, the
state of North Carolina, the Charlotte-Gastonia-Rock Hill Metropolitan
Statistical Area ("Charlotte MSA") and the County of Gaston. Total population
growth in Gaston County is expected to lag behind the growth of the Charlotte
MSA and the state of North Carolina over the next five years. Income levels in
Gaston County are also projected to grow at below-average levels. The 1997
average household income of $44,554 in Gaston County was 15% below the Charlotte
MSA average of $52,472, 2% below the state average of $45,528 and 12% below the
national average of $50,540. Population and income growth in the Charlotte MSA
is largely expected to equal or lead statewide trends.
Tables 9 and 10 show deposit concentrations at June 30, 1996 within
Gaston County and the Charlotte MSA. Gaston ranked fourth in total deposits in
Gaston County with a 9.9% market share. The Association's market share in the
Charlotte MSA is 0.82% and it is the second largest thrift in the MSA.
In summary, the Association's market area is characterized by very
below average income levels with a stable population and economic base. The
region represents an attractive market that can be served by a community
financial institution such as Gaston. However, competition for originating loans
and attracting deposits is intense and expected to escalate as merging financial
institutions seek to leverage combined resources and to advance their
competitive positions. In addition, non-depository competitors have
significantly penetrated the traditional customer base of thrifts and banks as a
result of the sustained performance of the stock market.
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Feldman Financial Advisors, Inc.
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Table 8
Key Economic Indicators
United States, North Carolina, Charlotte-Gastonia-Rock Hill MSA,
and Gaston County
<TABLE>
<CAPTION>
===========================================================================================================================
United North Charlotte Gaston
Key Economic Indicators States Carolina MSA County
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Population
- ----------
Total Population - 1997 267,240,272 7,411,239 1,341,841 183,482
5-year projection percent change 4.5% 7.6% 10.1% 3.0%
1990 - 1997 percent change 7.5% 11.8% 15.5% 4.8%
Households
- ----------
Total Households - 1997 98,741,200 2,816,128 505,037 67,766
5-year projection percent change 4.9% 8.1% 10.2% 2.9%
1990 - 1997 percent change 7.4% 11.9% 14.6% 3.7%
Per Capita Income
- -----------------
Per Capita Income - 1997 $18,885 $17,595 $19,846 $16,541
5-year projection percent change 21.7% 25.3% 24.9% 22.8%
1990 - 1997 percent change 31.2% 36.7% 36.0% 32.9%
Average Household Income
- ------------------------
Average Household Income - 1997 $50,540 $45,528 $52,472 $44,554
5-year projection percent change 20.7% 24.4% 24.5% 22.7%
1990 - 1997 percent change 31.3% 36.8% 37.3% 34.3%
Median Household Income
- -----------------------
Median Household Income - 1997 $37,079 $34,408 $40,240 $35,654
5-year projection percent change 13.1% 17.1% 16.1% 15.3%
1990 - 1997 percent change 23.2% 28.9% 29.3% 26.6%
Household Income Distribution - 1997
- ------------------------------------
$ 0 - 24 K 33.5% 36.0% 29.6% 33.8%
$25 - 49 K 30.9% 32.7% 32.0% 34.8%
$50K + 35.6% 31.3% 38.4% 31.4%
Household Income Distribution - proj. 2002
- ------------------------------------------
$ 0 - 24 K 29.4% 30.4% 24.9% 28.7%
$25 - 49 K 28.3% 29.7% 28.0% 30.4%
$50K + 42.3% 39.9% 47.1% 40.9%
===========================================================================================================================
</TABLE>
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Feldman Financial Advisors, Inc.
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Table 9
Deposit Market Share for Gaston County
June 30, 1994 to June 30, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1996 1995 1994 1994-96
No. of Deposits % of Deposits % of Deposits % of Growth
Rank Institution Offices Type ($000s) Total ($000s) Total ($000s) Total Rate
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 BB&T Corp. 22 B $435,174 28.8% $479,121 32.1% $469,455 33.2% -3.7%
2 First Union Corp. 7 B 212,064 14.1% 201,991 13.5% 194,469 13.7% 4.4%
3 Wachovia Corp. 4 B 156,004 10.3% 150,977 10.1% 129,871 9.2% 9.6%
- -----------------------------------------------------------------------------------------------------------------------------------
4 Gaston FS&LA 4 T 149,786 9.9% 138,934 9.3% 131,094 9.3% 6.9%
- -----------------------------------------------------------------------------------------------------------------------------------
5 NationsBank Corp. 8 B 142,663 9.5% 135,788 9.1% 134,674 9.5% 2.9%
6 Centura Bank 4 B 100,257 6.6% 97,809 6.5% 80,354 5.7% 11.7%
7 CCB Financial Corp. 6 B 69,971 4.6% 67,720 4.5% 66,454 4.7% 2.6%
NA All Others 14 NA 243,383 16.1% 221,108 14.8% 208,337 14.7% 8.1%
-- ------- ----- ------- ----- ------- ----- ----
Total in City 69 $1,509,302 100.0% $1,493,448 100.0% $1,414,708 100.0% 3.3%
</TABLE>
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Feldman Financial Advisors, Inc.
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Table 10
Deposit Market Share for Charlote-Gastonia-Rock Hill MSA
As of June 30, 1994, 1995 and 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1996 1995
------------------------- -------------------------
Inst. No. of Deposits % of Deposits % of
Rank Institution Type Offices ($000s) Total ($000s) Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 FIRST UNION CORP Bank 81 5,463,912 29.99 4,544,336 29.35
2 NATIONSBANK CORP Bank 69 4,619,286 25.35 3,172,319 20.49
3 BB&T CORP. Bank 90 1,884,311 10.34 1,835,337 11.85
4 WACHOVIA CORPORATION Bank 42 1,530,801 8.40 1,441,681 9.31
5 CCB FINANCIAL CORPORATION Bank 63 1,074,204 5.90 1,061,919 6.86
6 FIRST CITIZENS BANCSHARES Bank 35 633,305 3.48 605,921 3.91
7 HFNC FINANCIAL CORP Thrift 8 449,125 2.46 492,121 3.18
8 FIRST CHARTER CORPORATION Bank 18 440,302 2.42 397,428 2.57
9 SOUTHTRUST CORPORATION Bank 16 377,400 2.07 328,576 2.12
10 CAROLINA FIRST BANCSHARES Bank 18 311,859 1.71 284,803 1.84
11 CENTURA BANK Bank 13 219,120 1.20 210,747 1.36
12 TRIANGLE BANCORP Bank 3 177,161 0.97 141,798 0.92
13 F&M FINANCIAL CORPORATION Bank 8 174,636 0.96 157,252 1.02
- --------------------------------------------------------------------------------------------------------------------------
14 GASTON FS&LA Thrift 4 149,786 0.82 138,934 0.90
- --------------------------------------------------------------------------------------------------------------------------
15 CITIZENS SB OF SALISBURY SB 2 104,661 0.57 119,517 0.77
16 FIRST FS&LA OF LINCOLNTON Thrift 1 90,141 0.49 86,520 0.56
17 YORK BANCSHARES Bank 4 76,421 0.42 68,863 0.44
18 BELMONT FS&LA Thrift 1 69,923 0.38 68,546 0.44
19 PARK MERIDIAN BANK Bank 1 65,052 0.36 59,208 0.38
20 CHERRYVILLE FS&LA Thrift 1 50,754 0.28 48,907 0.32
Other 11 Institutions 23 258,155 1.42 217,748 1.41
Totals 501 18,220,315 100.00 15,482,481 100.00
====== === ========== ====== ========== ======
<CAPTION>
- ----------------------------------------------------------------------------------
1994 1994-96
-------------------------
Deposits % of Growth
Rank Institution ($000s) Total Rate
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 FIRST UNION CORP 4,342,084 28.51 12.2%
2 NATIONSBANK CORP 3,583,649 23.53 13.5%
3 BB&T CORP. 1,711,752 11.24 4.9%
4 WACHOVIA CORPORATION 1,341,960 8.81 6.8%
5 CCB FINANCIAL CORPORATION 1,075,287 7.06 -0.1%
6 FIRST CITIZENS BANCSHARES 607,957 3.99 2.1%
7 HFNC FINANCIAL CORP 446,387 2.93 0.3%
8 FIRST CHARTER CORPORATION 347,248 2.28 12.6%
9 SOUTHTRUST CORPORATION 291,669 1.91 13.8%
10 CAROLINA FIRST BANCSHARES 255,541 1.68 10.5%
11 CENTURA BANK 212,694 1.40 1.5%
12 TRIANGLE BANCORP 115,354 0.76 23.9%
13 F&M FINANCIAL CORPORATION 137,005 0.90 12.9%
- ----------------------------------------------------------------------------------
14 GASTON FS&LA 131,094 0.86 6.9%
- ----------------------------------------------------------------------------------
15 CITIZENS SB OF SALISBURY 117,679 0.77 -5.7%
16 FIRST FS&LA OF LINCOLNTON 89,491 0.59 0.4%
17 YORK BANCSHARES 65,369 0.43 8.1%
18 BELMONT FS&LA 71,100 0.47 -0.8%
19 PARK MERIDIAN BANK 38,666 0.25 29.7%
20 CHERRYVILLE FS&LA 47,205 0.31 3.7%
Other 11 Institutions 203,475 1.34 12.6%
Totals 15,232,666 100.00 9.4%
====== ========== ====== ===
</TABLE>
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Feldman Financial Advisors, Inc.
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Summary
Gaston has carved out a profitable niche as a traditional thrift
offering primarily residential real estate mortgage loans. The Association's
lending expertise, efficient operations, and strong capital base have
contributed to a consistent record of profitability. Going forward, the
Association will attempt to transform the institution into a more retail
bank-like institution while maintaining its edge in the residential real estate
lending market. The Association must closely monitor its credit requirements and
asset quality and not allow the Association to lower its credit requirements to
attract new customers. The strong base of capital plus increased reserve levels
serves as an important buffer toward such risk management.
The Association' franchise in concentrated in Gaston County. The
Association's long-standing presence in the local community provides it with a
loyal customer base and a saturated degree of market penetration. However,
customers seeking a full range of competitive products and services may not be
adequately contented with the Association's limited offerings as compared to
other competitors. As the Association seeks to manage both sides of the balance
sheet, assets and liabilities, it may face increased pressure to improve and
expand its retail banking franchise. Such action could generate a cost-effective
source of funds, but would also require additional cost investments.
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<PAGE>
II
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
II. COMPARISONS WITH PUBLICLY HELD COMPANIES
General
The comparative market approach provides a sound basis for determining
estimates of going-concern valuations where a regular and active market exists
for the stocks of peer institutions. The comparative market approach was
utilized in determining the estimated aggregate pro forma market value of Gaston
because: (i) reliable market and financial data are readily available for
comparable institutions; (ii) the comparative market method is required by the
applicable regulatory guidelines; and (iii) other alternative valuation methods
(such as income capitalization, liquidation analysis, or discounted cash flow)
are unlikely to produce a valuation relevant to the future trading patterns of
the related equity interest. The generally employed valuation method in initial
public offerings, where possible, is the comparative market approach, which also
can be relied upon to determine pro forma market value in an initial thrift
stock offering.
The comparative market approach derives valuation benchmarks from the
trading patterns of selected peer institutions which due to certain factors,
such as financial performance and operating strategies, enable the appraiser to
estimate the potential value of the subject institution in a stock conversion
offering. The pricing and trading history of recent initial public offerings of
thrifts are also examined to provide any evidence of the new issue discount
which must be considered. In Chapter II, our valuation analysis focuses on the
selection and comparison of Gaston with a comparable group of publicly held
thrifts (the "Comparative Group"). Chapter III will detail any additional
discounts or premiums that we believe are appropriate to the Association's pro
forma conversion valuation.
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Feldman Financial Advisors, Inc.
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Selection Criteria
Selected market price and financial performance data for thrifts listed
on the New York and American Stock Exchanges and those thrifts traded on the
over-the-counter markets listed on the National Association of Securities
Dealers Automated Quotation System ("Nasdaq") are shown in Exhibit III. Several
criteria were used to select the individual members of the Comparative Group
from the overall universe of publicly held thrifts.
o Operating characteristics - An institution's operating
characteristics are the most important factors because they affect
investors' expected rates of return on a company's stock under
various business/economic scenarios, and they influence the
market's general perception of the quality and attractiveness of a
given company. Operating characteristics, which may vary in
importance during the business cycle, include financial variables
such as profitability, balance sheet growth, capitalization, asset
quality, and other factors such as lines of business and
management strategies.
o Degree of marketability and liquidity - Marketability of a stock
reflects the relative ease and promptness with which a security
may be sold when desired, at a representative current price,
without material concession in price merely because of the
necessity of sale. Marketability also connotes the existence of
buying interest as well as selling interest and is usually
indicated by trading volumes and the spread between the bid and
asked price for a security. Liquidity of the stock issue refers to
the organized market exchange process whereby the security can be
converted into cash. We attempted to limit our selection to
companies that have access to a regular trading market. We
eliminated from the comparative group companies with market prices
that were materially influenced by publicly announced or widely
rumored acquisitions. However, the expectation of continued
industry consolidation is currently embedded in thrift and bank
stock valuations.
o Geographic Location - The region of the country where a company
operates is also of importance in selecting the comparative group.
The operating environment for savings institutions varies from
region to region with respect to business and economic
environments, real estate market conditions, speculative takeover
activity, and investment climates. Economic and investor climates
can also vary greatly within a region, particularly due to
takeover activity.
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Feldman Financial Advisors, Inc.
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The Association's lending operations conform to the typical lending
profile of a traditional thrift institution. The balance sheet of Gaston is
concentrated heavily in residential mortgage loans. The Association's moderate
earnings level places it in line with the average thrift. The Association's net
margin is bolstered by its strong capital base and is accompanied by a very low
operating expense ratio. In determining the Comparative Group composition, we
focused on the Association's level of earnings, asset size and capital as well
as its residential real estate lending activities. As with any composition of a
group of comparable companies, the identification process was broadened
sufficiently to assemble a meaningful number of candidates. Specifically, we
initiated a search for companies by applying the selection criteria identified
below. Companies that met a majority of the following parameters were considered
for inclusion in the Comparative Group:
o Asset size - total assets ranging between $100 million and $250
million.
o Capital level - regulatory capital ratios that would generally qualify
for well capitalized designation.
o Profitability - return on average assets ("ROAA") between 0.60% and
1.10%.
o Balance sheet composition - level of loans to assets greater than 60%
and accompanied by modest concentration of non-earning assets with
reliance upon deposits as chief funding source.
o Loan concentration - significant concentration of single-family
residential mortgage loans.
o Asset quality - ratio of non-performing assets to total assets less
than 1.00%.
o Geographic location - additional consideration given to companies
located in the state of North Carolina.
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Feldman Financial Advisors, Inc.
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Our search for comparable publicly held thrifts initially targeted
strongly capitalized, profitable thrifts with significant residential real
estate lending activities. Many public thrifts exhibited all of these distinct
operating and financial characteristics.
As a result of applying the aforementioned criteria and analyzing the
screening results, the selection process has produced a reliable representation
of publicly traded thrifts with operations comparable to those of Gaston. A
general overview of the seventeen members selected for the Comparative Group is
presented in Table 11. The Comparative Group is further sub-divided into two
groups: (i) North Carolina Thrift Group with seven institutions; and (ii)
Nationwide Thrift Group with ten institutions. The asset sizes of the
Comparative Group companies range from $109 million at KS Bancorp to $867
million at HFNC Financial Corp., with an overall average size of $242 million.
While some differences inevitably exist between the Association and the
individual companies, we believe that the chosen Comparative Group on the whole
provides a meaningful basis of comparison for valuation purposes.
-41-
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Feldman Financial Advisors, Inc.
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Table 11
Comparative Group Operating Summary
As of the Latest Period Ended September 30, 1997
<TABLE>
<CAPTION>
Total Equity/
No. of Assets Assets
Company City State Offices ($000s) (%)
------- ---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Gaston Federal Gastonia NC 4 173,470 12.03
North Carolina Thrift Group
- ---------------------------
Cooperative Bankshares Inc Wilmington NC 16 359,535 7.69
First Savings Bancorp Inc. Southern Pines NC 5 295,315 23.01
Haywood Bancshares Inc. Waynesville NC 4 152,796 14.18
HFNC Financial Corp. Charlotte NC 8 866,859 18.81
KS Bancorp Inc. Kenly NC 5 109,137 13.24
South Street Financial Corp. Albemarle NC 2 240,524 25.66
United Federal Savings Bank Rocky Mount NC 13 285,744 7.33
Nationwide Thrift Group
- -----------------------
Capital Savings Bancorp Inc. Jefferson City MO 8 242,259 9.14
Classic Bancshares Inc. Ashland KY 3 132,186 14.88
Community Financial Corp. Staunton VA 4 183,278 13.21
First Bancshares Inc. Mountain Grove MO 6 162,755 13.92
FirstFed Bancorp Inc. Bessemer AL 8 176,464 9.63
HFB Financial Corp. Middlesboro KY 3 160,876 10.52
OHSL Financial Corp Cincinnati OH 5 234,600 10.92
River Valley Bancorp Madison IN 6 138,461 12.72
Southern Missouri Bancorp, Inc. Poplar Bluff MO 8 163,297 16.15
Wells Financial Corp. Wells MN 8 204,761 14.22
</TABLE>
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Feldman Financial Advisors, Inc.
- --------------------------------
Recent Financial Comparisons
Table 12 summarizes certain key financial comparisons between Gaston
and the comparative group. Tables 13 through 17 contain the detailed financial
comparisons of the Association with the individual Comparative Group companies
based on measures of profitability, income and expense components, yield-cost
structure, capital levels, credit risk, balance sheet composition, and growth
rates. Comparative financial data for both Gaston and the Comparative Group
companies were utilized as of or for the last twelve months ("LTM") ended
September 30, 1997.
Gaston's ROAA was 0.84% as compared to the Comparative Group's average
ROAA of 1.06%. The Association's 0.81% core ROAA (excluding gains on sale and
other non-recurring items) also trailed the Comparative Group's average core
ROAA of 0.99%. In contrast to the Comparative Group, the Association's
profitability was restrained due to a higher level of loan loss provisions and
operating expenses and lower noninterest income. Among the members of the
Comparative Group, four institutions reported lower levels of profitability.
These institutions were Cooperative Bankshares Inc. at 0.63%, United Federal
Savings Bank at 0.72%, Classic Bancshares at 0.81% and River Valley Bancorp at
0.76%.
The Association's net interest income of 3.50% relative to average
assets was positioned slightly above the Comparative Group's average of 3.43%.
As discussed in Chapter I, the Association's level of net interest income is
attributable to its significant concentration of single-family residential
loans, overall high proportion of loans to assets, and its strong capital base.
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Feldman Financial Advisors, Inc.
- --------------------------------
The Association's net interest rate spread measured 3.13% over the
observed period, measuring above the Comparative Group's average of 2.94%. The
Association's cost of funds at 4.66% fell below the Comparative Group's average
of 4.86%. The Association's lower cost of funds reflected its limited reliance
on borrowed funds as a funding sources. The Association's yield on
interest-earning assets measured 7.81%, slightly exceeding the Comparative
Group's average of 7.80%. The Association's interest-earning asset yield trailed
the North Carolina Thrift Group's average of 7.96%, and exceeded the Nationwide
Thrift Group's average of 7.70%.
The Association's net interest-earning asset balance averaged 8.62% of
total assets and was positioned well below the Comparative Group's average of
11.99%. This disadvantage primarily reflected the Association's lower capital
level compared to the Comparative Group. The Association's 12.03% ratio of
equity to assets fell below the Comparative Group's average equity ratio of
13.64%. The Comparative Group's ratio was affected by two North Carolina thrifts
with equity to asset ratios greater than 20.0%; First Savings Bancorp at 23.01%
and South Street Financial Corp. at 25.66%. The ratio of equity to assets for
the Nationwide Thrift Group stood at 12.53% while the North Carolina Comparative
Group had an equity to assets ratio of 15.70%, significantly higher than Gaston.
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Feldman Financial Advisors, Inc.
- --------------------------------
Table 12
Key Financial Comparisons
Gaston Federal and the Comparative Group
As of the Latest Twelve Months Ended September 30, 1997
Comparative
Gaston Group
Federal Average
------- -----------
Profitability
- -------------
LTM Return on Average Assets 0.84 % 1.06 %
Core Return on Average Assets 0.81 0.99
LTM Return on Average Equity 7.77 8.09
Core Return on Average Equity 7.00 7.53
Income and Expense (% of avg. assets)
- ------------------
Total Interest Income 7.56 7.54
Total Interest Expense 4.06 4.11
Net Interest Income 3.50 3.43
Provision for Loan Losses 0.17 0.08
Other Operating Income 0.27 0.34
Net Gains and Non-recurring Income 0.03 0.09
General and Administrative Expense 2.31 2.14
Real Estate Expense (Income) 0.00 (0.05)
Non-recurring Expense 0.00 0.01
Pre-tax Core Earnings 1.25 1.53
Yield-Cost Data
- ---------------
Yield on Earning Assets 7.81 7.80
Cost of Funds 4.68 4.86
---- ----
Net Interest Spread 3.13 2.94
Asset Utilization (% of avg. assets)
- -----------------
Avg. Interest-earning Assets 95.47 96.64
Avg. Interest-bearing Liabilities 86.85 84.65
----- -----
Net Interest-earning Assets 8.62 11.99
-45-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Table 12 (continued)
Key Financial Comparisons
Gaston Federal and the Comparative Group
As of the Latest Twelve Months Ended September 30, 1997
Comparative
Gaston Group
Federal Average
------- -----------
Balance Sheet Composition (% of assets)
- -------------------------
Cash and Securities 19.24 % 21.47 %
Loans Receivable, net 77.53 75.57
Real Estate 0.14 0.12
Intangible Assets 0.00 0.22
Other Assets 3.09 2.62
Total Deposits 83.84 74.66
Borrowed Funds 2.02 10.24
Other Liabilities 2.11 1.27
Total Equity 12.03 13.83
Loan Portfolio (% of total loans)
- --------------
Residential Mortgage Loans 80.72 81.59
Other Real Estate Mortgage Loans 9.91 11.50
Non-mortgage Loans 9.37 6.91
Growth Rates
- ------------
Total Assets 0.88 10.63
Total Loans 2.77 16.21
Total Deposits (0.36) 7.89
Regulatory Capital Ratios
- -------------------------
Tier 1 Leverage Capital 12.03 12.25
Tier 1 Risk-based Capital 21.05 25.22
Total Risk-based Capital 22.16 25.32
Credit Risk Ratios
- ------------------
Non-performing Loans / Total Loans 0.76 0.47
Non-performing Assets / Total Assets 0.75 0.45
Reserves / Non-performing Assets 104.82 159.20
Reserves / Total Loans 0.80 0.59
-46-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
The Association's non-interest operating income totaled 0.27% in
relation to average assets, trailing the Comparative Group's average of 0.34%.
The seven thrifts in the North Carolina Comparative Group displayed an average
non-interest operating income ratio equal to the Association at 0.27%, while the
ten thrifts in the Nationwide Comparative Group demonstrated a higher average of
0.34%. Gaston has not developed a broad offering of fee-producing products and
services beyond its lending activities and traditional deposit operations.
Historically, the Association had not charged fees for many services offered
related to their deposit and loan products, but has instituted fees in the past
year that should boost their level of non-interest income. The Association's
production of gains on sale was insignificant during this recent period. The
Association's level of gains and other non-recurring income amounted to 0.03% of
average assets as compared to the Comparative Group's average of 0.09%.
As discussed in Chapter I, the Association has begun to increase its
level of provision for loan losses in recent years to raise its level of
reserves to total loans to approximately 1.0%. The Comparative Group exhibited
varying levels of provisions, with an overall average of 0.08% relative to
average assets compared to the Association's 0.17%. The Association and the
Comparative Group on the whole maintained low levels of non-performing assets,
with Gaston at 0.75% of assets and the Comparative Group averaging 0.45%. Gaston
maintained a comparatively higher level of loan loss reserves as a total of
total loans while its ratio of reserves to non-performing assets fell below the
Comparative Group due to Gaston's higher level of non-performing assets. The
Association's reserve level measured 104.8% of non-performing assets versus the
Comparative Group's average of 159.2%. Relative to total loans, the
Association's reserve level of 0.82% exceeded the Comparative Group's average of
0.59%.
-47-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
The Association's operating expenses have been targeted by management
as a critical linchpin toward sustaining a high level of profitability. The
Association's 2.31% ratio of operating expense was higher than most members of
the Comparative Group. In comparison, the aggregate thrift industry's expense
ratio has hovered slightly above 2.00%. The thrifts in the Comparative Group
averaged 2.14%, with the North Carolina thrifts averaging 2.03% and the
Nationwide Thrift Group at 2.22%.
The Association's balance sheet composition reflected many similarities
with that of the Comparative Group companies. Total net loans amounted to 77.5%
of assets at Gaston, slightly above the Comparative Group's average
concentration of 75.6%. Companies exhibiting loan concentrations above that of
the Association included United Federal Savings Bank (84.5%), KS Bancorp Inc.
(84.3%), Community Financial Corp. (87.8%), Wells Financial Corp. (91.5%), and
First Bancshares Inc. (84.1%). The Association's holdings of cash and investment
securities amounted to 19.4% of total assets, slightly below the Comparative
Group's average of 21.5%.
The Association's 80.72% proportion of one-to-four family residential
mortgages to total loans was closer to the Nationwide Thrift Group's average of
77.02% than the North Carolina Thrift Group's average of 88.13%. The Nationwide
Thrift Group had a greater percentage of loans in the non-residential mortgage
loan and consumer loan portfolios compared to the North Carolina Thrift Group.
Gaston exhibited a 9.91% concentration of its loan portfolio in the
non-residential mortgage loan segment compared to the Comparative Group's
average of 10.69%. Several members of the Comparative Group exhibited a majority
of loans in the non-residential mortgage category, including Classic Bancshares
(25.29%), Community Financial Corp. (25.29%), and OHSL Financial Corp. (21.90%).
-48-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
The Association's growth rates trailed the Comparative Group's averages
in each category of assets, loans, and deposits. The Association's asset growth
rate of 0.88% over the past twelve months was below the Comparative Group's
average of 10.63%. A few of the Comparative Group companies have completed
acquisitions which enhanced their respective growth rates. The Association's
recent growth has been internally generated with a high emphasis on selective
origination of assets at attractive yields and with prudent credit risk
considerations. The Association's deposit growth of negative 0.36% was
significantly behind the Comparative Group's average of 7.89%.
In summary, the Association's earnings performance trailed that of the
Comparative Group. Its strong capital base provides a substantial source of
interest-free funds. The Association's capital base also provides an important
buffer against its planned expansion into a higher concentration of riskier
commercial real estate and multi-family loans, as compared to the traditional
thrift profile of emphasizing single-family residential mortgages.
-49-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
================================================================================
Table 13
General Financial Performance Ratios
As of or for the Latest Twelve Months Ended September 30, 1997
================================================================================
<TABLE>
<CAPTION>
Total Tang. Total Net
Total Total Equity/ Equity/ NPAs/ Interest LTM LTM Core Core
Assets Deposits Assets Assets Assets Margin ROAA ROAE ROAA ROAE
($mil.) ($mil.) (%) (%) (%) (%) (%) (%) (%) (%)
-------- -------- ---- ----- ----- ----- ----- ----- ----- -----
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gaston FS&LA 173,470 145,444 12.03 12.03 0.75 3.45 0.84 7.77 0.81 7.00
Comparative Group Average 241,744 170,889 13.84 13.64 0.45 3.55 1.06 8.09 0.99 7.53
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
North Carolina Thrift Group Avg. 330,101 219,716 15.70 15.64 0.49 3.60 1.16 7.93 1.11 7.48
- ---------------------------------------------------------------------------------------------------------------------------------
Cooperative Bankshares Inc. 359,535 289,081 7.69 7.69 0.10 3.00 0.63 8.26 0.63 8.21
First Savings Bancorp Inc. 295,315 206,438 23.01 23.01 0.29 3.89 1.76 7.28 1.76 7.28
Haywood Bancshares Inc. 152,796 118,295 14.18 13.77 0.67 3.39 1.37 9.41 1.37 9.41
HFNC Financial Corp. 866,859 442,314 18.81 18.81 0.92 3.51 1.21 5.28 1.05 4.55
KS Bancorp Inc. 109,937 86,462 13.24 13.23 0.53 4.05 1.21 8.84 1.20 8.77
South Street Financial Corp. 240,524 141,570 25.66 25.66 0.31 3.49 1.23 6.85 1.19 6.62
United Federal Savings Bank 285,744 253,853 7.33 7.33 0.62 3.86 0.72 9.56 0.57 7.55
- ---------------------------------------------------------------------------------------------------------------------------------
Other Thrift Group Avg. 179,894 136,710 12.53 12.25 0.42 3.52 0.99 8.21 0.91 7.57
- ---------------------------------------------------------------------------------------------------------------------------------
Capital Savings Bancorp Inc. 242,259 170,995 9.14 9.14 0.17 3.28 0.95 10.99 0.94 10.77
Classic Bancshares Inc. 132,186 99,329 14.88 12.92 0.43 3.83 0.81 5.53 0.62 4.25
Community Financial Corp. 183,278 128,238 13.21 13.21 0.56 3.94 1.12 8.18 1.13 8.22
First Bancshares Inc. 162,755 120,117 13.92 13.92 0.13 3.52 1.20 8.49 1.08 7.68
FirstFed Bancorp Inc. 176,464 157,432 9.63 8.89 0.98 3.64 1.03 10.60 1.01 10.32
HFB Financial Corp. 160,876 132,206 10.52 10.52 0.04 3.60 1.09 10.64 0.91 8.86
OHSL Financial Corp. 234,600 181,319 10.92 10.92 0.03 3.25 0.90 8.06 0.88 7.86
River Valley Bancorp 138,461 115,676 12.72 12.56 0.71 3.51 0.76 6.28 0.57 4.75
Southern Missouri, Bancorp, Inc. 163,297 117,294 16.15 16.15 0.88 3.18 0.93 5.81 0.90 5.61
Wells Financial Corp. 204,761 144,494 14.22 14.22 0.23 3.41 1.06 7.49 1.04 7.37
</TABLE>
Source: Gaston FS&LA; SNL Securities; Feldman Financial
-50-
<PAGE>
Feldman Financial Advisors, Inc.
- ------------------------------
================================================================================
Table 14
Income and Expense Analysis
For the Latest Twelve Months Ended September 30, 1997
================================================================================
<TABLE>
<CAPTION>
As a Percent of Average Assets
---------------------------------------------------------------------------------------------------
Net Other Gains & Loan Real Pre-tax
Interest Interest Interest Oper. Non-rec. Loss Operating Estate Non-rec. Core
Income Expense Income Income Income Prov. Expense Expense Expense Earnings
------ ------- ------ ------ ------ ----- -------- ------- ------- --------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gaston FS&LA 7.56 4.06 3.50 0.27 0.03 0.17 2.31 0.00 0.00 1.29
Comparative Group Average 7.54 4.11 3.43 0.34 0.09 0.08 2.14 (0.05) 0.01 1.53
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
North Carolina Thrift Group Avg. 7.66 4.19 3.46 0.27 0.09 0.04 2.03 (0.11) 0.02 1.71
- ------------------------------------------------------------------------------------------------------------------------------------
Cooperative Bankshares Inc. 7.31 4.38 2.92 0.16 0.01 0.04 2.03 0.00 0.00 0.96
First Savings Bancorp Inc. 7.51 3.70 3.81 0.16 0.00 0.00 1.24 (0.00) 0.00 2.70
Haywood Bancshares Inc. 7.34 4.10 3.24 0.27 0.00 0.01 2.06 (0.69) 0.00 2.11
HFNC Financial Corp. 7.58 4.19 3.39 0.13 0.38 (0.06) 1.87 (0.01) 0.13 1.61
KS Bancorp Inc. 8.21 4.36 3.85 0.14 0.02 0.02 2.00 (0.05) 0.00 1.85
South Street Financial Corp. 7.41 4.03 3.38 0.05 0.00 0.00 1.55 0.00 0.00 1.84
United Federal Savings Bank 8.25 4.59 3.66 0.98 0.23 0.26 3.48 0.00 0.00 0.87
- ------------------------------------------------------------------------------------------------------------------------------------
Other Thrift Group Avg. 7.46 4.06 3.40 0.38 0.09 0.11 2.22 (0.01) 0.00 1.41
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Savings Bancorp Inc. 7.60 4.41 3.19 0.56 0.03 0.05 2.16 (0.00) 0.00 1.44
Classic Bancshares Inc. 7.21 3.60 3.61 0.31 0.04 0.14 2.77 0.04 0.00 0.96
Community Financial Corp. 7.84 4.05 3.78 0.37 (0.01) 0.28 2.07 0.00 0.00 1.74
First Bancshares Inc. 7.60 4.25 3.35 0.31 0.18 0.05 1.91 (0.04) 0.00 1.66
FirstFed Bancorp Inc. 7.65 4.15 3.51 0.49 0.00 0.11 2.30 0.01 0.00 1.55
HFB Financial Corp. 7.79 4.27 3.53 0.29 0.28 0.08 2.27 0.00 0.00 1.40
OHSL Financial Corp. 7.68 4.49 3.18 0.14 0.03 0.02 1.98 0.00 0.00 1.35
River Valley Bancorp 6.63 3.26 3.37 0.51 0.28 0.17 2.69 0.01 0.00 0.88
Southern Missouri Bancorp, Inc. 7.05 3.92 3.13 0.36 0.05 0.15 2.09 (0.09) 0.00 1.47
Wells Financial Corp. 7.54 4.16 3.37 0.47 0.03 0.09 1.95 (0.01) 0.00 1.60
</TABLE>
Source: Gaston FS&LA; SNL Securities; Feldman Financial
-51-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
================================================================================
Table 15
Yield-Cost Structure and Growth Rates
For the Latest Twelve Months Ended September 30, 1997
================================================================================
<TABLE>
<CAPTION>
Avg. Int. Avg. Int Net Yield on Cost of
Earning Bearing Earning Interest Interest Net Asset Loan Deposit
Assets/ Liabs./ Assets/ Earning Bearing Interest Growth Growth Growth
Assets/ Assets Assets/ Assets Liabs. Spread Rate Rate Rate
------- ------ ------- ------ ------ ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Gaston FS&LA 95.47 86.85 8.62 7.81 4.68 3.13 0.88 2.77 (0.36)
Comparative Group Average 96.64 84.65 11.99 7.80 4.86 2.94 10.63 16.21 7.89
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
North Carolina Thrift Group Avg. 96.33 82.65 13.68 7.96 5.08 2.88 10.65 14.86 5.62
- -----------------------------------------------------------------------------------------------------------------------------------
Cooperative Bankshares Inc. 97.33 90.25 7.08 7.51 4.86 2.65 9.88 13.61 4.44
First Savings Bancorp Inc. 98.00 74.88 23.12 7.67 4.94 2.73 12.20 7.58 7.30
Haywood Bancshares Inc. 95.55 83.96 11.59 7.68 4.88 2.80 16.76 7.27 9.20
HFNC Financial Corp. 96.79 75.91 20.88 7.83 5.51 2.32 2.58 23.75 0.78
KS Bancorp Inc. 95.06 84.29 10.76 8.64 5.17 3.47 14.34 17.13 12.11
South Street Financial Corp. 96.88 80.66 16.21 7.65 4.99 2.66 10.36 1.94 (3.30)
United Federal Savings Bank 94.69 88.61 6.08 8.71 5.18 3.53 8.41 32.77 8.83
- -----------------------------------------------------------------------------------------------------------------------------------
Other Thrift Group Avg. 96.87 86.05 10.82 7.70 4.71 2.99 10.62 17.15 9.47
- -----------------------------------------------------------------------------------------------------------------------------------
Capital Savings Bancorp Inc. 97.14 89.75 7.39 7.82 4.91 2.91 4.76 9.79 10.72
Classic Bancshares Inc. 94.21 84.23 9.98 7.65 4.28 3.37 (2.96) 13.75 (0.06)
Community Financial Corp. 96.09 85.20 10.90 8.15 4.76 3.39 13.99 12.44 16.18
First Bancshares Inc. 95.41 83.36 12.04 7.97 5.10 2.87 5.48 11.48 9.21
FirstFed Bancorp Inc. 96.34 89.32 7.02 7.94 4.64 3.30 (0.73) (4.74) 0.19
HFB Financial Corp. 98.15 88.52 9.63 7.94 4.82 3.12 9.52 10.83 4.45
OHSL Financial Corp. 97.86 85.94 11.91 7.84 5.23 2.61 7.80 8.61 7.15
River Valley Bancorp 96.29 86.47 9.81 6.89 3.77 3.12 64.64 92.27 50.56
Southern Missouri Bancorp, Inc. 98.41 82.76 15.65 7.16 4.73 2.43 1.98 12.37 (1.90)
Wells Financial Corp. 98.77 84.94 13.83 7.63 4.90 2.73 1.71 4.71 (1.76)
</TABLE>
Source: Gaston FS&LA; SNL Securities; Feldman Financial
-52-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
================================================================================
Table 16
Balance Sheet Composition
As of the Latest Twelve Months Ended September 30, 1997
================================================================================
<TABLE>
<CAPTION>
As a Percent of Total Assets
-------------------------------------------------------------------------------------------------
Cash & Net Real Intang. Other Total Borrowed Other Total Total
Securities Loans Estate Assets Assets Deposits Funds Liabs. Liabs. Equity
---------- ------ ------ ------- ------- -------- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Gaston FS&LA 19.24 77.53 0.14 0.00 3.09 83.84 2.02 2.11 87.97 12.03
Comparative Group Average 21.47 75.57 0.12 0.22 2.62 74.66 10.24 1.27 86.16 13.84
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
North Carolina Thrift Group Avg. 23.44 73.73 0.06 0.07 2.69 72.16 10.64 1.50 84.30 15.70
- ------------------------------------------------------------------------------------------------------------------------------------
Cooperative Bankshares Inc. 17.81 80.05 0.10 0.00 2.04 80.40 11.19 0.72 92.31 7.69
First Savings Bancorp Inc. 32.18 66.47 0.00 0.00 1.35 69.90 6.10 0.99 76.99 23.01
Haywood Bancshares Inc. 20.69 74.96 0.14 0.48 3.73 77.42 6.87 1.52 85.82 14.18
HFNC Financial Corp. 17.44 79.27 0.13 0.00 3.16 51.02 28.47 1.70 81.19 18.81
KS Bancorp Inc. 13.05 84.25 0.06 0.00 2.63 78.65 7.28 0.84 86.76 13.24
South Street Financial Corp. 51.91 46.56 0.01 0.00 1.52 58.86 14.55 0.93 74.34 25.66
United Federal Savings Bank 11.02 84.54 0.02 0.00 4.41 88.84 0.00 3.83 92.67 7.33
- ------------------------------------------------------------------------------------------------------------------------------------
Other Thrift Group Avg. 20.09 76.86 0.16 0.32 2.57 76.41 9.96 1.10 87.47 12.53
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Savings Bancorp Inc. 18.49 79.75 0.01 0.00 1.75 70.58 18.58 1.70 90.86 9.14
Classic Bancshares Inc. 26.63 66.69 0.21 2.24 4.22 75.14 8.95 1.03 85.12 14.88
Community Financial Corp. 9.39 87.76 0.10 0.00 2.75 69.97 15.82 1.00 86.79 13.21
First Bancshares Inc. 13.04 84.09 0.10 0.00 2.78 73.80 11.89 0.38 86.08 13.92
FirstFed Bancorp Inc. 25.99 69.58 1.00 0.82 2.61 89.21 0.57 0.59 90.37 9.63
HFB Financial Corp. 30.45 67.33 0.04 0.00 2.18 82.18 5.72 1.58 89.48 10.52
OHSL Financial Corp. 25.14 72.07 0.00 0.00 2.79 77.29 10.98 0.82 89.08 10.92
River Valley Bancorp 15.26 81.27 0.06 0.18 3.23 83.54 2.17 1.57 87.28 12.72
Southern Missouri Bancorp, Inc. 29.52 68.55 0.05 0.00 1.88 71.83 10.74 1.28 83.85 16.15
Wells Financial Corp. 7.00 91.49 0.02 0.00 1.49 70.57 14.16 1.05 85.78 14.22
</TABLE>
Source: Gaston FS&LA; SNL Securities; Feldman Financial
-53-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
================================================================================
Table 17
Capital Ratios, Asset Quality, and Loan Composition
As of the Latest Twelve Months Ended September 30, 1997
================================================================================
<TABLE>
<CAPTION>
Tier 1 Tier 1 Total
Capital/ Capital/ Capital/ Total Total Resid. Other Nonmtg.
Total RiskAdj. RiskAdj. NPLs/ NPAs/ Resrvs./ Resrvs./ Mtgs./ Mtgs./ Loans/
Assets Assets Assets Loans Assets NPAs Loans Loans Loans Loans
-------- -------- -------- ------- -------- ------ ------- ------- ------- ------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gaston FS&LA 12.03 21.05 22.16 0.76 0.75 104.82 0.82 80.72 9.91 9.37
Comparative Group Average 12.25 25.22 25.32 0.47 0.45 159.20 0.59 81.99 10.69 7.32
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
North Carolina Thrift Group Avg. 16.03 35.87 32.62 0.58 0.49 102.90 0.56 88.13 7.95 3.92
- ------------------------------------------------------------------------------------------------------------------------------------
Cooperative Bankshares Inc. 7.71 14.19 14.60 - 0.10 245.91 0.29 92.88 5.51 1.61
First Savings Bancorp Inc. 22.87 50.42 50.87 0.44 0.29 70.15 0.31 91.47 7.11 1.42
Haywood Bancshares Inc. NA NA NA 0.71 0.67 71.19 0.64 87.24 12.55 0.21
HFNC Financial Corp. 16.60 30.17 31.41 0.99 0.92 92.55 1.06 90.81 7.47 1.72
KS Bancorp Inc. NA NA 12.99 0.56 0.53 55.44 0.35 98.32 0.91 0.76
South Street Financial Corp. 25.66 74.86 75.38 0.65 0.31 57.66 0.38 91.99 3.90 4.11
United Federal Savings Bank 7.35 9.71 10.47 0.69 0.62 127.42 0.92 64.18 18.18 17.64
- ------------------------------------------------------------------------------------------------------------------------------------
Other Thrift Group Avg. 9.89 18.56 19.84 0.40 0.42 202.98 0.61 77.70 12.61 9.69
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Savings Bancorp Inc. 8.14 16.40 17.03 0.20 0.17 184.06 0.39 88.12 6.14 5.74
Classic Bancshares Inc. 5.81 22.25 23.20 0.32 0.43 147.35 0.94 74.86 11.51 13.63
Community Financial Corp. 11.26 16.44 17.23 0.51 0.56 105.58 0.67 68.06 25.29 6.65
First Bancshares Inc. 11.06 16.82 16.98 0.04 0.13 234.27 0.36 85.43 7.23 7.34
FirstFed Bancorp Inc. 9.63 16.38 17.08 0.64 0.98 45.40 0.63 76.15 8.39 15.46
HFB Financial Corp. NA NA NA - 0.04 NM 0.71 84.34 10.25 5.42
OHSL Financial Corp. 9.01 17.01 17.42 0.04 0.03 777.94 0.31 73.62 21.90 4.48
River Valley Bancorp NA NA NA 0.79 0.71 122.47 1.05 65.75 12.60 21.65
Southern Missouri Bancorp, Inc. 13.33 24.51 30.51 1.21 0.88 51.46 0.66 74.14 16.09 9.77
Wells Financial Corp. 10.86 18.66 19.27 0.22 0.23 158.32 0.39 86.56 6.67 6.77
</TABLE>
Source: Gaston FS&LA; SNL Securities; Feldman Financial
-54-
<PAGE>
III
<PAGE>
Feldman Financial Advisors, Inc.
- -------------------------------
III. MARKET VALUE ADJUSTMENTS
This concluding chapter of the appraisal identifies certain additional
adjustments to Gaston's estimated pro forma market value relative to the
Comparative Group selected in Chapter II. Adjustments are also necessary to
reflect the equity market's likely reception of a new thrift stock offering
under current conditions. The adjustments discussed in this chapter are made
from the viewpoints of potential investors, which include depositors holding
subscription rights exercisable in the Subscription Offering and unrelated
parties who may purchase stock in the Community Offering. It is assumed that
these potential investors are aware of all relevant and necessary facts as they
would pertain to the value of the Association relative to other publicly held
financial institutions and relative to alternative investments.
In determining the aggregate pro forma market value of the Association
pursuant to its Reorganization, we have assumed that the Association would be
valued initially based on a full standard conversion, and subsequently with the
mutual holding company structure in place based on a sale of a 47% minority
ownership interest. Our appraised value is predicated on a continuation of the
current operating environment for the Association and thrift institutions in
general. Changes in the Association's operating performance along with changes
in the local and national economy, the stock market, interest rates, the
regulatory environment, and other external factors may occur from time to time,
often with great unpredictability, which could impact materially the value of
the Association or thrift stocks in general. Therefore, the valuation range
provided herein is subject to a more current re-evaluation prior to the actual
completion of the Stock Offering.
-55-
<PAGE>
Feldman Financial Advisors, Inc.
- -------------------------------
In addition to the comparative operating fundamentals discussed in Chapter
II, it is important to address additional market value adjustments based on
certain financial and other criteria, which include, among other factors:
(1) Earnings Prospects
(2) Market Area
(3) Management
(4) Dividend Capacity
(5) Liquidity
(6) Subscription Interest
(7) Stock Market Conditions
(8) New Issue Discount
(9) Mutual Holding Company Issues
Earnings Prospects
- ------------------
Earnings prospects are dependent upon the sensitivity of asset yields and
liability costs to changes in market interest rates, the credit quality of
assets, the stability of non-interest components of income and expense, and the
ability to leverage the balance sheet. Each of the foregoing is an important
factor to investors in assessing earnings prospects. The Association's earnings
structure is predicated on the ability to manage the expansion into higher risk,
higher yielding loans at profitable spreads over its cost of funds and operating
expenses while maintaining strong credit quality on the new portfolios.
Historically, the Association has operated as traditional thrift, offering
primarily singe-family residential loans. The Association's has a new management
team in place which has no track record in implementing this business strategy
in the current economic environment at the Association. Both the CEO and CFO
have been with the Association for approximately six months. Given its asset
composition, the Association is adeptly focused on risk management through
maintaining strong capital levels, flexible liquidity, solid credit reserves,
highly efficient operations, and conservative underwriting practices.
-56-
<PAGE>
Feldman Financial Advisors, Inc.
- -------------------------------
The challenges facing the Association's profitability are fourfold: (i)
maintain and advance competitive advantages in originating residential mortgage
loans; (ii) focus on lending activities that create a more retail bank-like
company; (iii) preserve its financial strength in the face of such riskier
lending activity; and (iv) guard against liberalized lending standards in good
times and an economic downturn in bad times. On the whole, we do not believe
that the Association's earnings face a greater vulnerability to economic
conditions than the average thrift as lending is primarily focused on the
residential mortgage market, and supplemented with consumer, multi-family and
commercial real estate, and home equity lending. The Association's post-
Reorganization capital level will be additionally fortified to help the
Association manage these business risks. However, while the Association's return
on assets should be enhanced in the near term through the re-investment of net
capital proceeds, Gaston will be challenged to generate competitive returns on
equity due to the high level of capital.
While the Association has had success in producing positive returns in
recent years, a new senior management team is now in place and is faced with the
challenge of transforming the Association from a typical thrift to a more retail
bank-like focus. While we believe it is a challenge for any financial
institution to manage such a change in focus and maintain their level of
profitability, the Association has the additional burden of integrating the new
management team. Although economic conditions in the Association's market area
are anticipated to remain stable, an unexpected business downturn or dramatic
interest rate increases could suppress the Association's ability to expand its
lending niche, disrupt asset quality, and strain earnings. However, we believe
that the Association's expected capital levels and low cost operating profile
are mitigating factors. Therefore, we believe that no additional adjustment is
warranted.
-57-
<PAGE>
Feldman Financial Advisors, Inc.
- -------------------------------
Market Area
- -----------
The members of the Comparative Group are located primarily in North
Carolina and other states in the Southeast and Central regions of the country.
All of the Comparative Group companies have a significant base of real estate
mortgage lending. The Association's primary market area is characterized by a
stable population base with above-average income levels. We do not believe that,
on the whole, the market area conditions of the Comparative Group are materially
different from those facing the Association. Accordingly, we believe that no
adjustment is warranted for market area.
Management
- ----------
Management's principal challenge is to generate profitable results, monitor
credit risks, and control operating costs while the Association competes in an
increasingly competitive financial services environment. Gaston's senior
management has only been in place for approximately six months and has not had
the time to demonstrate its effectiveness in implementing new lending
strategies, maintaining the Association's competitive advantage in its current
lending segments, and promoting a favorable image within the local community,
which constitutes an important factor in cultivating local depositor and
borrower relationships. Accordingly, while we believe that the Association has
sufficient managerial resources in place to implement its operating goals,
management has no track record related to their ability to transform the
Association from a traditional thrift into a retail bank and therefore a
downward adjustment is necessary.
-58-
<PAGE>
Feldman Financial Advisors, Inc.
- -------------------------------
Dividend Capacity
- -----------------
Upon completion of the Stock Offering, the Stock Company intends to pay
cash dividends consistent with industry payout ratios and current dividend
yields. Actual payment of dividends will depend upon a number of factors,
including the amount of the net proceeds retained by the Stock Company, capital
requirements, regulatory limitations, and operating results. All but one of the
seventeen companies in the Comparative Group currently pay regular dividends.
Furthermore, payment of cash dividends has become commonplace among publicly
owned thrifts with relatively high capital levels. There is no reason to believe
that the Association, with its current earnings outlook and capital position,
would not have the capacity to support dividend payments comparable to those of
the Comparative Group. Accordingly, we do not believe an additional adjustment
is warranted for this factor.
Liquidity of the Issue
- ----------------------
Following the completion of the Stock Offering, the Stock Company
anticipates that its common stock will be listed on the Nasdaq National Market.
Fifteen of the seventeen Comparative Group companies are traded on the Nasdaq
National Market, while the remainder are listed on other stock exchanges. With
the increased number of market makers and institutional investors following
thrift stocks, even small thrift stock conversions are able to develop a
regulator trading market for their stock issues. Given the expected market
capitalization of the Stock Company, it is reasonable to expect that an active
and liquid trading market should develop for its stock issue. Additionally, the
existence of active buyers and sellers trading thrift equity securities in the
current stock environment has limited the impact of illiquidity on thrift market
valuations overall. Therefore, given these overall consideration, we believe
that there is no need to apply a discount to reflect the possible lack of stock
liquidity.
-59-
<PAGE>
Feldman Financial Advisors, Inc.
- -------------------------------
Subscription Interest
- ---------------------
In recent years, initial public offerings of thrift stocks have attracted a
great deal of investor interest. During 1996, increased pro forma valuations and
more restrained aftermarket performance did little to deter investors from
actively participating in thrift stock conversions. Almost two-thirds of the
conversions in 1996 were oversubscribed by depositors alone with no shares
remaining for community offerings. Contributing to this huge demand is the
growing scarcity factor of mutual candidates for thrift stock conversions. The
annual number of conversion offerings and aggregate amount of gross proceeds
have both declined over past years.
The visibility of thrift conversions moved to the forefront once again in
late 1996 and early 1997 with the conversion of Roslyn Savings Bank, which
received orders totaling approximately $1.7 billion for an offering that was
ultimately valued at $424 million. Conversion activity has continued at a brisk
pace in 1997 on the heels of a record-setting stock market. Staten Island
Bancorp received orders of $817 million in November 1997 for its maximum stock
offering of $383 million, which contributed to a resolicitation at a higher
offering range. Notwithstanding the demand for thrift stocks in initial
offerings, a strong subscription does not always indicate that the valuation
range should be increased or the offering should be priced in the upper end of
the valuation range. Many conversion investors do not routinely purchase in the
after-market, particularly at higher stock prices or involving stock issues with
limited liquidity. As such, absent actual results of the Association's
Subscription Offering, we do not believe any adjustment is warranted at this
time.
-60-
<PAGE>
Feldman Financial Advisors, Inc.
- -------------------------------
Stock Market Conditions
- -----------------------
Table 18 graphically displays the performance of the SNL Thrift Index of
all publicly traded thrifts and the SNL Thrift MHC Index as compared to the
Standard & Poor's 500-Stock Index ("S&P 500") over the past two years. Both the
SNL Thrift Index and SNL Thrift MHC Index have substantially outperformed the
S&P 500 during this period, advancing by 136.5% and 99.98% respectively, since
year-end 1995 through month-end November 1997 as compared to the broader market
S&P 500 Index up 55.1%.
Table 19 graphically depicts selected interest rate levels over the past
three years. General market interest rates declined throughout 1995 and
propelled the stock market to new heights. Interest rates turned upward during
the first half of 1996, responding to concerns about inflationary pressures.
Thrift stocks, which had significantly outperformed the overall market in 1995,
trailed the broader market through mid-year of 1996. However, as interest rates
declined modestly and stabilized during the second half of 1996, thrift stocks
regained momentum and were sparked additionally by another wave of mergers and
acquisitions. Resolution of the SAIF recapitalization appeared to break a logjam
that resulted in the announcements of a number of acquisitions of relatively
large thrifts.
Speculation about higher rates and the sustainability of thrift stock
valuations stalled the rally in early 1997. The market sell-off was prompted in
part as reaction to suggestions from the Federal Reserve Chairman that the stock
market was overheated and that the central bank might raise rates to head off
inflation. However, a flurry of bank and thrift merger activity during mid-1997
pumped further speculative fervor into thrift stocks. Also, general interest
levels remained stable over the past several months.
-61-
<PAGE>
Feldman Financial Advisors, Inc.
- -------------------------------
On October 27, 1997, investors sold off stocks in a frenzy as turmoil in
global securities markets spilled over into the U.S. market. The Dow Jones
Industrial Average dropped 554 points or 7.2%, representing the largest one-day
point decline in its history. Market observers generally attributed the slide to
fallout from recent disorder in global markets, especially in Asia, where
investors fear that economic troubles will hurt profits of American companies
with overseas interests. Many analysts also felt that valuation levels for U.S.
stocks had been bid up and were due for correction. The SNL Thrift Index fell by
5.2% on this day, trailing the decline of the broader S&P 500 at 6.9%. Spurred
by unprecedented trading volume, domestic stocks rebounded firmly in subsequent
days as investors pointed to the firm underpinning of the U.S. economy.
Through December 11, 1997, the S&P 500 has continued to fluctuate due to
the problems related to the Asian economies while the SNL Thrift Index and SNL
Thrift MHC Index have continued to climb to record levels. On a year-to-date
basis, the SNL Thrift Index was up 62.8%, as compared to the S&P 500 at 28.9%.
The SNL MHC Index has advanced ahead of other thrift indices, registering a
101.6% increase through December 11, 1997. Notwithstanding the spillover effect
of merger activity, many stock analysts believe that the financial sector is
headed for more sluggishness as valuation multiples continue to enter ground-
breaking territory, but operating fundamentals remain strong enough to avert a
major correction independent of the overall market.
-62-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Table 18
Comparative Stock Market Performance
Month-end Index Data, Year-end 1995=100
[LINE GRAPH APPEARS HERE--PLOT POINTS FOLLOW]
<TABLE>
<CAPTION>
Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96
<S> <C> <C> <C> <C> <C> <C> <C>
All Public Thrifts 100 98.45949535 99.22974768 101.4873838 101.0092961 101.7264276 102.8419655
S&P 500 100 103.2635168 103.9779185 104.805975 106.218542 108.6377659 108.8813119
Small Public Thrifts 100 100.2786033 100.0928678 100.3157504 101.3001486 101.3001486 101.281575
All Thrift MHCs 100 99.912759 102.8571429 101.308615 100.1090513 93.60959651 93.95856052
<CAPTION>
Jul-96 Aug-96 Sep-96 Oct-96 Nov-96 Dec-96 Jan-97
<S> <C> <C> <C> <C> <C> <C> <C>
All Public Thrifts 103.5590969 108.4462151 114.0239044 121.3014608 129.0305445 128.4462151 138.1407703
S&P 500 103.9129729 105.8613411 111.592791 114.5153434 122.9095632 120.2630297 127.6505926
Small Public Thrifts 100.4086181 103.2132244 105.9806835 105.9806835 108.9524517 108.9524517 112.7971768
All Thrift MHCs 90.51254089 92.32279171 100.959651 103.9258451 113.5005453 117.3391494 127.742639
<CAPTION>
Feb-97 Mar-97 Apr-97 May-97 Jun-97 Jul-97 Aug-97
<S> <C> <C> <C> <C> <C> <C> <C>
All Public Thrifts 149.5618 140.16 142.68 153.49 165.87 181.81 176.52
S&P 500 128.3975 122.9 130.1 137.73 143.72 154.94 146.05
Small Public Thrifts 118.1092 117.9 118.8 120.49 125.56 134.08 139.39
All Thrift MHCs 132.955289 130.9269357 128.1788441 137.1210469 149.1384951 163.7949836 185.7579062
<CAPTION>
Sep-97 Oct-97 Nov-97
<S> <C> <C> <C>
All Public Thrifts 195.88 199.84 199.877504
S&P 500 153.81 148.5 155.124
Small Public Thrifts 148.077 147.79
All Thrift MHCs 213.3478735 232.431843 236.4998625
</TABLE>
-63-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Table 19
Selected Interest Rate Benchmarks
Month-end Indicators
[LINE GRAPH APPEARS HERE--PLOT POINTS FOLLOW]
<TABLE>
<CAPTION>
Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Prime Rate 8.5 8.5 9 9 9 9 9 8.75 8.75 8.75 8.75 8.75 8.5 8.5
FNMA Fixed Mtg. 9.28 8.99 8.55 8.64 8.46 7.8 7.84 7.97 7.82 7.76 7.6 7.37 7.15 7.11
1-Yr. Treasury 6.73 6.39 6.04 6.09 5.93 5.47 5.34 5.34 5.33 5.35 5.26 5.08 4.89 4.66
<CAPTION>
Feb-96 Mar-96 Apr-96 May-96 Jun-96 Jul-96 Aug-96 Sep-96 Oct-96 Nov-96 Dec-96 Jan-97 Feb-97 Mar-97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Prime Rate 8.25 8.25 8.25 8.25 8.25 8.25 8.25 8.25 8.25 8.25 8.25 8.25 8.25 8.5
FNMA Fixed Mtg. 7.64 7.91 8.19 8.34 8.19 8.26 8.37 8.15 7.81 7.62 7.84 7.85 7.93 8.24
1-Yr. Treasury 4.96 5.12 5.33 5.45 5.38 5.53 5.6 5.4 5.14 5.1 5.22 5.3 5.37 6
<CAPTION>
Apr-97 May-97 Jun-97 Jul-97 Aug-97 Sep-97 Oct-97 Nov-97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Prime Rate 8.5 8.5 8.5 8.5 8.5 8.5 8.5 8.5
FNMA Fixed Mtg. 8.06 7.98 7.76 7.38 7.64 7.44 7.3 7.28
1-Yr. Treasury 5.9 5.77 5.66 5.42 5.56 5.44 5.35 5.35
</TABLE>
-64-
<PAGE>
Feldman Financial Advisors, Inc.
- -------------------------------
Recent Acquisition Activity
- ---------------------------
Acquisition speculation is one factor impacting the prices of newly
converted thrifts in the after-market. Table 20 summarizes recent acquisition
activity involving thrifts and banks based in North Carolina. Overall
acquisition premiums for North Carolina financial institutions have been similar
to the ratios reported nationwide. During 1996 and 1997 year-to-date, there were
15 acquisitions involving North Carolina banks and thrifts. Most of the
acquisition activity involved in-state combinations, only one transaction
involved an out-of-state acquirer. The most prominent acquisition was the
purchase of United Carolina Bancshares, a $4.3 billion-asset bank, by BB&T
Corporation.
The state's financial institution marketplace comprises a large number of
middle-tier and large banks and thrifts. Larger institutions, such as
NationsBank, First Union, Wachovia and BB&T Corporation have continued to expand
their presence along the East Coast. Because of the relatively large number of
stockholder-owned thrifts, consolidation activity is expected to continue in
North Carolina. We believe that while acquisition premiums are a significant
factor to consider in determining the Association's estimated pro forma market
value, such speculative behavior is reflected to some degree in the general
trading valuation levels of thrift stocks. Furthermore, because of its mutual
holding company organizational structure, the Association will be shielded from
acquisition activity. We do not believe any adjustment is warranted at this
time.
-65-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Table 20
Summary of Recent North Carolina Acquisition Activity
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Seller Financial Data
--------------------------------------------
Total TanEq./ YTD YTD
Bank/ Assets Assets ROAA ROAE Date
Buyer St. Seller St. Thrift ($000) (%) (%) (%) Anncd. Status
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
All North Carolina Acquisitions -- 1997 Average 109,488 12.38 0.81 7.48
All North Carolina Acquisitions -- 1996 Average 642,370 10.67 0.93 9.53
Southern Bancshares NC ESB Bncp NC T 26,502 19.03 1.98 10.55 11/21/97 N
Triangle Bancorp NC Guaranty State Bncp NC B 103,830 10.75 1.15 10.71 10/16/97 P
First Charter Corp NC Carolina State Bank NC B 139,014 8.55 0.78 8.46 06/30/97 P
FNB Corp. NC Home Savings Bank NC T 53,446 17.74 0.96 5.36 06/03/97 P
First Citizens BcShs NC First Savings Fin'l NC T 55,850 16.44 (0.99) (5.64) 04/03/97 C
Triangle Bancorp NC Bank of Mecklenburg NC B 259,280 6.68 0.82 11.27 03/27/97 C
LSB Bancshares NC Old North State Bank NC B 128,497 7.48 0.98 11.64 01/21/97 C
FCFT, Inc WV Blue Ridge Bank NC B 103,156 10.56 1.04 10.02 11/22/96 C
BB&T Corp NC United Carolina Bncs NC B 4,366,324 7.55 1.14 14.25 11/04/96 C
Clyde Savings Bank NC Tryon FS&LA NC T 116,443 9.16 0.58 6.35 06/12/96 C
Triangle Bancorp NC Granville United Bnk NC B 59,342 9.83 0.84 8.31 06/10/96 C
CCB Financial Corp NC Salem Trust Bank NC B 154,098 8.83 0.92 9.39 05/14/96 C
Fidelity BancShares NC Perpetual State Bank NC B 45,939 20.67 0.52 2.88 04/22/96 C
Centura Banks NC FirstSouth Bank NC B 181,306 8.72 1.14 12.22 04/18/96 C
Centura Banks NC First Community Bank NC B 112,355 10.07 1.27 12.82 03/20/96 C
<CAPTION>
- --------------------------------------------------------------
Acquisition Ratios
-----------------------------------------------
Offer Price/ Price/ Price/ Dep.
Value Book TanBk. EPS Prem.
Buyer ($M) (%) (%) (x) (%)
- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
All North Carolina Acquisitions -- 1997 Average 26.2 217.1 227.3 27.7 18.6
All North Carolina Acquisitions -- 1996 Average 162.5 214.5 220.1 26.4 16.9
Southern Bancshares 6.4 126.9 126.9 25.3 8.3
Triangle Bancorp 35.5 301.5 301.5 30.7 31.8
First Charter Corp 42.2 336.3 356.8 35.1 30.2
FNB Corp. 14.5 150.9 150.9 NA 12.3
First Citizens BcShs 10.6 102.1 102.1 NA 3.9
Triangle Bancorp 42.0 217.8 230.3 20.6 19.2
LSB Bancshares 32.5 284.1 322.3 27.0 24.8
FCFT, Inc 24.3 214.8 214.8 22.4 18.0
BB&T Corp 980.7 284.4 295.1 20.8 17.6
Clyde Savings Bank NA NA NA NA NA
Triangle Bancorp 11.1 176.4 192.0 24.0 11.9
CCB Financial Corp 41.2 246.5 246.5 29.8 28.8
Fidelity BancShares 11.3 117.4 117.4 47.0 6.2
Centura Banks 40.9 221.8 235.0 20.2 18.0
Centura Banks 28.0 240.1 240.1 20.8 18.1
</TABLE>
-66-
<PAGE>
Feldman Financial Advisors, Inc.
- -------------------------------
New Issue Discount
- ------------------
A "new issue" discount that reflects investor concerns and investment risks
inherent in all initial stock offerings is a factor to be considered in
valuations of initial thrift stock offerings. The magnitude of the new issue
discount typically expands during periods of declining thrift stock prices as
investors require larger inducements, and narrows during strong market
conditions.
The thrift conversion market continues to respond to the after-market
performance of recent offerings. Table 21 presents a summary of publicly traded
thrifts that have completed standard conversions since January 1, 1997. While
the overall stock market performance during the second half of 1997 slowed
compared to the first half, the market for thrift conversions has continued to
gain momentum. After market performance in the second half of 1997 has outpaced
the performance of the first half of 1997 even though pro forma pricing
valuations have increased.
Recently, the thrift conversion market has proven to be resilient with the
typical offering selling out in the subscription phase and being priced at or
near the adjusted maximum of the valuation range. With valuations increasing to
reflect the strength of recent offerings, it is uncertain when the market will
reach its tolerance for higher valuations accompanied by the prospect of
companies generating lackluster returns on equity. The average price/book ratio
for the thirty-one publicly traded conversions completed thus far in 1997 was
71.1% with the average price/earnings ratio was 22.1x.
In the after-market, full conversions have been trading upward to and above
90% of book value. To price a new offering at 90% of pro forma book value,
because of the
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<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Table 21
Recent Thrift Conversion Activity
Summary of 1997 Offerings Year-to-Date
<TABLE>
<CAPTION>
====================================================================================================================================
Pro Forma Ratios
Gross Expense/ ----------------
Total Offering Gross Price/ Price/
IPO Assets Proceeds Proceeds Book Earnings
Company St. Exchange Date ($M) ($M) (%) (%) (x)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average -- Full Conversion Offerings 196 40.8 4.2 71.1 22.1
Average -- MHC Offerings 133 8.6 5.3 102.6 24.9
Average -- 2nd Stage Offerings 348 30.3 NA NA NA
High Country Bancorp, Inc. CO NASDAQ 12/10/97 76 13.2 4.4 77.7 30.5
First SecurityFed Financial IL NASDAQ 10/31/97 260 64.1 1.5 73.4 21.3
Oregon Trail Financial Corp. OR NASDAQ 10/06/97 204 46.9 2.3 76.6 18.5
Roebling Savings Bank (MHC) NJ OTC-BB 10/02/97 34 2.0 7.7 102.0 26.3
SHS Bancorp Inc. PA NASDAQ 10/01/97 82 8.2 5.6 70.7 13.9
Ohio State Financial Services OH NASDAQ 09/29/97 34 6.3 5.4 63.3 17.0
Citizens Bancorp Inc. IN OTC-BB 09/18/97 45 10.6 4.6 73.5 18.4
WSB Holding Co. PA OTC-BB 08/29/97 33 3.3 8.5 71.4 NA
Bayonne Bancshares Inc. (2nd stage) NJ NASDAQ 08/22/97 602 48.7 NA NA NA
Peoples Home Savings Bk (MHC) PA NASDAQ 07/10/97 202 12.4 4.7 106.2 30.1
FirstSpartan Financial Corp. SC NASDAQ 07/09/97 376 88.6 1.6 73.0 26.0
GSB Financial Corp. NY NASDAQ 07/09/97 96 22.5 4.1 73.4 23.2
FirstBank Corp. ID NASDAQ 07/02/97 133 19.8 3.5 71.9 19.2
Community First Banking Co. GA NASDAQ 07/01/97 353 48.3 2.9 72.7 36.1
Montgomery Financial Corp. (2nd stage) IN NASDAQ 07/01/97 94 11.9 NA NA NA
Security Bancorp, Inc. TN OTC-BB 06/30/97 44 4.4 6.9 72.9 18.1
Sistersville Bancorp Inc. WV OTC-BB 06/26/97 26 6.6 6.8 65.4 26.7
SFB Bancorp Inc. TN OTC-BB 05/30/97 47 7.7 5.2 69.6 17.7
Rocky Ford Financial Inc. CO Pink Sheet 05/22/97 20 4.2 8.3 68.8 17.7
HCB Bancshares Inc. AR NASDAQ 05/07/97 171 26.5 2.8 72.0 29.0
Peoples-Sidney Financial Corp. OH NASDAQ 04/28/97 87 17.9 3.2 71.2 11.5
First Carnegie Deposit (MHC) PA NASDAQ 04/04/97 136 10.4 3.9 98.8 NM
Pulaski Savings Bank (MHC) NJ NASDAQ 04/03/97 159 9.5 5.0 103.2 18.2
Hemlock Federal Financial Corp IL NASDAQ 04/02/97 147 20.8 3.1 71.6 37.5
GS Financial Corp. LA NASDAQ 04/01/97 87 34.4 2.4 63.8 38.7
Market Financial Corp. OH NASDAQ 03/27/97 46 13.4 3.5 71.1 26.2
Vermilion Bancorp Inc. IL OTC-BB 03/26/97 35 4.0 7.2 71.4 NA
Empire Federal Bancorp Inc. MT NASDAQ 01/27/97 87 25.9 2.4 68.1 21.5
FirstFed America Bancorp Inc. MA AMSE 01/15/97 724 87.1 2.4 72.0 13.6
Roslyn Bancorp Inc. NY NASDAQ 01/13/97 1,597 423.7 2.2 72.0 9.3
Advance Financial Bancorp WV NASDAQ 01/02/97 92 10.8 4.5 71.1 16.8
<CAPTION>
=================================================================================================
Current 1st Day 1st Day YTD
IPO Stock Price/ Price Price
Price Price Book Change Change
Company ($) ($) (%) (%) (%)
=================================================================================================
<S> <C> <C> <C> <C> <C>
Average -- Full Conversion Offerings 10.8 17.8 102.8 44.4 63.2
Average -- MHC Offerings NA NA 137.6 34.1 84.4
Average -- 2nd Stage Offerings NA NA NA 14.4 25.6
High Country Bancorp, Inc. 10.00 14.75 112.2 44.4 47.5
First SecurityFed Financial 10.00 15.19 110.6 50.6 51.9
Oregon Trail Financial Corp. 10.00 16.13 128.4 67.5 61.3
Roebling Savings Bank (MHC) 10.00 17.75 168.3 65.0 77.5
SHS Bancorp Inc. 10.00 15.75 104.3 47.5 57.5
Ohio State Financial Services 10.00 15.25 98.2 55.0 52.5
Citizens Bancorp Inc. 10.00 14.31 102.9 40.0 43.1
WSB Holding Co. 10.00 14.37 96.4 35.0 43.7
Bayonne Bancshares Inc. (2nd stage) 10.00 12.63 NA 17.5 26.3
Peoples Home Savings Bk (MHC) 10.00 18.38 148.7 40.0 83.8
FirstSpartan Financial Corp. 20.00 37.94 133.9 83.4 89.7
GSB Financial Corp. 10.00 15.75 107.4 46.3 57.5
FirstBank Corp. 10.00 17.00 113.7 58.1 70.0
Community First Banking Co. 20.00 37.50 115.9 59.4 87.5
Montgomery Financial Corp. (2nd stage) 10.00 12.50 NA 11.3 25.0
Security Bancorp, Inc. 10.00 15.81 105.6 45.0 58.1
Sistersville Bancorp Inc. 10.00 15.13 89.9 37.5 51.3
SFB Bancorp Inc. 10.00 14.50 96.1 38.1 45.0
Rocky Ford Financial Inc. 10.00 14.25 128.7 87.1 42.5
HCB Bancshares Inc. 10.00 13.50 90.8 26.3 35.0
Peoples-Sidney Financial Corp. 10.00 18.00 89.5 25.6 80.0
First Carnegie Deposit (MHC) 10.00 18.63 114.8 16.3 86.3
Pulaski Savings Bank (MHC) 10.00 19.00 118.6 15.0 90.0
Hemlock Federal Financial Corp 10.00 17.13 92.2 28.8 71.3
GS Financial Corp. 10.00 17.56 85.3 33.8 75.6
Market Financial Corp. 10.00 15.13 91.9 29.4 51.3
Vermilion Bancorp Inc. 10.00 13.50 88.3 23.8 35.0
Empire Federal Bancorp Inc. 10.00 17.00 90.2 32.5 70.0
FirstFed America Bancorp Inc. 10.00 20.56 98.1 36.3 105.6
Roslyn Bancorp Inc. 10.00 22.06 108.0 50.0 120.6
Advance Financial Bancorp 10.00 17.75 91.5 28.8 77.5
</TABLE>
-68-
<PAGE>
Feldman Financial Advisors, Inc.
- -------------------------------
mathematics of the calculation, would require dramatic increases in capital and
produce very marginal returns on equity. This would likely produce price
declines in the after-market. Accordingly, thrift conversions continue to be
priced at discounts to publicly traded companies. This is due to the relatively
high pro forma equity ratios, expected low returns on equity, and the
uncertainty regarding the ability of an institution to leverage the balance
sheet. These are especially relevant issues to the Association given its already
high level of capital.
Investors are aware that at pro forma price/book ratios approaching the
current trading range of a majority of public thrifts, price/earnings ratios of
converting thrifts would be excessive, returns on equity very low, and capital
levels dramatically high. Standard thrift conversions are being discounted by
30% to 40% relative to the overall market based upon price/book measures and at
lesser discounts based upon the price/earnings ratios.
Mutual Holding Company Issues
- -----------------------------
Market evidence indicates that minority ownership interests are discounted
to majority ownership interests, which convey the ability to effect changes,
influence business policies, and transfer control. In the thrift MHC ownership
structure, public shareholders hold an aggregate minority ownership interest
that is subordinate to the MHC. However, the governing board of the MHC is quite
often similar to that managing the subsidiary bank. Furthermore, the public
shareholders in a fully converted thrift offering also assume a minority
ownership role since there are limitations on the purchase and accumulation of
stock interests.
The most significant impediment that the MHC poses is the ability to avert
a sale of control by acquisition. Until recent, the trading activity of other
publicly held MHCs indicated that this inability to be acquired suppressed the
comparative market valuation of MHCs versus
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Feldman Financial Advisors, Inc.
- -------------------------------
fully converted thrift stock issues. However, the anticipation of second-stage
conversion announcements, the strong advancements posted by MHCs in general, and
a growing cadre of research analysts advancing the investment attributes of MHC
from prior trading levels have combined to propel MHC stock price performance in
1997. On a fully converted basis, we have determined that thrift MHCs are
trading at comparable price/earnings ratios to overall thrift stock norm, but at
discounts on a price/book basis. This discount is not so much a qualitative
abstraction but rather a recognition that the resulting high pro forma capital
ratios have a restraining impact on the price/book measure.
MHCs also have been typically characterized by reduced liquidity from the
full conversion valuations and higher dividend expectations. However, because of
the increased market valuations of thrift stocks in general and the relatively
low yields being earned on the increased thrift stock prices, these
characteristics are less important today than in prior periods. Furthermore,
given the size of the Association's expected Stock Offering and its trading
market, the issue of liquidity does not loom pivotal.
Many MHCs have completed full second-stage conversions within a relatively
short time frame. As previously noted, the imminent expectation of second-stage
offerings has resulted in speculative upward price movements of current MHCs. We
do not believe that an adjustment is warranted for these overall factors.
Adjustments Conclusion
- ----------------------
Individual discounts and premiums are not necessarily additive and may, to
some extent, offset or overlay each other. Currently, conversions are generally
priced at substantial discounts to peer institutions relative to price/book
ratios, but at lesser discounts to the
-70-
<PAGE>
Feldman Financial Advisors, Inc.
- -------------------------------
comparable institutions' price/earnings ratios. It is the role of the appraiser
to balance the relative dynamics of price/book and price/earnings discounts and
premiums. We believe that relative to the Comparative Group, the Association's
pro forma valuation measures should be discounted on the basis of certain
managerial direction issues as well as for the new issue discount encountered by
heavily capitalized companies on a price/book basis.
Valuation Approach
- ------------------
Table 22 displays the market price and valuation data of the Comparative
Group, all publicly traded thrifts and all MHCs as of December 11, 1997. Table
23 also includes the Association's pro forma valuation ratios on a full
conversion and MHC offering basis. Exhibit IV displays the pro forma conversion
assumptions and calculations utilized in analyzing the Association's valuation
ratios.
Investors continue to make decisions to purchase thrift conversion stocks
and more seasoned thrift issues based primarily upon consideration of
price/earnings ratio comparisons and secondarily, price/book valuations. As
evidenced by the trading valuation ratios of such highly capitalized and
superior earning Comparative Group members such as First Savings Bancorp, South
Street Financial Corp., and Haywood Bancshares, certain strong performing
institutions demonstrate valuation discounts because of their exceptionally high
financial ratios. Utilizing a discount of approximately 15% to the corresponding
Comparative Group average, the Association's resulting pro forma price/earnings
at the midpoint is 15.13x, reflecting a maximum price/earnings ratio of 16.59x
and an adjusted maximum of 18.13x. At the adjusted maximum valuation level,
where most thrift offerings are being closed in the current market environment,
the Association's price/earnings ratio is positioned at a 2.6% premium to the
-71-
<PAGE>
Feldman Financial Advisors, Inc.
- -------------------------------
Comparative Group's average price earnings ratio of 17.67x. We believe that this
is an appropriate discount given the level of earnings performance evidenced by
the Association and attendant challenge it faces in generating competitive
returns on equity.
The Association's resulting pro forma price/book ratio of 72.5% at the
maximum represents a significant discount to the Comparative Group's average
price/book ratio of 137.1%. However this disparity is distorted by the differing
levels of capital. On a full conversion basis, the Association's equity to
assets ratio would measure 26.10% at the maximum valuation and 27.87% at the
adjusted maximum. Among the Comparative Group companies, only South Street
Financial Corp. and First Savings Bancorp exhibit comparably high ratios of
25.66 and 23.017%, respectively. The trading price/book ratios of these highly
capitalized companies are discounted to market norms, measuring 127.6% for South
Street Financial Corp. and 128.9% for First Savings Bancorp.
The Association's price/assets ratios of 18.92% at the maximum and 21.24%
at the adjusted maximum valuation trailed the Comparative Group's average
price/assets ratio of 22.35%. However, the Association's pro forma price/assets
ratio is higher than all but four companies in the Comparative Group.
Valuation Conclusion
- --------------------
It is our opinion that, as of December 11, 1997, the aggregate estimated
pro forma market value of the Association was within the valuation range of
$28,900,000 to $39,100,000 with a midpoint of $34,000,000. The valuation range
was based upon a 15 percent decrease from the midpoint to determine the minimum
and a 15 percent increase to establish the maximum. Assuming an additional 15
percent increase above the maximum value results in an
-72-
<PAGE>
Feldman Financial Advisors, Inc.
- -------------------------------
adjusted maximum of $44,965,000. Exhibit IV displays the conversion calculations
and assumptions utilized in determining the Association's estimated pro forma
market value on a full conversion basis and on the MHC Reorganization basis. The
Board of Directors has determined to offer for sale in the Reorganization a
minority ownership interest equal to 47% of all the common stock to be issued
and outstanding. Therefore, the total amount of common stock to be sold in the
Reorganization will be equal to $13,583,000 at the minimum valuation,
$15,980,000 at the midpoint valuation, $18,377,000 at the maximum valuation, and
$21,133,550 at the adjusted maximum.
-73-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
<TABLE>
<CAPTION>
====================================================================================================================================
Table 22
Comparative Market Valuation Analysis
Market Price Data as of December 11, 1997
====================================================================================================================================
Current Total Price/ Price/ Price/ Price/ Price/ Current
Stock Market LTM Core Book Tang. Total Equity/ Dividend
Price Value EPS EPS Value Book Assets Assets Yield
($) ($M) (x) (x) (%) (%) (%) (%) (%)
----- ------ ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gaston Federal Savings
- ------------------------------------------------------------------------------------------------------------------------------------
MHC Offering -- Pro Forma Minimum 10.00 13.6 16.58 16.92 90.3 90.3 15.65 17.32 NA
MHC Offering -- Pro Forma Midpoint 10.00 16.0 18.98 19.36 99.8 99.8 18.20 18.24 NA
MHC Offering -- Pro Forma Maximum 10.00 18.4 21.25 21.66 108.2 108.2 20.71 19.13 NA
MHC Offering -- Pro Forma Adj. Max. 10.00 21.1 23.70 24.14 116.8 116.8 23.52 20.13 NA
- ------------------------------------------------------------------------------------------------------------------------------------
Full Conversion--Pro Forma Minimum 10.00 28.9 13.74 13.50 64.0 64.0 14.61 22.83 NA
Full Conversion--Pro Forma Midpoint 10.00 34.0 15.38 15.13 68.6 68.6 16.81 24.50 NA
Full Conversion--Pro Forma Maximum 10.00 39.1 16.85 16.59 72.5 72.5 18.92 26.10 NA
Full Conversion--Pro Forma Adj. Max. 10.00 45.0 18.40 18.13 76.2 76.2 21.24 27.87 NA
- ------------------------------------------------------------------------------------------------------------------------------------
All Public Thrift Average NA 215.5 17.52 16.95 154.3 160.1 18.40 12.59 1.53
All MHC Thrift Average NA 200.1 22.19 22.24 235.6 242.0 27.16 11.57 1.97
Comparative Group Average NA 50.1 17.67 18.93 137.1 139.4 18.70 13.84 2.07
- ------------------------------------------------------------------------------------------------------------------------------------
North Carolina Thrift Group Avg. NA 80.0 19.20 20.51 146.2 146.8 22.35 15.70 2.18
- ------------------------------------------------------------------------------------------------------------------------------------
Cooperative Bankshares Inc. 18.25 54.5 26.45 26.45 196.9 196.9 15.14 7.69 0.00
First Savings Bancorp Inc. 23.75 87.8 19.31 19.31 128.9 128.9 29.73 23.01 3.71
Haywood Bancshares Inc. 21.38 26.7 13.70 13.70 123.3 127.7 17.49 14.18 2.62
HFNC Financial Corp. 14.75 253.6 22.01 25.43 155.6 155.6 29.25 18.81 1.90
KS Bancorp Inc. 22.50 19.9 17.05 17.18 136.9 136.9 18.12 13.24 2.67
South Street Financial Corp. 18.94 85.2 NA NA 127.6 127.6 35.40 25.66 2.11
United Federal Savings Bank 10.50 32.3 16.67 21.00 154.0 154.0 11.30 7.33 2.29
- ------------------------------------------------------------------------------------------------------------------------------------
Other Thrift Group Avg. NA 29.16 16.66 17.87 130.8 134.2 16.15 12.53 2.00
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Savings Bancorp Inc. 23.25 44.0 19.54 20.04 198.7 198.7 18.15 9.14 1.03
Classic Bancshares Inc. 16.25 21.1 18.68 23.90 107.4 126.5 15.98 14.88 1.72
Community Financial Corp. 26.50 33.8 17.67 17.67 139.6 139.6 18.46 13.21 2.11
First Bancshares Inc. 26.00 28.4 15.29 16.88 125.4 125.4 17.47 13.92 0.77
FirstFed Bancorp Inc. 21.28 24.5 14.48 14.88 144.1 157.4 13.88 9.63 2.35
HFB Financial Corp. 15.50 16.8 9.87 11.92 99.2 99.2 10.44 10.52 2.71
OHSL Financial Corp. 26.50 32.7 16.16 16.67 123.7 123.7 13.95 10.92 3.32
River Valley Bancorp 18.13 21.6 NA NA 122.5 124.2 15.58 12.72 0.88
Southern Missouri Bancorp Inc. 20.13 32.4 21.41 21.88 123.0 123.0 19.87 16.15 2.48
Wells Financial Corp. 18.50 36.3 16.82 16.97 124.5 124.5 17.70 14.22 2.60
</TABLE>
Source: Gaston FS&LA; SNL Securities; Feldman Financial
-74-
<PAGE>
IV
<PAGE>
Feldman Financial Advisors, Inc.
Exhibit I
Background of Feldman Financial Advisors, Inc.
Overview of Firm
- ----------------
FELDMAN FINANCIAL ADVISORS provides consulting services to financial
institutions and mortgage companies in the areas of corporate valuations,
mergers and acquisitions, strategic planning, branch sales and purchases,
developing and implementing regulatory business and capital plans, enhancing
franchise value, portfolio analysis and restructuring, advising on retail branch
strategies, evaluating bank management, regulatory analysis, and expert witness
testimony and analysis.
FELDMAN FINANCIAL ADVISORS was incorporated in February 1996 by a group of
consultants who were previously associated with Kaplan Associates. Each of the
principals at Feldman Financial Advisors has more than 10 years experience in
consulting and all were officers of their former employer. Our principals
collectively have worked with more than 1,000 banks, thrifts and mortgage
companies nationwide. The firm's office is located in downtown Washington, D.C.
Background of Senior Professional Staff
- ---------------------------------------
TRENT FELDMAN, President - Trent is a nationally recognized expert in valuing
financial institutions, providing strategic advice to financial institutions,
and advising on mergers and acquisitions for banks and thrifts of all sizes.
Trent was with Kaplan Associates for 14 years and was one of three founding
principals at that firm. Trent also has worked in the Chairman's Office of the
Federal Home Loan Bank Board, the Federal Savings and Loan Insurance
Corporation, and with the California state legislature. Trent holds Bachelors
and Masters degrees from the University of California at Los Angeles.
PETER WILLIAMS, Principal - Peter specializes in merger and acquisition
analysis, corporate valuations, strategic business plans and retail branch
analysis. Peter was with Kaplan Associates for 13 years. Peter also served as a
Corporate Planning Analyst with the Wilmington Trust Company in Delaware. Peter
holds a BA in Economics from Yale University and an MBA in Finance from George
Washington University.
MICHAEL GREEN, Principal - Mike is an expert in mergers and acquisition
analysis, financial institution valuations, and business plans. During Mike's 10
years at Kaplan Associates, his experience also included mark-to-market
analysis, goodwill valuations and core deposit studies. Mike holds a BS in
Finance and Economics from Rutgers College.
LINDA FARRELL, Principal - Linda is nationally known for her expertise in branch
purchases and sales, and she specializes in small bank mergers and acquisitions,
retail banking analysis, business plans and management reviews. Linda was with
Kaplan Associates for 12 years. Linda also was a Senior Vice President of Retail
Banking at Western Savings in Salt Lake City and a consultant with both Arthur
Young & Company and Richard T. Pratt Associates. Linda holds a BA in English
from Oklahoma State University and an MBA from the University of Utah.
GREG IZYDORCZYK, Vice President - Greg specializes in merger and acquisition
analysis and corporate valuations and also has experience in mark-to-market
analysis and business plans. Greg was with Kaplan Associates for three years.
Greg also has four years experience as a Senior Auditor in the commercial
banking industry for First Virginia and Integra Financial. Greg worked as a
Financial Analyst with Airbus Industrie of North America for two years
performing analysis on the airline industry and airline capital markets (debt
and leasing) in North America, preparing financial proposals in conjunction with
commercial sales proposals and analyzing the Company's current and potential
financing portfolio. Greg holds a BS in Finance from Pennsylvania State
University and an MBA in Finance from the Katz Graduate School, University of
Pittsburgh.
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit II-1
Statement of Financial Condition
As of September 30, 1996 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
- ------
Cash and due from banks $ 2,422 $ 1,655
Short-term investments 2,203 508
Securities available for sale 8,248 5,515
Securities held to maturity 10,407 14,751
Mortgage-backed securities 10,087 12,918
Loans 135,601 131,692
Allowance for loan losses (1,110) (830)
--------- ---------
Net loans 134,491 130,862
--------- ---------
Accrued interest receivable 981 995
Bank premises and equipment, net 2,139 2,327
Other real estate owned, net 247 0
FHLB stock 1,276 1,261
Other assets 941 1,159
--------- ---------
TOTAL ASSETS $ 173,470 $ 171,953
========= =========
LIABILITIES AND RETAINED EARNINGS
- ---------------------------------
Deposits $ 145,444 $ 145,975
Borrowed funds 3,500 3,750
Accrued interest payable 412 408
Mortgagors' escrow deposits 1,042 791
Deferred income taxes 424 183
Accrued expenses and other liabilities 1,780 1,762
--------- ---------
TOTAL LIABILITIES $ 152,602 $ 152,869
--------- ---------
Retained earnings:
Retained earnings 19,769 18,337
Net unrealized gain on securities
available for sale, net of taxes 1,099 746
--------- ---------
TOTAL RETAINED EARNINGS 20,868 19,084
--------- ---------
TOTAL LIABILITIES AND
RETAINED EARNINGS $ 173,470 $ 171,953
========= =========
</TABLE>
II-1
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit II-2
Statement of Income
For the Years Ended September 30, 1995 to 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended
September 30,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Total interest income $ 12,936 $ 12,518 $ 11,548
Total interest expense 6,952 7,381 6,304
-------- -------- --------
Net interest income 5,984 5,137 5,243
Provision for loan losses (293) (47) (60)
-------- -------- --------
Net int. income after prov 5,691 5,090 5,183
Service charges on deposit accts 209 189 --
Gain on sale of securities 52 -- 1
Other income 256 228 371
-------- -------- --------
Total non-interest income 516 417 372
Compensation and benefits 2,228 1,976 1,755
Occupancy 465 500 364
Professional services 184 174 171
Deposit insurance premiums 139 1,197 298
Other expense 941 828 756
-------- -------- --------
Total non-interest expense 3,957 4,645 3,344
Income before taxes 2,251 861 2,212
Income tax provision 819 351 792
-------- -------- --------
Net income $ 1,432 $ 510 $ 1,420
======== ======== ========
</TABLE>
II-2
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit II-3
Loan Portfolio Composition
At September 30, 1996 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------
1997 1996
------------------------- -------------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
<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 6,824 5.02
Commercial 7,277 5.23 6,355 4.67
Multi-family residential 6,514 4.68 6,843 5.03
Land 41 0.03 106 0.08
-------- ------ -------- ------
Total mortgage loans 126,123 90.66 124,491 91.52
-------- ------ -------- ------
Commercial loans 5,558 4.00 5,160 3.79
Consumer loans
- --------------
Home equity 5,651 4.06 4,747 3.49
Loans on deposit 688 0.49 709 0.52
Other 1,091 0.78 923 0.68
-------- ------ -------- ------
Total consumer loans 7,430 5.33 6,379 4.69
Total loans $139,111 100.00% $136,030 100.00%
-------- ------ -------- ------
Less:
Loans in process 2,990 2.15 3,812 2.80
Deferred loan origination fees 520 0.37 526 0.39
Allowance for loan losses 1,110 0.79 803 0.61
-------- ------ -------- ------
Total loans, net $134,501 96.69% $130,862 94.07%
======== ====== ======== ======
</TABLE>
II-3
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit II-4
Net Lending Activity
For the Years Ended September 30, 1996 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended
September 30,
-------------
1997 1996
---- ----
<S> <C> <C>
Total mortgage loans receivable at beginning of period $ 124,491 $ 128,841
Mortgage loans originated
- -------------------------
One-to-four family residential 12,608 18,466
Construction 7,536 8,6459
Commercial 1,747 1,235
Multi-family 0 2,513
--------- ---------
Total mortgage loans 21,891 30,859
Principal repayments 16,634 23,585
--------- ---------
Net loan activity (3,915) (11,624)
Total mortgage loans receivable at end of period $ 126,123 $ 124,491
========= =========
</TABLE>
II-4
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit II-5
Investment Portfolio Composition
At September 30, 1996 and 1997
(Dollars in Thousands)
<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>
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 &
FIIG Stock 44 1,542 1,586 94 1,073 1,167
------- -------- ------- ------- ------- ------
Total other investments
available for sale $ 4,455 $ 1,784 $ 6,239 $ 4,250 $ 1,265 $ 5,515
===== ======== ====== ====== ======= ======
</TABLE>
II-5
<PAGE>
Feldman Financial Advisors, Inc
- -------------------------------
Exhibit II-6
Deposit Account Distribution
For the Year Ended September 30, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Balance
Minimum as of Percentage
Interest Balance Sept.30, of Total
Term Rate Amount 1997 Deposits
---- ---- ------ ---- --------
<S> <C> <C> <C> <C> <C>
Non-interest NOW accounts None 0.00% $ 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
--------- -------
Total transaction deposit accounts 43,126 29.65
--------- -------
Certificate of deposit accounts:
91 day 4.34 500 1,101 0.76
6 months 5.23 500 30,466 20.95
12 months 5.31 500 16,996 11.96
18 months 5.35 500 3,692 2.54
24 months 6.02 500 3,962 2.72
30 months 6.16 500 10,849 7.46
36 months 5.93 500 2,344 1.61
Various (1) 5.86 50,000 13,862 9.53
Fixed rate IRA 18 months 5.48 25 70 0.05
Variable rate IRA 18 months 5.44 500 13,862 13.05
--------- -------
Total certificate of deposit accounts 102,318 70.35
--------- -------
Total deposits $ 145,444 100.00%
========= ========
</TABLE>
II-6
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit II-7
Borrowed Funds Activity
Year Ended September 30, 1996 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended
September 30,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Advances from the FHLB
- ----------------------
Average balance outstanding $2,309 $1,403
Maximum amount outstanding at any
month end during the period 3,500 3,800
Balance outstanding at end of period 3,500 3,800
Weighted average interest rate
during the period 6.37% 6.27%
</TABLE>
II-7
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit II-8
Office Facilities
As of September 30, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Net Book Value
of Property or
Original Year Leasehold
Leased or Leased or Year of Lease Improvements at
Location Owned Acquired Expiration September 30, 1997
- ------------------------------- ------------ ---------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Corporate/Main Office
- ---------------------
245 West Main Street Owned 1971 Not Applicable $373
Gastonia, NC 28052
Other Branch Offices
- --------------------
1670 Neal Hawkins Road Owned 1976 Not Applicable 174
Gastonia, NC 28053
1535 Burtonwood Drive Owned 1990 Not Applicable 546
Gastonia, NC 28054
233 South Main Street Owned 1987 Not Applicable 444
Mount Holly, NC 28120
</TABLE>
II-8
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III
Market Valuation and Financial Data for All Public Thrifts
<TABLE>
<CAPTION>
===============================================================================================================================
LTM LTM Stock Total
Total Core Core Price Market
Assets ROAA ROAE 12/11/97 Value
Company Ticker St. ($000) (%) (%) ($) ($M)
===============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
1ST Bancorp FBCV IN 260,935 0.36 4.40 26.000 26.98
1st Bergen Bancorp FBER NJ 284,739 0.77 4.94 19.500 55.86
Abington Bancorp Inc. ABBK MA 501,622 0.76 11.05 37.000 67.52
Acadiana Bancshares Inc. ANA LA 274,018 0.95 5.44 23.625 62.77
Access Anytime Bancorp Inc. AABC NM 105,639 1.34 20.89 10.750 12.83
Advance Financial Bancorp AFBC WV 105,717 0.86 5.92 17.750 19.25
Affiliated Community Bancorp AFCB MA 1,128,579 1.08 11.05 33.000 214.44
AFSALA Bancorp Inc. AFED NY 159,181 0.71 5.54 18.750 26.03
ALBANK Financial Corp. ALBK NY 3,716,954 1.05 11.35 46.125 593.99
Albion Banc Corp. ALBC NY 70,810 0.49 5.46 28.000 7.00
Algiers Bancorp Inc. ALGC LA 45,325 0.26 1.28 13.875 8.54
Alliance Bancorp Inc. ABCL IL 1,371,184 0.84 9.35 26.500 212.56
Alliance Bncorp of New England ANE CT 241,918 0.76 10.93 16.750 27.25
AMB Financial Corp. AMFC IN 103,388 0.73 4.46 16.750 16.14
Ambanc Holding Co. AHCI NY 529,309 (0.61) (4.74) 17.000 73.21
Ameriana Bancorp ASBI IN 393,028 0.83 7.60 20.250 65.44
American Bank of Connecticut BKC CT 609,923 1.10 13.05 49.125 113.64
AmTrust Capital Corp. ATSB IN 69,685 0.23 2.27 13.750 7.24
Anchor BanCorp Wisconsin ABCW WI 1,954,749 0.93 14.53 34.875 317.01
Andover Bancorp Inc. ANDB MA 1,280,601 1.03 12.93 37.500 193.22
Argo Bancorp Incorporated ARGO IL 229,026 (0.09) (1.23) 34.125 16.60
ASB Financial Corp. ASBP OH 112,449 0.91 5.53 13.500 22.53
Astoria Financial Corp. ASFC NY 7,904,363 0.77 9.80 56.750 1,172.79
Avondale Financial Corp. AVND IL 596,918 (1.94) (20.35) 16.375 57.22
Bancorp Connecticut Inc. BKCT CT 423,800 1.24 12.06 25.000 127.20
Bank Plus Corp. BPLS CA 3,920,257 0.30 6.27 12.500 241.76
Bank United Corp. BNKU TX 11,967,072 0.54 10.48 42.500 1,342.81
Bank West Financial Corp. BWFC MI 164,854 0.57 3.72 16.000 41.96
BankAtlantic Bancorp Inc. BANC FL 2,844,996 0.54 9.57 15.375 339.59
BankPlus FSB BNKP IL 195,076 0.73 11.40 18.000 12.36
BankUnited Financial Corp. BKUNA FL 2,145,406 0.48 7.49 13.625 129.88
Baxley Federal Savings Bank BAXF GA 103,219 1.43 9.18 18.000 9.93
Bay View Capital Corp. BVCC CA 3,162,207 0.61 9.92 34.375 426.98
Bayonne Bancshares Inc. FSNJ NJ 609,053 0.53 5.77 12.250 110.87
Bedford Bancshares Inc. BFSB VA 139,179 1.19 8.34 28.250 32.27
Big Foot Financial Corp. BFFC IL 215,162 NA NA 19.250 48.37
Big Sky Bancorp Incorporated FFLN MT 62,758 0.94 7.94 23.813 7.42
BostonFed Bancorp Inc. BFD MA 960,704 0.66 6.87 19.750 111.59
Broadway Financial Corp. BYFC CA 124,740 0.31 2.75 13.000 10.80
Calumet Bancorp Inc. CBCI IL 488,346 1.41 8.96 33.250 105.28
Camco Financial Corp. CAFI OH 502,186 0.99 10.23 24.875 79.96
Cameron Financial Corp CMRN MO 212,504 1.25 5.45 21.000 53.80
Carolina Fincorp Inc. CFNC NC 114,069 1.16 5.32 17.750 32.86
<CAPTION>
==================================================================================================================================
Price/ Price/ Price/ Price/ Price/
LTM Core Book Tang. Total Div.
EPS EPS Value Book Assets Yield
Company Ticker St. (x) (x) (%) (%) (%) (%)
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1ST Bancorp FBCV IN 14.36 28.26 119.54 121.84 10.34 1.08
1st Bergen Bancorp FBER NJ 26.71 26.71 143.70 143.70 19.62 1.03
Abington Bancorp Inc. ABBK MA 17.54 19.58 190.43 210.11 13.46 1.08
Acadiana Bancshares Inc. ANA LA 22.08 22.72 137.27 137.27 22.91 1.52
Access Anytime Bancorp Inc. AABC NM 8.60 9.60 143.14 143.14 12.15 -
Advance Financial Bancorp AFBC WV NA NA 118.25 118.25 18.21 1.80
Affiliated Community Bancorp AFCB MA 18.97 18.97 190.97 191.97 19.00 1.82
AFSALA Bancorp Inc. AFED NY NA NA 117.78 117.78 16.35 1.28
ALBANK Financial Corp. ALBK NY 17.34 17.41 172.82 196.19 15.98 1.56
Albion Banc Corp. ALBC NY 21.05 21.37 115.46 115.46 9.89 1.14
Algiers Bancorp Inc. ALGC LA 42.05 69.38 90.45 90.45 18.84 1.44
Alliance Bancorp Inc. ABCL IL 22.84 20.54 164.60 166.56 15.50 1.66
Alliance Bncorp of New England ANE CT 14.57 15.51 152.97 156.69 11.26 1.19
AMB Financial Corp. AMFC IN 16.75 23.93 112.04 112.04 15.61 1.67
Ambanc Holding Co. AHCI NY NM (30.91) 121.60 121.60 13.83 1.18
Ameriana Bancorp ASBI IN 18.08 19.85 148.57 148.68 16.65 3.16
American Bank of Connecticut BKC CT 15.40 18.26 211.56 219.50 18.63 2.93
AmTrust Capital Corp. ATSB IN 24.55 40.44 95.09 96.02 10.39 1.46
Anchor BanCorp Wisconsin ABCW WI 17.61 18.85 252.35 256.81 16.22 0.92
Andover Bancorp Inc. ANDB MA 15.06 15.43 185.64 185.64 15.09 2.03
Argo Bancorp Incorporated ARGO IL 14.84 (57.84) 94.27 95.29 7.25 2.11
ASB Financial Corp. ASBP OH 19.85 21.09 131.07 131.07 20.04 2.96
Astoria Financial Corp. ASFC NY 19.64 20.79 192.31 227.36 14.84 1.06
Avondale Financial Corp. AVND IL NM (4.83) 124.24 124.24 9.59 -
Bancorp Connecticut Inc. BKCT CT 24.04 26.60 279.02 279.02 30.01 2.00
Bank Plus Corp. BPLS CA 18.38 21.93 136.46 136.76 6.17 -
Bank United Corp. BNKU TX 17.56 22.61 224.39 229.61 11.22 1.51
Bank West Financial Corp. BWFC MI 25.81 45.71 180.38 180.38 25.45 1.33
BankAtlantic Bancorp Inc. BANC FL 16.18 30.15 218.71 264.18 11.94 0.86
BankPlus FSB BNKP IL 9.33 9.57 104.59 104.59 6.34 -
BankUnited Financial Corp. BKUNA FL 25.23 28.39 171.60 218.00 6.05 -
Baxley Federal Savings Bank BAXF GA 6.62 6.62 72.73 72.73 9.62 4.44
Bay View Capital Corp. BVCC CA 26.04 23.71 232.11 277.89 13.50 0.93
Bayonne Bancshares Inc. FSNJ NJ NA NA 115.78 115.78 18.20 1.39
Bedford Bancshares Inc. BFSB VA 19.22 19.35 156.60 156.60 23.19 1.98
Big Foot Financial Corp. BFFC IL NA NA 128.59 128.59 22.48 -
Big Sky Bancorp Incorporated FFLN MT 13.69 13.69 98.32 98.32 11.82 -
BostonFed Bancorp Inc. BFD MA 17.48 19.17 128.00 132.91 11.62 1.42
Broadway Financial Corp. BYFC CA 33.33 30.23 88.02 88.02 8.66 1.54
Calumet Bancorp Inc. CBCI IL 16.46 16.79 132.95 132.95 21.56 -
Camco Financial Corp. CAFI OH 14.38 16.92 166.05 179.47 15.92 2.17
Cameron Financial Corp CMRN MO 21.65 21.65 120.48 120.48 25.32 1.33
Carolina Fincorp Inc. CFNC NC NA NA 127.51 127.51 28.81 1.35
</TABLE>
III-1
<PAGE>
Feldman Financial Adviors, Inc.
- -------------------------------
Exhibit III
Market Valuation and Financial Data for All Public Thrifts
<TABLE>
<CAPTION>
============================================================================================================================
LTM LTM Stock Total
Total Core Core Price Market
Assets ROAA ROAE 12/11/97 Value
Company Ticker St. ($000) (%) (%) ($) ($M)
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Carver Bancorp Inc. CNY NY 415,561 0.18 2.08 16.625 38.47
Cascade Financial Corp. CASB WA 426,451 0.61 9.55 13.250 44.88
Catskill Financial Corp. CATB NY 289,619 1.37 5.11 17.375 80.92
CBES Bancorp Inc. CBES MO 106,635 1.13 6.28 21.875 22.42
CCF Holding Company CCFH GA 109,342 (0.15) (1.17) 19.750 16.20
Cecil Bancorp Inc. CECB MD 64,313 0.80 6.89 19.500 9.17
CENIT Bancorp Inc. CNIT VA 701,708 0.78 10.96 66.500 110.02
Central Co-operative Bank CEBK MA 358,424 0.83 8.20 26.875 52.81
Century Bancorp Inc. CENB NC 100,937 1.59 6.25 83.000 33.81
CFSB Bancorp Inc. CFSB MI 859,962 1.14 14.86 35.875 182.25
Charter One Financial COFI OH 15,196,993 1.24 18.34 62.000 3,953.61
Chester Valley Bancorp Inc. CVAL PA 322,321 0.93 10.83 27.125 59.39
CitFed Bancorp Inc. CTZN OH 3,294,554 0.87 13.46 38.250 496.65
Citizens Bancorp Inc. CIBC IN 51,365 1.46 10.06 15.120 16.00
Citizens First Financial Corp. CBK IL 277,962 0.54 3.70 18.063 46.67
CKF Bancorp Inc. CKFB KY 59,868 1.37 5.63 18.500 16.71
Classic Bancshares Inc. CLAS KY 132,186 0.62 4.25 16.250 21.12
CNS Bancorp Inc. CNSB MO 97,411 0.80 3.23 21.500 35.54
Coastal Bancorp Inc. CBSA TX 2,929,560 0.40 11.94 29.125 145.40
Coastal Financial Corp. CFCP SC 494,003 1.05 16.81 22.250 103.39
Commercial Federal Corp. CFB NE 7,207,143 0.94 15.97 52.875 1,141.65
Commonwealth Bancorp Inc. CMSB PA 2,278,099 0.58 5.76 21.250 345.20
Community Federal Bancorp CFTP MS 215,953 1.45 4.71 18.500 85.63
Community Financial Corp. CFFC VA 183,278 1.13 8.22 26.500 33.84
Community First Banking Co. CFBC GA 394,570 0.48 4.41 39.500 95.34
Community Investors Bancorp CIBI OH 94,328 0.97 8.37 16.250 14.66
Cooperative Bankshares Inc. COOP NC 359,535 0.63 8.21 18.250 54.45
Crazy Woman Creek Bancorp CRZY WY 59,952 1.30 4.79 15.375 14.68
CSB Financial Group Inc. CSBF IL 48,844 0.51 1.99 13.500 12.71
Cumberland Mountain Bancshares CMBN KY 128,838 0.86 12.51 16.250 11.03
D & N Financial Corp. DNFC MI 1,754,069 0.83 14.74 26.500 218.47
Delphos Citizens Bancorp Inc. DCBI OH 107,796 1.61 8.03 17.250 33.80
Dime Bancorp Inc. DME NY 19,413,597 0.66 12.47 26.000 2,638.79
Dime Community Bancorp Inc. DIME NY 1,385,356 1.04 6.55 23.500 296.68
Dime Financial Corp. DIBK CT 921,510 1.90 23.53 30.000 154.87
Downey Financial Corp. DSL CA 5,853,968 0.70 9.58 28.375 759.14
Eagle BancGroup Inc. EGLB IL 172,160 0.24 2.00 19.250 22.91
Eagle Bancshares EBSI GA 872,706 0.76 8.90 19.000 108.27
East Side Financial Inc. ESDF IL 74,057 0.85 5.43 23.125 7.33
East Texas Financial Services ETFS TX 115,949 0.62 3.44 20.000 20.53
Elmira Savings Bank (The) ESBK NY 228,268 0.34 5.40 30.000 22.25
Emerald Financial Corp. EMLD OH 603,493 0.97 12.70 19.625 99.53
Empire Federal Bancorp Inc. EFBC MT 110,540 NA NA 16.250 42.12
<CAPTION>
===================================================================================================================================
Price/ Price/ Price/ Price/ Price/
LTM Core Book Tang. Total Div.
EPS EPS Value Book Assets Yield
Company Ticker St. (x) (x) (%) (%) (%) (%)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carver Bancorp Inc. CNY NY NM 50.38 110.25 114.66 9.26 -
Cascade Financial Corp. CASB WA 18.66 18.93 158.49 158.49 10.52 -
Catskill Financial Corp. CATB NY 21.19 21.72 112.75 112.75 27.94 1.84
CBES Bancorp Inc. CBES MO 17.09 18.86 124.29 124.29 21.02 1.83
CCF Holding Company CCFH GA 131.67 (98.75) 138.99 138.99 14.82 2.79
Cecil Bancorp Inc. CECB MD 15.85 17.57 123.26 123.26 14.26 2.05
CENIT Bancorp Inc. CNIT VA 20.15 20.65 214.45 234.15 15.68 1.50
Central Co-operative Bank CEBK MA 17.92 19.06 148.89 165.38 14.73 1.19
Century Bancorp Inc. CENB NC NA NA 110.59 110.59 33.50 2.41
CFSB Bancorp Inc. CFSB MI 19.18 20.50 275.33 275.33 21.19 1.90
Charter One Financial COFI OH 17.17 17.56 286.64 312.03 26.02 1.61
Chester Valley Bancorp Inc. CVAL PA 19.94 21.03 210.43 210.43 18.43 1.62
CitFed Bancorp Inc. CTZN OH 20.03 20.03 240.26 264.34 15.07 0.63
Citizens Bancorp Inc. CIBC IN NA NA 104.71 104.71 31.15 -
Citizens First Financial Corp. CBK IL 31.14 34.74 110.82 110.82 16.79 -
CKF Bancorp Inc. CKFB KY 14.80 19.68 109.40 109.40 27.91 2.70
Classic Bancshares Inc. CLAS KY 18.68 23.90 107.40 126.46 15.98 1.72
CNS Bancorp Inc. CNSB MO 42.16 41.35 149.93 149.93 36.48 1.12
Coastal Bancorp Inc. CBSA TX 12.39 12.89 144.68 172.13 4.96 1.65
Coastal Financial Corp. CFCP SC 18.70 21.60 319.23 319.23 20.93 1.62
Commercial Federal Corp. CFB NE 17.74 17.68 256.80 286.90 15.84 0.62
Commonwealth Bancorp Inc. CMSB PA 21.04 27.24 163.21 209.36 15.15 1.32
Community Federal Bancorp CFTP MS 26.43 26.43 138.06 138.06 39.65 1.62
Community Financial Corp. CFFC VA 17.67 17.67 139.55 139.55 18.46 2.11
Community First Banking Co. CFBC GA NA NA 125.44 127.13 24.16 1.52
Community Investors Bancorp CIBI OH 15.48 15.48 134.41 134.41 15.54 1.97
Cooperative Bankshares Inc. COOP NC 26.45 26.45 196.87 196.87 15.14 -
Crazy Woman Creek Bancorp CRZY WY 21.06 20.78 103.33 103.33 24.49 2.60
CSB Financial Group Inc. CSBF IL 79.41 50.00 103.93 110.02 26.02 -
Cumberland Mountain Bancshares CMBN KY NA NA 124.81 124.81 8.56 -
D & N Financial Corp. DNFC MI 16.36 17.67 237.03 239.39 12.46 0.76
Delphos Citizens Bancorp Inc. DCBI OH NA NA 117.75 117.75 31.36 -
Dime Bancorp Inc. DME NY 20.97 21.31 250.48 263.16 13.59 0.62
Dime Community Bancorp Inc. DIME NY 21.96 23.27 158.68 184.17 21.42 1.02
Dime Financial Corp. DIBK CT 10.17 10.42 206.33 212.46 16.81 1.47
Downey Financial Corp. DSL CA 19.17 20.12 181.77 184.13 12.97 1.13
Eagle BancGroup Inc. EGLB IL 42.78 56.62 113.04 113.04 13.31 -
Eagle Bancshares EBSI GA 22.09 17.92 150.91 150.91 12.41 3.16
East Side Financial Inc. ESDF IL 11.34 11.92 60.58 60.58 9.90 4.67
East Texas Financial Services ETFS TX 25.64 27.40 98.33 98.33 17.71 1.00
Elmira Savings Bank (The) ESBK NY 23.08 28.57 149.48 153.53 9.75 2.03
Emerald Financial Corp. EMLD OH 16.49 17.68 211.48 214.72 16.49 1.22
Empire Federal Bancorp Inc. EFBC MT NA NA 104.77 104.77 38.10 1.85
</TABLE>
III-2
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III
Market Valuation and Financial Data for All Public Thrifts
<TABLE>
<CAPTION>
====================================================================================================================================
LTM LTM Stock Total Price/
Total Core Core Price Market LTM
Assets ROAA ROAE 12/11/97 Value EPS
Company Ticker St. ($000) (%) (%) ($) ($M) (x)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Enterprise Federal Bancorp EFBI OH 274,888 0.78 6.14 28.250 56.10 22.97
Equitable Federal Savings Bank EQSB MD 308,197 0.73 14.49 48.500 29.21 23.54
Essex Bancorp Inc. ESX VA 191,886 0.02 0.30 4.625 4.89 NM
Falmouth Bancorp Inc. FCB MA 96,391 0.75 3.04 20.500 29.82 37.27
FCB Financial Corp. FCBF WI 522,991 1.09 6.92 28.250 109.59 22.60
Fed One Bancorp FOBC WV 357,721 0.94 8.26 26.000 61.71 19.40
FFBS BanCorp Inc. FFBS MS 134,952 1.41 7.42 22.250 34.98 18.54
FFD Financial Corp. FFDF OH 88,220 0.97 3.92 18.625 26.91 14.90
FFLC Bancorp Inc. FFLC FL 383,382 0.94 6.42 22.000 84.36 24.44
FFVA Financial Corp. FFFC VA 567,266 1.35 9.97 33.750 152.68 20.71
FFW Corp. FFWC IN 181,468 1.03 10.34 41.750 29.98 16.97
FFY Financial Corp. FFYF OH 610,974 1.26 8.58 32.000 131.66 17.30
Fidelity Bancorp Inc. FBCI IL 497,862 0.81 7.81 23.375 65.33 16.94
Fidelity Bancorp Inc. FSBI PA 380,951 0.76 11.19 27.500 42.76 16.08
Fidelity Federal Bancorp FFED IN 235,336 0.73 13.74 10.000 27.91 14.29
Fidelity Financial of Ohio FFOH OH 528,704 0.94 7.07 15.250 85.09 19.55
Financial Bancorp Inc. FIBC NY 296,956 0.98 10.16 24.375 41.67 16.25
First Allen Parish Bancorp FALN LA 33,228 0.97 7.10 16.500 4.36 12.79
First Bancshares Inc. FBSI MO 162,755 1.08 7.68 26.000 28.43 15.29
First Bell Bancorp Inc. FBBC PA 681,215 1.09 9.27 18.625 121.26 16.06
First Citizens Corp. FSTC GA 337,197 1.75 18.43 26.750 73.39 12.92
First Coastal Corp. FCME ME 148,571 3.97 44.97 14.750 20.05 3.28
First Colorado Bancorp Inc. FFBA CO 1,512,605 1.20 8.96 24.625 413.47 22.18
First Defiance Financial FDEF OH 574,364 1.00 4.67 15.000 134.35 25.00
First Essex Bancorp Inc. FESX MA 1,209,698 0.77 10.65 20.625 155.24 14.95
First Federal Bancorp Inc. FFBZ OH 203,703 0.97 12.73 20.000 31.50 17.54
First Federal Bancorporation BDJI MN 111,492 0.63 5.72 28.000 18.83 23.14
First Federal Bancshares of AR FFBH AR 547,119 1.01 6.51 23.625 115.67 19.52
First Federal Capital Corp. FTFC WI 1,559,672 0.90 13.94 30.000 274.95 18.07
First Federal Financial Corp. FFKY KY 382,585 1.62 11.85 22.250 92.25 15.24
First Federal Finl Bncp Inc. FFFB OH 59,315 0.67 3.57 16.125 10.68 48.86
First Federal of East Hartford FFES CT 987,416 0.60 9.47 37.125 99.58 19.85
First Financial Bancorp Inc. FFBI IL 84,242 0.42 5.18 21.000 8.72 NM
First Financial Holdings Inc. FFCH SC 1,712,931 0.85 13.85 48.000 305.68 21.52
First Franklin Corp. FFHS OH 231,189 0.65 7.31 26.000 30.99 25.49
First Georgia Holding Inc. FGHC GA 156,383 0.78 9.53 8.250 25.18 27.50
First Home Bancorp Inc. FSPG NJ 525,092 0.91 13.69 28.875 78.21 16.79
First Independence Corp. FFSL KS 112,523 0.65 6.09 15.000 14.67 22.06
First Indiana Corporation FISB IN 1,547,121 0.95 9.90 29.500 311.56 18.67
First Keystone Financial FKFS PA 373,430 0.77 10.53 36.750 45.14 16.19
First Lancaster Bancshares FLKY KY 47,184 1.24 3.64 15.750 14.98 28.64
First Liberty Financial Corp. FLFC GA 1,288,919 0.94 12.81 30.875 238.68 23.57
First Midwest Financial Inc. CASH IA 404,589 0.88 8.04 22.000 59.38 17.32
<CAPTION>
======================================================================================================================
Price/ Price/ Price/ Price/
Core Book Tang. Total Div.
EPS Value Book Assets Yield
Company Ticker St. (x) (%) (%) (%) (%)
======================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Enterprise Federal Bancorp EFBI OH 27.43 178.57 178.68 20.41 3.54
Equitable Federal Savings Bank EQSB MD 14.70 187.98 187.98 9.48 -
Essex Bancorp Inc. ESX VA (3.89) NM NM 2.55 -
Falmouth Bancorp Inc. FCB MA 41.00 130.74 130.74 30.94 0.98
FCB Financial Corp. FCBF WI 22.07 150.91 150.91 20.95 2.83
Fed One Bancorp FOBC WV 19.55 149.00 155.88 17.25 2.39
FFBS BanCorp Inc. FFBS MS 18.54 147.64 147.64 25.92 2.25
FFD Financial Corp. FFDF OH 30.04 125.34 125.34 30.50 1.61
FFLC Bancorp Inc. FFLC FL 25.88 160.23 160.23 22.00 1.31
FFVA Financial Corp. FFFC VA 21.50 189.18 193.08 26.92 1.42
FFW Corp. FFWC IN 17.32 169.44 186.72 16.52 1.73
FFY Financial Corp. FFYF OH 17.58 157.64 157.64 21.55 2.50
Fidelity Bancorp Inc. FBCI IL 16.94 125.27 125.54 13.12 1.37
Fidelity Bancorp Inc. FSBI PA 16.37 165.17 165.17 11.22 1.31
Fidelity Federal Bancorp FFED IN 14.71 194.17 194.17 11.86 4.00
Fidelity Financial of Ohio FFOH OH 17.13 123.58 139.40 16.09 1.84
Financial Bancorp Inc. FIBC NY 15.33 155.16 155.85 14.03 1.64
First Allen Parish Bancorp FALN LA 12.79 95.76 95.76 13.12 1.82
First Bancshares Inc. FBSI MO 16.88 125.36 125.36 17.47 0.77
First Bell Bancorp Inc. FBBC PA 16.48 169.01 169.01 17.80 2.15
First Citizens Corp. FSTC GA 14.46 215.03 272.96 21.76 1.10
First Coastal Corp. FCME ME 3.41 138.37 138.37 13.50 -
First Colorado Bancorp Inc. FFBA CO 22.18 205.21 207.98 27.33 1.95
First Defiance Financial FDEF OH 25.42 118.95 118.95 23.39 2.13
First Essex Bancorp Inc. FESX MA 17.63 173.32 198.13 12.83 2.33
First Federal Bancorp Inc. FFBZ OH 18.35 220.75 220.99 15.46 1.40
First Federal Bancorporation BDJI MN 23.73 157.75 157.75 16.89 -
First Federal Bancshares of AR FFBH AR 20.54 141.98 141.98 21.14 1.02
First Federal Capital Corp. FTFC WI 21.74 261.78 277.78 17.63 1.60
First Federal Financial Corp. FFKY KY 15.45 176.59 187.13 24.11 2.52
First Federal Finl Bncp Inc. FFFB OH 25.60 99.97 99.97 18.01 1.74
First Federal of East Hartford FFES CT 17.51 152.15 152.15 10.08 1.62
First Financial Bancorp Inc. FFBI IL 23.08 116.02 116.02 10.35 -
First Financial Holdings Inc. FFCH SC 22.12 291.79 291.79 17.85 1.75
First Franklin Corp. FFHS OH 21.49 148.66 149.51 13.40 1.54
First Georgia Holding Inc. FGHC GA 22.30 195.96 213.73 16.10 0.65
First Home Bancorp Inc. FSPG NJ 17.19 216.94 220.25 14.89 1.39
First Independence Corp. FFSL KS 22.06 127.33 127.33 13.04 1.67
First Indiana Corporation FISB IN 22.52 208.92 211.47 20.14 1.63
First Keystone Financial FKFS PA 17.67 182.38 182.38 12.09 0.54
First Lancaster Bancshares FLKY KY 28.64 107.73 107.73 31.75 3.18
First Liberty Financial Corp. FLFC GA 20.18 251.02 278.40 18.52 1.43
First Midwest Financial Inc. CASH IA 18.18 136.56 153.74 14.68 2.18
</TABLE>
III-3
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III
Market Valuation and Financial Data for All Public Thrifts
<TABLE>
<CAPTION>
====================================================================================================================================
LTM LTM Stock Total Price/
Total Core Core Price Market LTM
Assets ROAA ROAE 12/11/97 Value EPS
Company Ticker St. ($000) (%) (%) ($) ($M) (x)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Mutual Bancorp Inc. FMBD IL 402,389 0.28 1.95 20.000 70.13 58.82
First Mutual Savings Bank FMSB WA 451,120 1.00 15.00 17.000 69.14 16.67
First Northern Capital Corp. FNGB WI 656,745 0.89 7.88 13.875 122.73 21.68
First Palm Beach Bancorp Inc. FFPB FL 1,808,420 0.50 7.31 38.750 195.60 20.95
First Savings Bancorp Inc. SOPN NC 295,315 1.76 7.28 23.750 87.80 19.31
First SB of Washington Bancorp FWWB WA 1,098,615 1.17 7.97 26.000 266.41 20.00
First SecurityFed Financial FSFF IL 267,332 NA NA 15.938 102.13 NA
First Shenango Bancorp Inc. SHEN PA 401,437 1.17 10.46 33.000 68.28 14.80
FirstBank Corp. FBNW ID 177,870 0.51 5.55 18.125 35.96 NA
FirstFed America Bancorp Inc. FAB MA 1,036,062 0.47 4.89 20.250 176.32 NA
FirstFed Bancorp Inc. FFDB AL 176,464 1.01 10.32 21.281 24.49 14.48
FirstFed Financial Corp. FED CA 4,104,647 0.56 11.68 38.188 404.32 17.76
FirstSpartan Financial Corp. FSPT SC 482,314 1.07 7.47 37.250 165.03 NA
FLAG Financial Corp. FLAG GA 238,463 0.72 7.98 18.500 37.68 18.50
Flagstar Bancorp Inc. FLGS MI 2,033,260 1.43 22.84 19.625 268.27 43.61
Flushing Financial Corp. FFIC NY 960,130 0.96 6.05 23.000 183.62 21.70
FMS Financial Corp. FMCO NJ 581,660 1.02 15.74 32.750 78.20 14.36
Fort Bend Holding Corp. FBHC TX 319,414 0.51 8.12 20.000 33.28 21.05
Fort Thomas Financial Corp. FTSB KY 97,843 1.22 7.18 14.875 22.24 18.83
Foundation Bancorp Inc. FOUN OH 36,605 0.80 4.11 15.500 7.17 23.48
Frankfort First Bancorp Inc. FKKYD KY 133,255 0.63 2.74 18.000 29.52 NM
FSF Financial Corp. FFHH MN 388,135 0.84 6.96 19.750 59.44 18.63
Fulton Bancorp Inc. FTNB MO 103,713 1.08 4.69 22.625 38.90 NA
GA Financial Inc. GAF PA 802,304 1.07 6.10 18.500 145.62 19.27
GFSB Bancorp Inc. GUPB NM 109,964 0.87 5.45 20.250 16.21 21.09
Gilmer Financial Svcs, Inc. GLMR TX 41,829 0.30 3.27 18.000 3.44 27.69
Glacier Bancorp Inc. GBCI MT 573,968 1.54 16.10 22.000 150.00 18.03
Glenway Financial Corp. GFCO OH 293,245 0.77 8.14 18.000 41.07 18.18
Golden State Bancorp Inc. GSB CA 16,432,304 0.74 11.69 34.563 1,743.90 25.23
Golden West Financial GDW CA 39,228,359 0.86 13.68 90.750 5,154.95 15.41
Great American Bancorp GTPS IL 139,568 0.59 2.65 18.500 31.39 47.44
Great Southern Bancorp Inc. GSBC MO 727,533 1.74 19.81 24.625 198.85 16.09
Green Street Financial Corp. GSFC NC 177,962 1.58 4.47 18.000 77.37 26.87
GreenPoint Financial Corp. GPT NY 13,093,985 1.05 10.01 66.750 2,858.64 18.75
GS Financial Corp. GSLA LA 131,071 1.32 3.50 17.500 60.17 NA
GSB Financial Corp. GOSB NY 154,649 NA NA 17.000 38.22 NA
Guthrie Savings Inc. GTSV OK 48,100 1.03 6.65 17.625 7.36 13.56
H.F. Ahmanson & Co. AHM CA 46,799,157 0.73 14.58 62.063 5,859.45 17.94
Hallmark Capital Corp. HALL WI 418,467 0.63 8.94 14.875 42.93 16.35
Harbor Federal Bancorp Inc. HRBF MD 217,202 0.71 5.50 23.000 38.95 24.47
Hardin Bancorp Inc. HFSA MO 117,364 0.75 5.55 17.750 15.25 18.49
Harleysville Savings Bank HARL PA 345,239 1.04 16.17 28.500 47.36 14.18
Harrington Financial Group HFGI IN 521,043 0.36 7.49 12.313 40.10 18.11
<CAPTION>
=====================================================================================================================
Price/ Price/ Price/ Price/
Core Book Tang. Total Div.
EPS Value Book Assets Yield
Company Ticker St. (x) (%) (%) (%) (%)
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
First Mutual Bancorp Inc. FMBD IL 64.52 119.26 156.49 17.43 1.60
First Mutual Savings Bank FMSB WA 17.00 225.76 225.76 15.33 1.18
First Northern Capital Corp. FNGB WI 22.38 168.39 168.39 18.69 2.31
First Palm Beach Bancorp Inc. FFPB FL 25.00 173.07 177.18 10.82 1.55
First Savings Bancorp Inc. SOPN NC 19.31 128.87 128.87 29.73 3.71
First SB of Washington Bancorp FWWB WA 21.14 164.25 177.84 24.25 1.08
First SecurityFed Financial FSFF IL NA NA NA 38.20 -
First Shenango Bancorp Inc. SHEN PA 14.86 146.34 146.34 17.01 1.82
FirstBank Corp. FBNW ID NA 113.35 113.35 20.22 1.55
FirstFed America Bancorp Inc. FAB MA NA 129.56 129.56 17.02 -
FirstFed Bancorp Inc. FFDB AL 14.88 144.08 157.40 13.88 2.35
FirstFed Financial Corp. FED CA 17.76 190.84 192.77 9.85 -
FirstSpartan Financial Corp. FSPT SC NA 127.70 127.70 34.22 1.61
FLAG Financial Corp. FLAG GA 23.13 173.55 173.55 15.80 1.84
Flagstar Bancorp Inc. FLGS MI NA 220.75 229.80 13.19 -
Flushing Financial Corp. FFIC NY 21.50 134.66 140.24 19.12 1.04
FMS Financial Corp. FMCO NJ 14.43 207.28 210.34 13.44 0.86
Fort Bend Holding Corp. FBHC TX 27.40 168.35 180.34 10.42 2.00
Fort Thomas Financial Corp. FTSB KY 18.83 140.86 140.86 22.73 1.68
Foundation Bancorp Inc. FOUN OH 23.48 104.17 104.17 19.59 6.45
Frankfort First Bancorp Inc. FKKYD KY 34.62 131.58 131.58 22.15 4.44
FSF Financial Corp. FFHH MN 18.81 121.61 121.61 15.31 2.53
Fulton Bancorp Inc. FTNB MO NA 152.05 152.05 37.51 0.88
GA Financial Inc. GAF PA 19.68 125.68 126.89 18.15 2.60
GFSB Bancorp Inc. GUPB NM 21.09 115.06 115.06 14.74 1.98
Gilmer Financial Svcs, Inc. GLMR TX 27.27 89.02 89.02 8.22 -
Glacier Bancorp Inc. GBCI MT 17.60 261.59 268.29 26.13 2.18
Glenway Financial Corp. GFCO OH 18.75 147.90 149.75 14.01 2.22
Golden State Bancorp Inc. GSB CA 20.95 213.88 239.02 10.61 -
Golden West Financial GDW CA 15.65 200.07 200.07 13.14 0.55
Great American Bancorp GTPS IL 43.02 100.33 100.33 22.49 2.16
Great Southern Bancorp Inc. GSBC MO 16.98 316.11 316.11 27.33 1.79
Green Street Financial Corp. GSFC NC 26.87 122.95 122.95 43.48 2.44
GreenPoint Financial Corp. GPT NY 19.46 198.37 370.01 21.83 1.50
GS Financial Corp. GSLA LA NA 106.45 106.45 45.91 1.60
GSB Financial Corp. GOSB NY NA NA NA 24.71 -
Guthrie Savings Inc. GTSV OK 14.33 100.60 100.60 15.30 -
H.F. Ahmanson & Co. AHM CA 20.90 307.70 362.09 12.52 1.42
Hallmark Capital Corp. HALL WI 16.71 140.46 140.46 10.26 -
Harbor Federal Bancorp Inc. HRBF MD 24.47 137.40 137.40 17.93 2.09
Hardin Bancorp Inc. HFSA MO 19.51 112.70 112.70 12.99 2.70
Harleysville Savings Bank HARL PA 14.18 207.12 207.12 13.72 1.54
Harrington Financial Group HFGI IN 22.39 159.08 159.08 7.70 0.98
</TABLE>
III-4
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III
Market Valuation and Financial Data for All Public Thrifts
<TABLE>
<CAPTION>
==================================================================================================================================
LTM LTM Stock Total Price/
Total Core Core Price Market LTM
Assets ROAA ROAE 12/11/97 Value EPS
Company Ticker St. ($000) (%) (%) ($) ($M) (x)
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Harrodsburg First Fin Bancorp HFFB KY 108,949 1.35 4.99 17.625 35.69 29.87
Harvest Home Financial Corp. HHFC OH 87,596 0.57 4.44 14.750 13.49 56.73
Haven Bancorp Inc. HAVN NY 1,833,284 0.69 11.45 21.750 190.79 17.13
Hawthorne Financial Corp. HTHR CA 891,163 1.04 18.86 21.625 66.78 16.38
Haywood Bancshares Inc. HBS NC 152,796 1.37 9.41 21.375 26.73 13.70
HCB Bancshares Inc. HCBB AR 199,946 NA NA 13.750 36.37 NA
Hemlock Federal Financial Corp HMLK IL 161,905 0.80 5.32 17.375 36.08 NA
HF Bancorp Inc. HEMT CA 1,050,377 0.18 2.17 17.125 107.58 NM
HF Financial Corp. HFFC SD 574,889 0.94 10.13 25.875 76.01 13.84
HFB Financial Corp. HFBC KY 160,876 0.91 8.86 15.500 16.80 9.87
HFNC Financial Corp. HFNC NC 866,859 1.05 4.55 14.750 253.59 22.01
HFS Bank FSB HFSK IN 153,738 0.91 11.84 16.750 15.10 11.47
High Country Bancorp Inc. HCBC CO 76,324 0.38 4.61 14.750 19.51 NA
Highland Federal Bank FSB HBNK CA 515,990 0.86 11.72 32.875 75.62 13.93
Hingham Instit. for Savings HIFS MA 216,240 1.25 12.96 27.875 36.34 14.08
HMN Financial Inc. HMNF MN 568,847 0.85 5.81 26.250 109.82 18.62
Home Bancorp HBFW IN 334,862 0.89 6.29 26.875 67.85 35.36
Home Bancorp of Elgin Inc. HBEI IL 342,518 0.80 2.90 18.250 125.12 39.67
Home Building Bancorp HBBI IN 41,746 0.73 5.65 21.250 6.62 18.48
Home City Financial Corp. HCFC OH 70,110 1.25 6.49 17.250 15.60 NA
Home Federal Bancorp HOMF IN 694,109 1.21 14.44 26.500 135.35 15.77
Home Financial Bancorp HWEN IN 41,309 0.74 4.00 17.625 8.19 23.50
Home Port Bancorp Inc. HPBC MA 201,014 1.67 15.64 22.875 42.13 13.00
Horizon Financial Corp. HRZB WA 531,028 1.55 9.95 17.000 126.47 15.32
Horizon Financial Svcs Corp. HZFS IA 87,784 0.66 6.37 11.750 10.00 15.06
IBS Financial Corp. IBSF NJ 734,751 0.78 4.44 17.250 188.88 31.94
Independence Federal Svgs Bank IFSB DC 251,561 0.23 3.40 14.000 17.94 12.84
Industrial Bancorp Inc. INBI OH 354,116 1.44 7.92 17.750 91.82 17.57
InterWest Bancorp Inc. IWBK WA 2,046,705 0.98 14.90 39.750 320.00 16.03
Ipswich Savings Bank IPSW MA 202,509 0.97 16.37 13.125 31.27 15.63
ISB Financial Corp. ISBF LA 956,048 0.72 5.76 27.625 190.63 26.31
ITLA Capital Corp. ITLA CA 901,555 1.46 13.06 18.000 141.29 12.08
Jacksonville Bancorp Inc. JXVL TX 226,182 1.33 8.42 19.750 48.26 25.65
Jefferson Savings Bancorp JSBA MO 1,257,753 0.76 9.32 41.750 209.02 19.42
Joachim Bancorp Inc. JOAC MO 35,073 0.79 2.72 15.000 10.84 39.47
JSB Financial Inc. JSB NY 1,531,068 1.72 7.67 49.063 486.63 17.22
Kankakee Bancorp Inc. KNK IL 339,937 0.87 8.11 34.250 48.83 16.79
Kentucky First Bancorp Inc. KYF KY 88,089 1.14 6.60 14.688 19.06 18.36
Kenwood Bancorp Inc. KNWP OH 49,044 (0.06) (0.63) 11.000 3.25 NA
Klamath First Bancorp KFBI OR 980,078 1.04 5.75 21.500 215.40 24.43
KS Bancorp Inc. KSAV NC 109,937 1.20 8.77 22.500 19.92 17.05
KSB Bancorp Inc. KSBK ME 149,657 1.08 14.95 20.563 25.46 15.94
Lakeview Financial LVSB NJ 505,882 0.93 9.48 25.000 112.73 20.83
<CAPTION>
=======================================================================================================================
Price/ Price/ Price/ Price/
Core Book Tang. Total Div.
EPS Value Book Assets Yield
Company Ticker St. (x) (%) (%) (%) (%)
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Harrodsburg First Fin Bancorp HFFB KY 23.50 112.40 112.40 32.76 2.27
Harvest Home Financial Corp. HHFC OH 27.83 130.42 130.42 15.40 2.98
Haven Bancorp Inc. HAVN NY 16.99 173.44 174.00 10.41 1.38
Hawthorne Financial Corp. HTHR CA 17.30 154.35 154.35 7.49 -
Haywood Bancshares Inc. HBS NC 13.70 123.34 127.69 17.49 2.62
HCB Bancshares Inc. HCBB AR NA 95.29 98.85 18.19 -
Hemlock Federal Financial Corp HMLK IL NA 115.37 115.37 22.28 1.38
HF Bancorp Inc. HEMT CA 57.08 129.15 154.98 10.24 -
HF Financial Corp. HFFC SD 15.04 142.01 142.01 13.22 1.62
HFB Financial Corp. HFBC KY 11.92 99.23 99.23 10.44 2.71
HFNC Financial Corp. HFNC NC 25.43 155.59 155.59 29.25 1.90
HFS Bank FSB HFSK IN 11.47 126.99 126.99 9.82 2.63
High Country Bancorp Inc. HCBC CO NA NA NA 25.56 -
Highland Federal Bank FSB HBNK CA 18.16 191.13 191.13 14.66 -
Hingham Instit. for Savings HIFS MA 14.08 173.14 173.14 16.81 1.72
HMN Financial Inc. HMNF MN 21.88 130.66 130.66 19.31 -
Home Bancorp HBFW IN 22.97 152.53 152.53 20.26 0.74
Home Bancorp of Elgin Inc. HBEI IL 41.48 132.53 132.53 36.53 2.19
Home Building Bancorp HBBI IN 18.81 104.01 104.01 15.86 1.41
Home City Financial Corp. HCFC OH NA 113.49 113.49 22.25 2.09
Home Federal Bancorp HOMF IN 17.21 225.15 232.05 19.50 1.32
Home Financial Bancorp HWEN IN 27.12 112.91 112.91 19.83 1.14
Home Port Bancorp Inc. HPBC MA 13.07 196.35 196.35 20.96 3.50
Horizon Financial Corp. HRZB WA 15.60 152.19 152.19 23.82 2.59
Horizon Financial Svcs Corp. HZFS IA 18.65 114.41 114.41 11.39 1.53
IBS Financial Corp. IBSF NJ 31.94 147.56 147.56 25.71 2.32
Independence Federal Svgs Bank IFSB DC 30.43 98.38 110.50 7.13 1.57
Industrial Bancorp Inc. INBI OH 18.49 150.94 150.94 25.93 3.16
InterWest Bancorp Inc. IWBK WA 18.23 246.44 250.95 15.63 1.61
Ipswich Savings Bank IPSW MA 19.30 274.58 274.58 15.44 0.91
ISB Financial Corp. ISBF LA 26.82 155.63 181.86 19.94 1.81
ITLA Capital Corp. ITLA CA 12.08 146.10 146.70 15.67 -
Jacksonville Bancorp Inc. JXVL TX 8.66 145.76 145.76 21.34 2.53
Jefferson Savings Bancorp JSBA MO 19.98 169.92 216.66 16.62 1.34
Joachim Bancorp Inc. JOAC MO 39.47 109.81 109.81 30.91 3.33
JSB Financial Inc. JSB NY 19.32 136.63 136.63 31.78 2.85
Kankakee Bancorp Inc. KNK IL 17.04 125.69 133.32 14.36 1.40
Kentucky First Bancorp Inc. KYF KY 18.59 130.10 130.10 21.64 3.40
Kenwood Bancorp Inc. KNWP OH NA 75.14 75.14 6.63 2.55
Klamath First Bancorp KFBI OR 24.43 137.47 151.20 21.98 1.49
KS Bancorp Inc. KSAV NC 17.18 136.86 136.94 18.12 2.67
KSB Bancorp Inc. KSBK ME 15.82 231.04 243.06 17.01 0.39
Lakeview Financial LVSB NJ 28.74 182.35 212.77 22.28 0.50
</TABLE>
III-5
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III
Market Valuation and Financial Data for All Public Thrifts
<TABLE>
<CAPTION>
===================================================================================================================================
LTM LTM Stock Total Price/
Total Core Core Price Market LTM
Assets ROAA ROAE 12/11/97 Value EPS
Company Ticker St. ($000) (%) (%) ($) ($M) (x)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Landmark Bancshares Inc. LARK KS 227,736 0.98 6.70 23.250 39.26 17.10
Laurel Capital Group Inc. LARL PA 209,980 1.41 13.60 28.125 40.69 14.35
Lawrence Savings Bank LSBX MA 352,980 1.74 20.08 15.750 67.48 11.50
Lenox Bancorp Inc. LNXC OH 48,707 0.69 4.55 16.750 6.86 22.95
Lexington B&L Financial Corp. LXMO MO 59,236 1.32 4.46 17.125 19.50 30.04
Life Financial Corp. LFCO CA 294,102 5.42 46.82 13.000 85.04 6.02
Little Falls Bancorp Inc. LFBI NJ 324,425 0.51 3.93 20.250 52.81 30.22
Logansport Financial Corp. LOGN IN 85,801 1.47 7.54 16.000 20.17 17.78
London Financial Corporation LONF OH 38,210 0.96 4.63 15.250 7.86 18.83
Long Island Bancorp Inc. LISB NY 5,930,784 0.73 7.93 45.375 1,090.04 21.81
LSB Financial Corp. LSBI IN 200,266 0.69 7.65 27.750 25.43 16.62
MAF Bancorp Inc. MAFB IL 3,370,587 1.15 14.72 34.250 517.23 14.64
Marion Capital Holdings MARN IN 179,822 1.68 7.40 27.000 48.00 16.98
Market Financial Corp. MRKF OH 56,121 0.99 3.66 15.438 20.62 NA
Maryland Federal Bancorp MFSL MD 1,175,006 0.91 11.00 27.000 174.62 23.48
MASSBANK Corp. MASB MA 932,757 1.03 9.90 47.000 167.86 17.41
Mayflower Co-operative Bank MFLR MA 129,033 0.94 9.79 23.750 21.15 16.27
MBLA Financial Corp. MBLF MO 224,013 0.85 6.63 27.000 34.22 20.15
MCM Savings Bank FSB MCMS MO 63,865 0.25 4.03 21.000 3.82 NM
Mechanics Savings Bank MECH CT 830,741 1.79 17.83 26.750 141.59 9.98
Medford Bancorp Inc. MDBK MA 1,106,345 1.00 11.19 38.250 173.70 16.00
Meritrust Federal SB MERI LA 233,311 1.15 14.61 69.000 53.42 21.23
Metropolitan Financial Corp. METF OH 865,572 0.60 15.21 15.250 107.53 20.61
MetroWest Bank MWBX MA 585,760 1.37 18.02 8.750 122.12 16.51
MFB Corp. MFBC IN 255,921 0.83 5.62 23.500 38.79 20.61
Mid-Central Financial Corp. MCFC MN 57,123 0.93 9.77 21.750 4.86 9.98
Mid-Coast Bancorp Inc. MCBN ME 61,473 0.72 8.25 28.750 6.70 14.82
Mid-Iowa Financial Corp. MIFC IA 128,017 1.15 12.41 11.250 18.88 12.50
Midland Federal S&LA MIDF IL 109,599 0.62 8.90 21.000 7.28 9.37
Midwest Bancshares Inc. MWBI IA 149,850 0.77 11.05 17.750 18.07 15.99
Midwest Savings Bank MDWB IL 43,342 0.44 6.21 15.437 2.96 12.76
Milton Federal Financial Corp. MFFC OH 209,958 0.65 4.52 15.000 34.57 23.81
Mississippi View Holding Co. MIVI MN 68,546 1.05 5.95 17.500 12.95 18.23
Mitchell Bancorp Inc. MBSP NC 34,591 1.62 3.79 17.250 16.06 27.82
Monterey Bay Bancorp Inc. MBBC CA 409,663 0.42 3.79 19.250 62.17 32.63
Montgomery Financial Corp. MONT IN 101,986 0.69 5.12 12.250 20.25 NA
MSB Bancorp Inc. MBB NY 773,991 0.54 6.06 30.500 86.75 27.23
MSB Financial Inc. MSBF MI 77,014 1.44 8.08 19.500 24.06 21.91
Mutual Community Savings Bank MTUC NC 59,620 0.21 1.67 11.375 4.12 NM
Mutual Savings Bank FSB MSBK MI 654,127 0.02 0.35 12.750 54.56 85.00
New Hampshire Thrift Bncshrs NHTB NH 319,338 0.60 8.11 21.250 44.09 21.46
NewMil Bancorp Inc. NMSB CT 317,407 0.82 7.93 13.125 50.34 20.51
North American Savings Bank NASB MO 736,585 1.20 16.21 54.000 120.76 13.33
<CAPTION>
===================================================================================================================
Price/ Price/ Price/ Price/
Core Book Tang. Total Div.
EPS Value Book Assets Yield
Company Ticker St. (x) (%) (%) (%) (%)
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Landmark Bancshares Inc. LARK KS 19.38 122.43 122.43 17.24 1.72
Laurel Capital Group Inc. LARL PA 14.88 185.03 185.03 19.38 1.85
Lawrence Savings Bank LSBX MA 11.50 200.89 200.89 19.12 -
Lenox Bancorp Inc. LNXC OH 22.95 99.17 99.17 14.08 1.19
Lexington B&L Financial Corp. LXMO MO 22.53 116.26 116.26 32.92 1.75
Life Financial Corp. LFCO CA 6.02 171.96 171.96 28.92 -
Little Falls Bancorp Inc. LFBI NJ 33.75 139.37 151.12 16.28 0.99
Logansport Financial Corp. LOGN IN 17.02 124.42 124.42 23.51 2.50
London Financial Corporation LONF OH 20.07 103.32 103.32 20.57 1.57
Long Island Bancorp Inc. LISB NY 25.64 199.54 201.40 18.38 1.32
LSB Financial Corp. LSBI IN 18.88 137.10 137.10 12.70 1.23
MAF Bancorp Inc. MAFB IL 14.70 198.90 226.37 15.35 0.82
Marion Capital Holdings MARN IN 17.20 121.51 121.51 26.69 3.26
Market Financial Corp. MRKF OH NA 103.68 103.68 36.74 1.81
Maryland Federal Bancorp MFSL MD 16.56 175.10 177.17 14.86 1.56
MASSBANK Corp. MASB MA 18.50 166.37 168.88 18.00 2.04
Mayflower Co-operative Bank MFLR MA 18.27 170.01 172.73 16.39 2.86
MBLA Financial Corp. MBLF MO 19.71 120.81 120.81 15.28 1.48
MCM Savings Bank FSB MCMS MO 24.42 95.67 95.67 5.98 0.95
Mechanics Savings Bank MECH CT 9.98 163.81 163.81 17.04 -
Medford Bancorp Inc. MDBK MA 17.23 174.18 185.86 15.70 1.88
Meritrust Federal SB MERI LA 21.23 277.22 277.22 22.90 1.01
Metropolitan Financial Corp. METF OH 21.79 308.08 337.39 12.42 -
MetroWest Bank MWBX MA 16.51 279.55 279.55 20.85 1.37
MFB Corp. MFBC IN 20.61 115.71 115.71 15.16 1.36
Mid-Central Financial Corp. MCFC MN 10.16 90.78 90.78 8.51 1.38
Mid-Coast Bancorp Inc. MCBN ME 15.63 126.93 126.93 10.90 1.81
Mid-Iowa Financial Corp. MIFC IA 13.72 156.47 156.69 14.75 0.71
Midland Federal S&LA MIDF IL 10.77 89.21 89.21 6.64 1.43
Midwest Bancshares Inc. MWBI IA 18.30 174.36 174.36 12.06 1.35
Midwest Savings Bank MDWB IL 15.44 98.01 98.01 6.83 -
Milton Federal Financial Corp. MFFC OH 26.79 121.85 121.85 16.47 4.00
Mississippi View Holding Co. MIVI MN 18.42 107.36 107.36 18.89 0.91
Mitchell Bancorp Inc. MBSP NC 27.82 112.30 112.30 46.43 2.32
Monterey Bay Bancorp Inc. MBBC CA 35.00 123.40 133.13 15.18 0.62
Montgomery Financial Corp. MONT IN NA 103.73 103.73 19.86 1.80
MSB Bancorp Inc. MBB NY 27.23 136.16 255.44 11.21 1.97
MSB Financial Inc. MSBF MI 22.67 188.77 188.77 31.24 1.44
Mutual Community Savings Bank MTUC NC 31.60 53.81 59.28 6.91 3.17
Mutual Savings Bank FSB MSBK MI 425.00 131.04 131.04 8.34 -
New Hampshire Thrift Bncshrs NHTB NH 26.56 176.50 205.51 13.81 2.35
NewMil Bancorp Inc. NMSB CT 21.88 155.88 155.88 15.86 2.44
North American Savings Bank NASB MO 14.14 212.85 220.23 16.39 1.48
</TABLE>
III-6
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
<TABLE>
<CAPTION>
Exhibit III
Market Valuation and Financial Data for All Public Thrifts
====================================================================================================================================
LTM LTM Stock Total Price/
Total Core Core Price Market LTM
Assets ROAA ROAE 12/11/97 Value EPS
Company Ticker St. ($000) (%) (%) ($) ($M) (x)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North Bancshares Inc. NBSI IL 122,081 0.56 3.86 25.875 24.73 34.50
North Central Bancshares Inc. FFFD IA 215,133 1.84 7.57 18.750 61.25 16.30
Northeast Bancorp NBN ME 265,442 0.61 7.89 27.500 40.75 23.11
Northeast Indiana Bancorp NEIB IN 190,319 1.20 7.78 20.000 35.25 16.53
Northwest Equity Corp. NWEQ WI 96,954 0.99 8.42 19.250 16.15 15.52
NorthWest Indiana Bancorp NWIN IN 307,522 1.11 11.81 42.500 58.71 17.28
NS&L Bancorp Inc. NSLB MO 59,711 0.77 3.72 18.500 13.09 42.05
NSS Bancorp Inc. NSSY CT 670,749 0.33 4.07 38.000 93.34 15.45
Nutmeg Federal S&LA NTMG CT 105,151 0.50 7.18 10.750 10.61 26.22
Ocean Financial Corp. OCFC NJ 1,489,220 1.00 5.71 37.125 297.55 22.64
Ocwen Financial Corp. OCN FL 2,956,300 1.74 19.54 24.750 1,497.50 16.61
Ohio State Financial Services OSFS OH 38,559 0.98 6.13 14.870 9.43 NA
OHSL Financial Corp. OHSL OH 234,600 0.88 7.86 26.500 32.72 16.16
Oregon Trail Financial Corp. OTFC OR 341,988 NA NA 16.000 75.12 NA
Ottawa Financial Corp. OFCP MI 866,966 0.79 8.88 28.625 152.60 23.27
Pamrapo Bancorp Inc. PBCI NJ 371,958 1.33 9.61 25.125 71.43 15.32
Park Bancorp Inc. PFED IL 174,515 1.06 4.65 17.875 43.46 21.80
Parkvale Financial Corporation PVSA PA 1,005,440 1.08 14.93 28.000 142.97 14.00
Peekskill Financial Corp. PEEK NY 181,242 1.15 4.33 17.500 55.88 26.12
Pekin Savings SB PEKS IL 84,910 0.78 9.49 62.500 10.51 25.61
PenFed Bancorp Incorporated PFBXX KY 30,485 0.88 5.09 13.000 3.86 NM
PennFed Financial Services Inc PFSB NJ 1,363,950 0.82 10.96 33.500 161.56 15.44
PennFirst Bancorp Inc. PWBC PA 822,350 0.66 8.61 18.625 98.91 17.91
Pennwood Bancorp Inc. PWBK PA 47,645 1.08 5.66 18.500 10.54 21.51
Peoples-Sidney Financial Corp. PSFC OH 102,835 1.04 6.37 17.250 30.80 NA
Peoples Bancorp PFDC IN 290,601 1.48 9.69 24.000 81.41 19.67
People's Bancshares Inc. PBKB MA 717,451 0.47 8.45 21.750 71.41 16.11
Peoples Financial Corp. PFFC OH 86,486 0.90 3.54 14.500 21.25 NA
Peoples Heritage Finl Group PHBK ME 6,056,083 1.30 16.37 43.500 1,196.29 17.06
Peoples Savings Bank of Troy PESV OH 128,229 1.34 12.97 14.250 25.85 16.38
Peoples Savings Financial Corp PSVF PA 43,991 1.00 4.92 24.500 10.84 24.26
Permanent Bancorp Inc. PERM IN 433,568 0.62 6.61 26.063 54.81 21.54
Perpetual Federal Savings Bank PFOH OH 214,649 1.71 10.57 17.250 38.36 13.58
Perpetual Midwest Financial PMFI IA 401,665 0.32 3.78 27.625 51.74 33.69
Perry County Financial Corp. PCBC MO 81,105 1.07 5.72 23.250 19.25 24.22
PFF Bancorp Inc. PFFB CA 2,615,466 0.46 4.33 19.125 342.40 28.98
Piedmont Bancorp Inc. PDB NC 126,544 0.57 3.19 10.625 29.23 NM
Pioneer Financial Corporation PONE KY 76,830 1.33 11.45 42.500 NA 11.55
Pittsburgh Home Financial Corp PHFC PA 273,304 0.76 6.02 17.875 35.20 17.19
Potters Financial Corp. PTRS OH 122,716 0.96 10.72 18.500 17.85 15.81
Prestige Bancorp Inc. PRBC PA 137,834 0.62 5.11 19.250 17.61 21.15
Princeton Federal Bank FSB PRNXX KY 31,738 0.88 6.28 17.500 4.57 24.65
Progress Financial Corp. PFNC PA 436,746 0.71 13.62 15.375 61.18 17.88
<CAPTION>
======================================================================================================================
Price/ Price/ Price/ Price/
Core Book Tang. Total Div.
EPS Value Book Assets Yield
Company Ticker St. (x) (%) (%) (%) (%)
======================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
North Bancshares Inc. NBSI IL 38.62 151.85 151.85 20.26 1.86
North Central Bancshares Inc. FFFD IA 16.30 123.93 123.93 28.47 1.33
Northeast Bancorp NBN ME 29.26 192.71 218.08 15.35 1.16
Northeast Indiana Bancorp NEIB IN 16.53 128.95 128.95 18.52 1.70
Northwest Equity Corp. NWEQ WI 16.04 132.48 132.48 16.66 2.91
NorthWest Indiana Bancorp NWIN IN 17.49 202.28 202.28 19.09 3.01
NS&L Bancorp Inc. NSLB MO 30.83 112.05 112.05 21.92 2.70
NSS Bancorp Inc. NSSY CT 52.05 168.96 174.07 13.92 1.05
Nutmeg Federal S&LA NTMG CT 39.81 182.82 182.82 10.09 1.40
Ocean Financial Corp. OCFC NJ 22.64 134.36 134.36 19.98 2.16
Ocwen Financial Corp. OCN FL 29.12 358.18 367.76 50.65 -
Ohio State Financial Services OSFS OH NA 90.29 90.29 24.46 -
OHSL Financial Corp. OHSL OH 16.67 123.72 123.72 13.95 3.32
Oregon Trail Financial Corp. OTFC OR NA NA NA 21.97 -
Ottawa Financial Corp. OFCP MI 23.85 202.30 250.44 17.60 1.40
Pamrapo Bancorp Inc. PBCI NJ 15.51 148.76 149.82 19.20 3.98
Park Bancorp Inc. PFED IL 22.63 107.62 107.62 24.90 -
Parkvale Financial Corporation PVSA PA 14.00 184.21 185.43 14.22 1.86
Peekskill Financial Corp. PEEK NY 26.12 118.16 118.16 30.83 2.06
Pekin Savings SB PEKS IL 16.71 147.65 147.65 12.38 1.60
PenFed Bancorp Incorporated PFBXX KY 15.12 80.95 80.95 12.66 -
PennFed Financial Services Inc PFSB NJ 15.44 149.35 176.41 11.85 0.84
PennFirst Bancorp Inc. PWBC PA 17.91 143.71 161.68 12.03 1.93
Pennwood Bancorp Inc. PWBK PA 19.89 120.60 120.60 22.12 1.73
Peoples-Sidney Financial Corp. PSFC OH NA 109.73 109.73 29.95 1.62
Peoples Bancorp PFDC IN 19.67 183.77 183.77 28.01 1.78
People's Bancshares Inc. PBKB MA 29.39 242.75 253.20 9.95 2.02
Peoples Financial Corp. PFFC OH NA 91.89 91.89 24.57 3.45
Peoples Heritage Finl Group PHBK ME 17.06 264.92 310.27 19.75 1.93
Peoples Savings Bank of Troy PESV OH 16.38 191.28 191.28 20.16 0.49
Peoples Savings Financial Corp PSVF PA 24.26 117.34 117.34 24.64 4.08
Permanent Bancorp Inc. PERM IN 21.72 128.71 130.45 12.64 1.54
Perpetual Federal Savings Bank PFOH OH 11.20 109.87 109.87 17.87 3.01
Perpetual Midwest Financial PMFI IA 41.86 151.45 151.45 12.88 1.09
Perry County Financial Corp. PCBC MO 17.22 123.60 123.60 23.73 1.72
PFF Bancorp Inc. PFFB CA 28.54 130.19 131.53 13.09 -
Piedmont Bancorp Inc. PDB NC 40.87 140.54 140.54 23.10 3.77
Pioneer Financial Corporation PONE KY 8.78 103.33 103.33 NA 3.77
Pittsburgh Home Financial Corp PHFC PA 19.22 122.18 123.45 12.88 1.34
Potters Financial Corp. PTRS OH 16.09 165.03 165.03 14.55 1.08
Prestige Bancorp Inc. PRBC PA 21.15 114.04 114.04 12.78 0.62
Princeton Federal Bank FSB PRNXX KY 16.51 104.35 104.35 14.40 5.71
Progress Financial Corp. PFNC PA 22.61 262.82 294.54 14.01 0.78
</TABLE>
III-7
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III
Market Valuation and Financial Data for All Public Thrifts
<TABLE>
<CAPTION>
====================================================================================================================================
LTM LTM Stock Total Price/
Total Core Core Price Market LTM
Assets ROAA ROAE 12/11/97 Value EPS
Company Ticker St. ($000) (%) (%) ($) ($M) (x)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Progressive Bank Inc. PSBK NY 884,617 0.94 11.17 36.250 138.79 16.48
Provident Financial Holdings PROV CA 640,634 0.36 2.55 21.750 105.19 22.66
PS Financial Inc. PSFI IL 85,698 2.10 5.43 18.250 37.85 NA
Pulse Bancorp PULS NJ 526,016 1.10 14.06 26.750 82.40 14.86
PVF Capital Corp. PVFC OH 383,278 1.31 18.82 20.750 53.75 11.53
QCF Bancorp Inc. QCFB MN 158,192 1.65 9.33 28.500 39.44 14.54
Quaker City Bancorp Inc. QCBC CA 847,024 0.69 7.79 22.000 102.81 18.33
Queens County Bancorp Inc. QCSB NY 1,541,049 1.55 11.55 36.500 551.45 25.70
Raritan Bancorp Inc. RARB NJ 407,262 1.02 13.07 27.500 65.24 17.86
RedFed Bancorp Inc. REDF CA 967,309 1.02 12.25 19.625 140.88 15.58
Redwood Financial Inc. REDW MN 64,651 0.84 3.81 12.000 10.97 27.27
Reliancd Bancshares Inc. RELI WI 46,987 1.29 2.52 8.875 21.94 34.13
Reliance Bancorp Inc. RELY NY 2,034,753 0.84 10.22 34.250 298.40 17.93
River Valley Bancorp RIVR IN 138,461 0.57 4.75 18.125 21.57 NA
Riverview Bancorp Inc. RVSB WA 282,247 1.23 11.07 15.125 92.69 NM
Rocky Ford Financial Inc. RFFC CO 23,708 1.08 7.03 14.125 5.98 NA
Roslyn Bancorp Inc. RSLN NY 3,474,150 1.17 6.80 22.000 960.13 NA
S. Carolina Community Bancshrs SCCB SC 45,619 1.15 4.37 22.500 15.72 28.85
Sandwich Bancorp Inc. SWCB MA 511,765 0.95 11.95 41.000 78.68 17.37
Scotland Bancorp Inc. SSB NC 64,399 1.88 6.36 10.250 19.61 13.85
Security Bancorp Inc. SCYT TN 49,130 NA NA 15.500 6.76 NA
Security Federal Bancorp Inc. SIYF AL 77,704 1.00 8.08 20.750 13.93 15.15
Security First Corp. SFSL OH 680,827 1.37 14.73 20.500 155.31 19.71
SFB Bancorp Inc. SFBK TN 52,757 1.16 7.65 15.500 11.89 NA
SFS Bancorp Inc. SFED NY 174,093 0.69 5.48 24.500 30.16 24.75
SGV Bancorp Inc. SGVB CA 408,975 0.31 3.95 17.250 40.41 25.37
Shelby County Bancorp SCBXX IN 88,776 0.78 9.99 25.000 4.40 10.08
SHS Bancorp Inc. SHSB PA 88,460 0.34 4.43 16.250 13.32 NA
SIS Bancorp Inc. SISB MA 1,453,017 0.82 11.33 37.500 209.28 18.29
Sistersville Bancorp Inc. SVBC WV 32,568 NA NA 15.500 10.25 NA
Skaneateles Bancorp Inc. SKAN NY 247,643 0.68 9.99 18.750 26.90 15.89
Sobieski Bancorp Inc. SOBI IN 84,279 0.57 3.56 19.500 15.20 29.55
South Street Financial Corp. SSFC NC 240,524 1.19 6.62 18.938 85.15 NA
Southern Banc Co. SRN AL 106,164 0.47 2.77 17.750 21.84 42.26
Southern Community Bancshares SCBS AL 70,370 0.90 5.16 19.000 21.61 NA
Southern Missouri Bancorp Inc. SMBC MO 163,297 0.90 5.61 20.125 32.44 21.41
SouthFirst Bancshares Inc. SZB AL 97,283 0.17 1.24 20.625 17.48 NM
Southwest Bancshares SWBI IL 375,004 1.02 9.55 25.250 67.13 17.53
Sovereign Bancorp Inc. SVRN PA 14,601,008 0.65 12.46 21.500 1,919.42 31.62
St. Francis Capital Corp. STFR WI 1,660,649 0.76 9.08 40.500 212.14 18.41
St. Landry Financial Corp. SLAN LA 58,660 0.33 2.77 16.000 6.63 NM
St. Paul Bancorp Inc. SPBC IL 4,548,436 1.07 12.11 24.750 845.65 18.33
StateFed Financial Corp. SFFC IA 87,542 1.28 7.20 13.500 21.03 18.75
</TABLE>
<TABLE>
<CAPTION>
=============================================================================================================
Price/ Price/ Price/ Price/
Core Book Tang. Total Div.
EPS Value Book Assets Yield
Company Ticker St. (x) (%) (%) (%) (%)
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Progressive Bank Inc. PSBK NY 16.78 179.63 199.39 15.69 1.88
Provident Financial Holdings PROV CA 47.28 123.16 123.16 16.42 -
PS Financial Inc. PSFI IL NA 123.64 123.64 44.17 2.63
Pulse Bancorp PULS NJ 14.86 190.66 190.66 15.66 2.62
PVF Capital Corp. PVFC OH 12.06 195.20 195.20 14.02 -
QCF Bancorp Inc. QCFB MN 14.54 151.35 151.35 24.93 -
Quaker City Bancorp Inc. QCBC CA 18.97 143.51 143.51 12.14 -
Queens County Bancorp Inc. QCSB NY 26.07 275.26 275.26 35.78 2.19
Raritan Bancorp Inc. RARB NJ 18.09 217.56 220.88 16.02 1.75
RedFed Bancorp Inc. REDF CA 15.70 175.07 175.69 14.56 -
Redwood Financial Inc. REDW MN 23.53 91.46 91.46 16.97 -
Reliancd Bancshares Inc. RELI WI 35.50 96.68 96.68 46.69 -
Reliance Bancorp Inc. RELY NY 19.03 177.55 241.71 14.67 1.87
River Valley Bancorp RIVR IN NA 122.47 124.23 15.58 0.88
Riverview Bancorp Inc. RVSB WA NA 158.21 164.22 32.84 -
Rocky Ford Financial Inc. RFFC CO NA 93.85 93.85 25.22 -
Roslyn Bancorp Inc. RSLN NY NA 156.70 157.48 27.64 1.27
S. Carolina Community Bancshrs SCCB SC 28.85 129.68 129.68 34.46 2.67
Sandwich Bancorp Inc. SWCB MA 17.67 193.76 201.57 15.37 3.42
Scotland Bancorp Inc. SSB NC 13.85 134.69 134.69 30.45 2.93
Security Bancorp Inc. SCYT TN NA 103.68 103.68 13.76 -
Security Federal Bancorp Inc. SIYF AL 18.53 152.46 152.46 17.93 -
Security First Corp. SFSL OH 19.71 246.69 250.61 22.81 1.56
SFB Bancorp Inc. SFBK TN NA 98.98 98.98 22.54 -
SFS Bancorp Inc. SFED NY 24.75 138.89 138.89 17.32 1.14
SGV Bancorp Inc. SGVB CA 31.94 132.90 134.98 9.88 -
Shelby County Bancorp SCBXX IN 6.81 62.59 62.59 4.96 1.60
SHS Bancorp Inc. SHSB PA NA NA NA 15.06 -
SIS Bancorp Inc. SISB MA 18.47 197.99 197.99 14.40 1.49
Sistersville Bancorp Inc. SVBC WV NA 94.98 94.98 31.47 -
Skaneateles Bancorp Inc. SKAN NY 16.30 154.96 159.57 10.86 1.42
Sobieski Bancorp Inc. SOBI IN 31.97 112.98 112.98 18.04 1.64
South Street Financial Corp. SSFC NC NA 127.61 127.61 35.40 2.11
Southern Banc Co. SRN AL 42.26 120.42 121.49 20.57 1.97
Southern Community Bancshares SCBS AL NA 144.05 144.05 30.71 1.58
Southern Missouri Bancorp Inc. SMBC MO 21.88 123.01 123.01 19.87 2.48
SouthFirst Bancshares Inc. SZB AL 108.55 128.42 128.42 17.97 2.42
Southwest Bancshares SWBI IL 18.04 157.71 157.71 17.90 3.17
Sovereign Bancorp Inc. SVRN PA 22.16 293.32 358.93 13.15 0.37
St. Francis Capital Corp. STFR WI 18.58 165.04 186.55 12.77 1.38
St. Landry Financial Corp. SLAN LA 32.65 97.50 97.50 11.30 -
St. Paul Bancorp Inc. SPBC IL 18.20 206.59 207.11 18.59 1.62
StateFed Financial Corp. SFFC IA 18.75 136.92 136.92 24.02 1.48
</TABLE>
III-8
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III
Market Valuation and Financial Data for All Public Thrifts
<TABLE>
<CAPTION>
====================================================================================================================================
LTM LTM Stock Total Price/
Total Core Core Price Market LTM
Assets ROAA ROAE 12/11/97 Value EPS
Company Ticker St. ($000) (%) (%) ($) ($M) (x)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statewide Financial Corp. SFIN NJ 703,112 0.81 8.46 22.500 101.46 17.72
Sterling Financial Corp. STSA WA 1,870,513 0.54 9.50 21.375 161.75 17.52
Stone Street Bancorp Inc. SSM NC 104,773 1.56 4.57 22.250 42.23 25.00
Sturgis B&TC, FSB STUR MI 192,271 0.82 9.82 27.500 33.05 19.37
SuburbFed Financial Corp. SFSB IL 432,559 0.54 8.28 36.000 45.46 17.65
SWVA Bancshares Inc. SWVB VA 72,187 0.89 7.42 19.750 10.09 12.99
Tappan Zee Financial Inc. TPNZ NY 124,603 0.84 4.77 19.250 28.65 26.74
Teche Holding Co. TSH LA 404,097 0.94 7.01 21.000 72.19 17.65
Telebanc Financial Corp. TBFC VA 838,533 0.24 5.20 17.500 38.92 12.07
Texarkana First Financial Corp FTF AR 178,710 1.69 10.66 25.750 46.02 15.70
TF Financial Corp. THRD PA 625,338 0.67 6.02 29.250 93.23 23.98
Three Rivers Financial Corp. THR MI 94,216 0.86 6.19 20.250 16.68 19.10
Towne Financial Corp. TOFI OH 108,300 0.61 8.21 27.000 5.63 8.91
TR Financial Corp. ROSE NY 3,691,564 0.87 14.14 33.250 584.94 17.78
Trenton SB (MHC) TSBS NJ 638,942 0.90 5.26 37.750 341.48 43.39
Tri-County Bancorp Inc. TRIC WY 88,173 1.07 7.26 13.688 15.98 18.01
TSB Financial Inc. TSBF IL 29,859 0.90 7.06 14.500 3.31 12.50
Twin City Bancorp TWIN TN 106,931 0.72 5.59 14.250 18.13 19.79
Union Financial Bcshs, Inc. UFBS SC 171,245 0.99 11.31 24.250 19.88 20.04
United Federal Savings Bank UFRM NC 285,744 0.57 7.55 10.500 32.28 16.67
United Financial Corp. UBMT MT 103,082 1.40 6.01 25.250 30.89 20.53
USABancshares, Inc. USAB PA 64,269 0.47 4.08 9.750 7.14 33.62
Vermilion Bancorp Inc. VBAS IL 37,391 0.41 4.12 14.500 5.31 NA
Virginia Beach Fed. Financial VABF VA 605,486 0.49 7.24 16.500 82.16 22.00
Warren Bancorp Inc. WRNB MA 364,130 1.76 17.57 20.250 77.02 10.38
Washington Bancorp WBIO IA 66,146 1.16 7.08 18.250 11.88 15.08
Washington Fed Bank for Svgs WFBS IL 25,694 0.65 6.06 19.687 2.70 17.27
Washington Federal Inc. WFSL WA 5,719,589 1.85 15.62 32.000 1,520.28 14.48
Washington Mutual Inc. WAMU WA 95,607,369 0.68 11.92 68.875 17,713.00 129.95
Washington Savings Bank, FSB WSB MD 267,870 0.62 7.14 7.125 30.98 29.69
Wayne Bancorp Inc. WYNE NJ 267,285 0.86 6.01 21.750 43.80 20.14
Webster Financial Corp. WBST CT 6,811,014 0.73 13.84 62.875 852.22 29.52
Wells Financial Corp. WEFC MN 204,761 1.04 7.37 18.500 36.25 16.82
West Town Bancorp Inc. WESXX IL 28,199 0.58 3.98 11.000 2.47 14.86
Westco Bancorp WCBI IL 309,070 1.41 9.19 26.500 65.56 15.59
Westcorp WES CA 3,757,362 (0.01) (0.11) 17.188 451.29 13.02
WesterFed Financial Corp. WSTR MT 999,203 0.76 6.60 24.063 134.20 19.10
Western Ohio Financial Corp. WOFC OH 397,425 0.43 3.16 26.500 62.43 39.55
Westwood Homestead Fin. Corp. WEHO OH 142,878 1.09 3.50 15.500 43.13 31.00
WHG Bancshares Corp. WHGB MD 100,235 0.85 3.72 15.875 23.21 45.36
Wilshire Financial Services WFSG OR 1,369,761 1.62 25.01 26.750 202.50 NA
Winton Financial Corp. WFI OH 324,532 0.86 12.06 19.750 39.23 12.19
Wood Bancorp Inc. FFWD OH 166,520 1.29 10.20 18.500 39.22 18.32
<CAPTION>
=================================================================================================================
Price/ Price/ Price/ Price/
Core Book Tang. Total Div.
EPS Value Book Assets Yield
Company Ticker St. (x) (%) (%) (%) (%)
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Statewide Financial Corp. SFIN NJ 17.72 156.90 157.12 14.43 1.96
Sterling Financial Corp. STSA WA 19.26 164.68 179.92 8.65 -
Stone Street Bancorp Inc. SSM NC 25.00 136.34 136.34 40.31 2.02
Sturgis B&TC, FSB STUR MI 21.83 205.84 221.95 17.19 1.16
SuburbFed Financial Corp. SFSB IL 21.56 158.38 158.94 10.51 0.89
SWVA Bancshares Inc. SWVB VA 15.08 123.36 123.36 13.98 1.52
Tappan Zee Financial Inc. TPNZ NY 27.11 134.05 134.05 22.99 1.46
Teche Holding Co. TSH LA 18.42 132.83 132.83 17.86 2.38
Telebanc Financial Corp. TBFC VA 29.66 129.15 130.60 4.64 -
Texarkana First Financial Corp FTF AR 15.80 168.08 168.08 25.75 2.18
TF Financial Corp. THRD PA 27.34 152.26 172.46 14.91 1.37
Three Rivers Financial Corp. THR MI 20.05 128.57 129.06 17.70 1.98
Towne Financial Corp. TOFI OH 9.68 72.19 75.67 5.20 -
TR Financial Corp. ROSE NY 19.79 238.52 238.52 15.85 1.93
Trenton SB (MHC) TSBS NJ 61.89 315.37 350.51 53.44 0.93
Tri-County Bancorp Inc. TRIC WY 17.55 118.31 118.31 18.12 2.92
TSB Financial Inc. TSBF IL 13.06 84.94 84.94 11.09 1.72
Twin City Bancorp TWIN TN 23.75 131.09 131.09 16.95 2.81
Union Financial Bcshs, Inc. UFBS SC 14.70 151.75 185.11 11.61 2.23
United Federal Savings Bank UFRM NC 21.00 153.96 153.96 11.30 2.29
United Financial Corp. UBMT MT 20.70 124.75 124.75 29.97 3.96
USABancshares, Inc. USAB PA 37.50 144.87 147.06 11.11 -
Vermilion Bancorp Inc. VBAS IL NA 90.97 90.97 14.20 -
Virginia Beach Fed. Financial VABF VA 27.05 189.66 189.66 13.57 1.21
Warren Bancorp Inc. WRNB MA 12.82 198.53 198.53 21.15 2.57
Washington Bancorp WBIO IA 15.08 109.81 109.81 17.96 2.19
Washington Fed Bank for Svgs WFBS IL 17.27 106.53 106.53 10.51 2.54
Washington Federal Inc. WFSL WA 14.55 211.78 230.71 26.58 2.88
Washington Mutual Inc. WAMU WA 29.43 339.62 366.55 18.53 1.63
Washington Savings Bank, FSB WSB MD 20.96 138.08 138.08 11.57 1.40
Wayne Bancorp Inc. WYNE NJ 20.14 131.90 131.90 16.39 0.92
Webster Financial Corp. WBST CT 19.11 234.35 272.19 12.51 1.27
Wells Financial Corp. WEFC MN 16.97 124.50 124.50 17.70 2.60
West Town Bancorp Inc. WESXX IL 15.07 62.22 62.22 8.76 -
Westco Bancorp WCBI IL 16.56 136.46 136.46 21.21 2.57
Westcorp WES CA NA 132.22 132.52 12.01 2.33
WesterFed Financial Corp. WSTR MT 19.89 126.45 156.76 13.43 1.91
Western Ohio Financial Corp. WOFC OH 33.13 113.25 121.34 15.71 3.77
Westwood Homestead Fin. Corp. WEHO OH 28.18 109.15 109.15 30.19 1.81
WHG Bancshares Corp. WHGB MD 27.37 112.11 112.11 23.16 2.02
Wilshire Financial Services WFSG OR NA 280.10 280.10 14.78 -
Winton Financial Corp. WFI OH 14.74 168.52 171.89 12.09 2.33
Wood Bancorp Inc. FFWD OH 19.89 189.36 189.36 23.55 2.16
</TABLE>
III-9
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III
Market Valuation and Financial Data for All Public Thrifts
<TABLE>
<CAPTION>
==================================================================================================================================
LTM LTM Stock Total Price/
Total Core Core Price Market LTM
Assets ROAA ROAE 12/11/97 Value EPS
Company Ticker St. ($000) (%) (%) ($) ($M) (x)
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WSB Holding Co. WSBH PA 35,637 NA NA 13.750 4.55 NA
WSFS Financial Corp. WSFS DE 1,495,609 1.13 20.39 20.250 251.96 15.94
WVS Financial Corp. WVFC PA 282,235 1.28 10.65 32.000 55.94 15.46
Yonkers Financial Corporation YFCB NY 312,956 1.07 6.79 18.250 55.13 17.89
York Financial Corp. YFED PA 1,155,725 0.80 9.70 25.250 222.36 20.70
Average 1,311,512 0.92 8.41 23.69 215.54 17.52
Median 273,661 0.89 7.65 20.38 44.88 17.54
<CAPTION>
============================================================================================================
Price/ Price/ Price/ Price/
Core Book Tang. Total Div.
EPS Value Book Assets Yield
Company Ticker St. (x) (%) (%) (%) (%)
============================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
WSB Holding Co. WSBH PA NA 92.72 92.72 12.77 -
WSFS Financial Corp. WSFS DE 16.07 304.05 306.35 16.85 -
WVS Financial Corp. WVFC PA 15.53 165.12 165.12 19.82 3.75
Yonkers Financial Corporation YFCB NY 17.72 125.60 125.60 17.62 1.32
York Financial Corp. YFED PA 24.28 217.30 217.30 19.24 1.90
Average 16.95 154.26 160.14 18.40 1.53
Median 18.17 140.70 144.91 16.79 1.54
</TABLE>
Note: average and median price/earnings ratios exclude values greater than 25.
III-10
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III
Market Valuation and Financial Data for All Public Thrifts
<TABLE>
<CAPTION>
===================================================================================================================================
LTM LTM Stock Total Price/
Total Core Core Price Market LTM
Assets ROAA ROAE 12/11/97 Value EPS
Company Ticker St. ($000) (%) (%) ($) ($M) (x)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thrifts Under Acquisition
- -------------------------
Advantage Bancorp Inc. AADV WI 1,037,462 0.94 10.49 66.500 215.18 21.52
America First Financial Fund AFFFZ CA 2,250,517 2.00 24.78 49.000 294.52 8.05
Anchor Savings Bank FSB ANCXX FL 164,685 0.88 11.84 1.000 4.44 2.63
Branford Savings Bank BSBC CT 182,868 1.11 11.92 6.063 39.77 20.91
Capital Savings Bancorp Inc. CAPS MO 242,259 0.94 10.77 23.250 43.98 19.54
CENFED Financial Corp. CENF CA 2,304,678 0.57 11.14 41.750 250.17 17.25
CFX Corp. CFX NH 2,821,182 0.95 11.09 28.500 684.04 26.39
Charter Financial Inc. CBSB IL 393,268 1.16 7.78 23.750 98.57 22.84
Coast Savings Financial CSA CA 9,040,413 0.66 13.39 62.563 1,165.63 22.26
Eagle Financial Corp. EGFC CT 2,097,179 0.51 6.85 52.000 328.43 48.15
Emerald Isle Bancorp Inc. EIRE MA 443,503 0.92 13.23 32.000 71.99 20.38
First FS&LA of San Bernardino FSSB CA 103,538 0.05 1.22 9.850 3.23 57.94
Gateway Bancorp Inc. GWBC KY 62,609 0.94 3.59 18.750 20.28 31.78
GF Bancorp Inc. GNPI OH 49,451 0.95 7.11 32.000 9.87 23.36
GF Bancshares Incorporated GFBH GA 98,919 1.35 10.44 13.000 12.86 9.22
GFS Bancorp Inc. GFSB IA 94,496 1.27 11.03 17.063 16.86 15.23
Great Financial Corp. GTFN KY 2,893,505 0.77 8.01 49.125 679.08 22.53
Home Savings Bk of Siler City HSSC NC 56,380 0.75 4.17 14.750 13.61 32.78
HomeCorp Inc. HMCI IL 326,877 0.41 6.43 27.375 46.74 29.76
Indiana Community Bank SB INCB IN 96,089 0.53 4.30 20.500 18.90 39.42
Life Bancorp Inc. LIFB VA 1,486,357 0.86 8.10 36.000 354.51 26.09
Mid Continent Bancshares Inc. MCBS KS 405,262 1.20 11.87 46.000 90.25 21.40
Midwest Federal Financial MWFD WI 211,689 1.11 12.82 27.000 43.95 15.98
ML Bancorp Inc. MLBC PA 2,315,784 0.51 7.09 30.000 355.97 23.81
New York Bancorp Inc. NYB NY 3,244,200 1.49 28.61 38.000 810.11 16.89
North Cincinnati Savings Bank NSGB OH 60,585 0.31 3.43 16.750 6.65 33.50
Norwich Financial Corp. NSSB CT 700,860 1.07 9.54 30.250 164.33 21.15
Palfed Inc. PALM SC 668,504 0.67 8.22 28.250 149.70 58.85
Poughkeepsie Financial Corp. PKPS NY 883,981 0.54 6.44 10.500 132.25 30.00
Sho-Me Financial Corp. SMFC MO 344,849 1.24 12.97 49.750 74.58 18.56
Somerset Savings Bank SOSA MA 520,339 0.99 16.47 5.063 84.31 16.33
Westwood Financial Corp. WWFC NJ 110,425 0.78 2.50 27.625 17.83 23.02
Average 1,116,022 0.89 9.93 29.187 196.96 18.23
Median 399,265 0.93 9.99 27.938 79.45 20.38
<CAPTION>
===================================================================================================================
Price/ Price/ Price/ Price/
Core Book Tang. Total Div.
EPS Value Book Assets Yield
Company Ticker St. (x) (%) (%) (%) (%)
===================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Thrifts Under Acquisition
- -------------------------
Advantage Bancorp Inc. AADV WI 23.92 217.32 233.58 20.74 0.60
America First Financial Fund AFFFZ CA 7.99 166.61 168.38 13.09 3.27
Anchor Savings Bank FSB ANCXX FL 2.94 33.90 34.13 2.70 -
Branford Savings Bank BSBC CT 20.91 225.39 225.39 21.75 1.32
Capital Savings Bancorp Inc. CAPS MO 20.04 198.72 198.72 18.15 1.03
CENFED Financial Corp. CENF CA 19.15 194.10 194.37 10.85 0.86
CFX Corp. CFX NH 21.92 278.05 288.46 24.25 3.09
Charter Financial Inc. CBSB IL 22.41 173.23 195.80 25.06 1.35
Coast Savings Financial CSA CA 20.85 248.17 251.06 12.89 -
Eagle Financial Corp. EGFC CT 35.86 226.98 285.24 15.66 1.92
Emerald Isle Bancorp Inc. EIRE MA 19.28 232.22 232.22 16.23 0.88
First FS&LA of San Bernardino FSSB CA 54.72 70.06 71.85 3.12 -
Gateway Bancorp Inc. GWBC KY 31.78 116.10 116.10 32.39 2.13
GF Bancorp Inc. GNPI OH 20.51 144.08 144.08 19.96 1.50
GF Bancshares Incorporated GFBH GA 9.63 99.16 99.16 13.00 16.92
GFS Bancorp Inc. GFSB IA 15.23 154.98 154.98 17.84 1.52
Great Financial Corp. GTFN KY 30.51 233.04 242.83 23.47 1.22
Home Savings Bk of Siler City HSSC NC 32.78 142.79 142.79 24.14 2.71
HomeCorp Inc. HMCI IL 36.99 209.45 209.45 14.30 -
Indiana Community Bank SB INCB IN 39.42 165.59 165.59 19.67 1.76
Life Bancorp Inc. LIFB VA 27.91 222.63 229.01 23.85 1.33
Mid Continent Bancshares Inc. MCBS KS 19.74 227.72 227.72 22.27 0.87
Midwest Federal Financial MWFD WI 20.77 230.77 238.73 20.76 1.26
ML Bancorp Inc. MLBC PA 33.33 208.19 223.21 15.37 1.33
New York Bancorp Inc. NYB NY 18.63 479.19 479.19 24.97 1.58
North Cincinnati Savings Bank NSGB OH 34.18 114.73 114.73 10.98 -
Norwich Financial Corp. NSSB CT 23.09 201.00 221.45 23.45 1.85
Palfed Inc. PALM SC 34.04 263.04 263.04 22.39 0.43
Poughkeepsie Financial Corp. PKPS NY 30.00 177.66 177.66 14.96 1.91
Sho-Me Financial Corp. SMFC MO 19.51 219.84 219.84 21.63 -
Somerset Savings Bank SOSA MA 16.88 245.78 245.78 16.20 -
Westwood Financial Corp. WWFC NJ 21.58 173.20 193.59 16.15 0.72
Average 18.25 196.68 202.75 18.20 1.67
Median 19.89 204.60 214.65 18.91 1.29
</TABLE>
Note: average and median price/earnings ratios exclude values greater than 25.
III-11
<PAGE>
Feldman Financial Advisors, Inc.
- -------------------------------
Exhibit III
Market Valuation and Financial Data for All Public Thrifts
<TABLE>
<CAPTION>
================================================================================================================================
LTM LTM Stock Total Price/
Total Core Core Price Market LTM
Assets ROAA ROAE 12/11/97 Value EPS
Company Ticker St. ($000) (%) (%) ($) ($M) (x)
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mutual Holding Companies
- ------------------------
Ashe Federal Bank (MHC) ASFE NC 87,709 0.73 5.62 18.500 18.50 NA
Community Savings Bnkshrs(MHC) CMSV FL 709,220 0.74 6.46 34.875 177.69 32.29
Fidelity Bankshares Inc. (MHC) FFFL FL 1,045,692 0.57 6.48 30.000 203.55 31.91
First Carnegie Deposit (MHC) SKBO PA 147,102 0.54 4.45 18.875 43.41 NA
First Fed SB of Siouxland(MHC) FFSX IA 456,850 0.71 8.61 32.375 91.72 27.21
First Federal of SC, FSB (MHC) FCFS SC 73,625 0.73 8.63 12.500 12.53 48.08
First FS&LA of Alpena (MHC) FFAL MI 208,167 0.66 7.46 17.875 29.26 26.29
First Savings Bank (MHC) FSLA NJ 1,044,513 0.93 9.99 41.625 333.74 37.17
Greater Delaware Valley (MHC) GDVS PA 248,792 0.93 7.95 30.000 98.18 44.12
Guaranty Federal SB (MHC) GFED MO 210,139 0.97 6.78 26.125 81.64 42.14
Harbor Florida Bancorp (MHC) HARB FL 1,131,024 1.20 14.58 67.000 333.22 25.19
Harris Financial Inc. (MHC) HARS PA 2,110,299 0.77 9.21 19.000 641.81 36.54
Jacksonville Savings Bk (MHC) JXSB IL 164,235 0.54 5.05 28.500 36.26 36.08
Jefferson FS&LA (MHC) JFSB TN 176,047 1.41 11.57 29.000 53.98 22.31
Leeds Federal Savings Bk (MHC) LFED MD 285,425 1.19 7.30 23.000 119.19 35.38
Liberty Savings Bank (MHC) LBTM MO 160,850 0.70 6.31 22.000 29.22 52.38
Northwest Savings Bank (MHC) NWSB PA 2,100,744 0.96 9.84 14.750 689.61 34.30
Oswego City Savings Bk (MHC) PBHC NY 193,005 0.95 8.27 25.000 47.92 23.36
Pennsylvania Svgs Bk (MHC) PSBI PA 126,364 0.35 2.90 26.750 31.96 76.43
People's Bank (MHC) PBCT CT 7,731,200 0.74 8.90 35.500 2,169.97 24.83
Peoples Home Savings Bk (MHC) PHSB PA 206,426 0.80 8.55 18.750 51.75 NA
Perpetual Bank (MHC) PERT SC 256,211 1.11 9.03 56.250 84.63 47.67
Pocahontas FS&LA (MHC) PFSL AR 383,417 0.62 9.98 35.500 57.95 24.32
Ponchatoula Homestead (MHC) PHSXX LA 58,537 0.43 4.67 13.000 7.88 20.97
Pulaski Bank, Svgs Bank (MHC) PULB MO 180,232 0.92 7.16 30.000 62.82 51.72
Pulaski Savings Bank (MHC) PLSK NJ 178,987 0.62 6.82 19.000 39.33 NA
Roebling Savings Bank (MHC) ROEB NJ 32,306 1.17 14.90 18.750 7.98 NA
Roslyn Bancorp Inc. RSLN NY 3,474,150 1.17 6.80 22.000 960.13 NA
S. Carolina Community Bancshrs SCCB SC 45,619 1.15 4.37 22.500 15.72 28.85
Sandwich Bancorp Inc. SWCB MA 511,765 0.95 11.95 41.000 78.68 17.37
SB of the Finger Lakes (MHC) SBFL NY 227,970 0.24 2.51 30.000 53.55 68.18
Wake Forest FS&LA (MHC) WAKE NC 62,527 1.38 7.14 20.500 24.42 35.34
Wayne Savings Bancshares (MHC) WAYN OH 250,241 0.69 7.40 31.000 69.91 38.27
Webster City Federal SB (MHC) WCFB IA 94,481 1.42 6.09 21.250 44.63 32.69
Average 716,879 0.85 7.76 27.434 200.08 22.19
Median 209,153 0.79 7.35 25.563 55.97 22.84
<CAPTION>
=================================================================================================================
Price/ Price/ Price/ Price/
Core Book Tang. Total Div.
EPS Value Book Assets Yield
Company Ticker St. (x) (%) (%) (%) (%)
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Mutual Holding Companies
- ------------------------
Ashe Federal Bank (MHC) ASFE NC NA 168.33 173.22 21.09 1.08
Community Savings Bnkshrs(MHC) CMSV FL 35.23 215.01 215.01 25.05 2.58
Fidelity Bankshares Inc. (MHC) FFFL FL 37.50 237.15 238.66 19.47 3.00
First Carnegie Deposit (MHC) SKBO PA NA 177.90 177.90 29.51 1.59
First Fed SB of Siouxland(MHC) FFSX IA 27.91 229.94 231.75 20.08 1.48
First Federal of SC, FSB (MHC) FCFS SC 24.51 196.54 196.54 17.02 -
First FS&LA of Alpena (MHC) FFAL MI 26.29 186.78 226.55 14.06 3.92
First Savings Bank (MHC) FSLA NJ 35.58 335.96 369.67 31.95 1.15
Greater Delaware Valley (MHC) GDVS PA 44.12 338.98 338.98 39.46 1.20
Guaranty Federal SB (MHC) GFED MO 43.54 298.23 298.23 38.85 1.68
Harbor Florida Bancorp (MHC) HARB FL 25.38 344.30 355.44 29.46 2.09
Harris Financial Inc. (MHC) HARS PA 44.19 371.09 419.43 30.41 1.16
Jacksonville Savings Bk (MHC) JXSB IL 43.18 209.25 209.25 22.08 1.58
Jefferson FS&LA (MHC) JFSB TN 22.31 246.60 246.60 30.66 1.72
Leeds Federal Savings Bk (MHC) LFED MD 35.38 250.27 250.27 41.76 2.20
Liberty Savings Bank (MHC) LBTM MO 28.21 175.16 175.16 18.17 3.64
Northwest Savings Bank (MHC) NWSB PA 35.12 340.65 360.64 32.83 1.09
Oswego City Savings Bk (MHC) PBHC NY 26.04 207.99 247.52 24.83 1.12
Pennsylvania Svgs Bk (MHC) PSBI PA 76.43 216.25 216.42 25.29 -
People's Bank (MHC) PBCT CT 38.17 311.13 311.40 28.07 2.14
Peoples Home Savings Bk (MHC) PHSB PA NA 183.46 183.46 25.07 -
Perpetual Bank (MHC) PERT SC 34.94 279.29 279.29 33.03 2.49
Pocahontas FS&LA (MHC) PFSL AR 24.48 239.06 239.06 15.11 2.54
Ponchatoula Homestead (MHC) PHSXX LA 30.95 138.15 138.15 13.46 5.85
Pulaski Bank, Svgs Bank (MHC) PULB MO 38.46 267.14 267.14 34.86 3.67
Pulaski Savings Bank (MHC) PLSK NJ NA 183.40 183.40 21.97 1.58
Roebling Savings Bank (MHC) ROEB NJ NA NA NA 24.70 -
Roslyn Bancorp Inc. RSLN NY NA 156.70 157.48 27.64 1.27
S. Carolina Community Bancshrs SCCB SC 28.85 129.68 129.68 34.46 2.67
Sandwich Bancorp Inc. SWCB MA 17.67 193.76 201.57 15.37 3.42
SB of the Finger Lakes (MHC) SBFL NY 103.45 251.68 251.68 23.49 1.33
Wake Forest FS&LA (MHC) WAKE NC 27.33 201.18 201.18 39.06 1.95
Wayne Savings Bancshares (MHC) WAYN OH 40.79 293.01 293.01 27.94 2.00
Webster City Federal SB (MHC) WCFB IA 32.69 202.00 202.00 47.24 3.77
Average 22.24 235.64 241.99 27.16 1.97
Median 23.40 216.25 231.75 26.46 1.70
</TABLE>
Note: average and median price/earnings ratios exclude values greater than 25.
III-12
<PAGE>
Feldman Financial Advisor, Inc.
- -------------------------------
Exhibit IV-1
Pro Forma Conversion Assumptions
1. The total amount of the net conversion proceeds was fully invested at the
beginning of the applicable period
2. The net conversion proceeds are invested to yield a return of 5.44%, which
represents the one-year U.S. Treasury bill yield as of September 30, 1997.
The effective income tax rate was assumed to be 36.0%, resulting in an
after-tax yield of 3.48%.
3. It is assumed that 8.0% of the shares offered in a full conversion would be
purchased by the Bank's Employee Stock Ownership Plan ("ESOP"). For the MHC
conversion valuation, it is assumed that the ESOP purchases 8.0% of the
amount sold in the initial offering. Pro forma adjustments have been made to
earnings and equity to reflect the impact of the ESOP. The annual ESOP
expense is estimated based on a 10-year debt amortization period. No
reinvestment is assumed on proceeds used to fund the ESOP.
4. It is assumed that 4.0% of the shares offered in a full conversion would be
purchased in the open market by the Bank's Stock Plans. For the MHC
conversion valuation, it is assumed that the Stock Plans acquires, through
open market purchases, 4.0% of the amount sold in the initial offering. Pro
forma adjustments have been made to earnings and equity to reflect the
impact of the RSP. The annual RSP expense is estimated based on a 5-year
vesting period. No reinvestment is assumed on proceeds used to fund the MRP.
5. Conversion expenses are estimated at $818,000 for both the MHC conversion
valuation and $1.23 million for the full conversion.
6. The number of shares outstanding for purposes of calculating earnings per
share is adjusted to reflect the shares assumed to held by the ESOP not
committed to be released within the first year following the conversion.
7. No effect has been given to withdrawals from deposit accounts for the
purpose of purchasing common stock in the conversion.
IV-1
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit IV-2
Pro Forma Valuation Range: Full Conversion
As of September 30, 1997
(In $000s, except share data)
<TABLE>
<CAPTION>
Pro Forma Market Capitalization $28,900 $34,000 $39,100 $44,965
Amount Sold to Public 100.0% 100.0% 100.0% 100.0%
------------------------------------------------------------------------
Minimum Midpoint Maximum Adj. Max
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares issued 2,890,000 3,400,000 3,910,000 4,496,500
Shares sold 2,890,000 3,400,000 3,910,000 4,496,500
Offering price $10.00 $10.00 $10.00 $10.00
- --------------------------------------------------------------------------------------------------------------------------------
Gross proceeds 28,900 34,000 39,100 44,965
Less: estimated expenses (1,028) (1,130) (1,232) (1,349)
------- ------- ------- -------
Net offering proceeds 27,872 32,870 37,868 43,616
Less: ESOP purchase (2,312) (2,720) (3,128) (3,597)
Less: RSP purchase (1,156) (1,360) (1,564) (1,799)
------- ------- ------- -------
Net investable proceeds 24,404 28,790 33,176 38,220
- --------------------------------------------------------------------------------------------------------------------------------
Net income:
LTM ended September 30, 1997 1,432 1,432 1,432 1,432
Pro forma income on net proceeds 849 1,002 1,155 1,330
Pro forma ESOP adjustment (148) (174) (200) (230)
Pro forma RSP adjustment (148) (174) (200) (230)
----- ----- ----- -----
Pro forma net income 1,985 2,086 2,187 2,302
----- ----- ----- -----
Pro forma net income per share $0.74 $0.66 $0.60 $0.55
- --------------------------------------------------------------------------------------------------------------------------------
Core net income:
LTM ended September 30, 1997 1,398 1,398 1,398 1,398
Pro forma income on net proceeds 849 1,002 1,155 1,330
Pro forma ESOP adjustment (148) (174) (200) (230)
Pro forma RSP adjustment (148) (174) (200) (230)
----- ----- ----- -----
Pro forma core net income 1,951 2,052 2,153 2,268
----- ----- ----- -----
Pro forma core income per share $0.73 $0.65 $0.59 $0.54
- --------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Total equity at September 30, 1997 20,768 20,768 20,768 20,768
Net proceeds 27,872 32,870 37,868 43,616
Less: ESOP purchase (2,312) (2,720) (3,128) (3,597)
Less: RSP purchase (1,156) (1,360) (1,564) (1,799)
------- ------- ------- -------
Pro forma stockholders' equity 45,172 49,558 53,944 58,988
------- ------- ------- -------
Pro forma book value per share $15.63 $14.58 $13.80 $13.12
- --------------------------------------------------------------------------------------------------------------------------------
Total assets:
Total assets at September 30, 1997 173,471 173,471 173,471 173,471
Net proceeds 27,872 32,870 37,868 43,616
Less: ESOP purchase (2,312) (2,720) (3,128) (3,597)
Less: RSP purchase (1,156) (1,360) (1,564) (1,799)
------- ------- ------- -------
Pro forma total assets 197,875 202,261 206,647 211,691
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
IV-2
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit IV-3
Pro Forma Valuation Range: MHC Offering
As of September 30, 1997
(In $000s, except share data)
<TABLE>
<CAPTION>
Pro Forma Market Capitalization $28,900 $34,000 $39,100 $44,965
Amount Sold to Public 47.0% 47.0% 47.0% 47.0%
------------------------------------------------------------------------
Minimum Midpoint Maximum Adj. Max
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares issued 2,890,000 3,400,000 3,910,000 4,496,500
Shares sold 1,358,300 1,598,000 1,837,700 2,113,355
Offering price $10.00 $10.00 $10.00 $10.00
- --------------------------------------------------------------------------------------------------------------------------------
Gross proceeds 13,583 15,980 18,377 21,134
Less: estimated expenses (722) (770) (818) (873)
------ ------ ------ -----
Net offering proceeds 12,861 15,210 17,559 20,261
Less: ESOP purchase (1,087) (1,278) (1,470) (1,691)
Less: RSP purchase (543) (639) (735) (845)
------ ------ ------ ------
Net investable proceeds 11,231 13,293 15,354 17,725
- --------------------------------------------------------------------------------------------------------------------------------
Net income:
LTM ended September 30, 1997 1,432 1,432 1,432 1,432
Pro forma income on net proceeds 391 463 534 617
Pro forma ESOP adjustment (70) (82) (94) (108)
Pro forma RSP adjustment (70) (82) (94) (108)
----- ------ ------ ------
Pro forma net income 1,683 1,731 1,778 1,833
----- ------ ------ ------
Pro forma net income per share $0.60 $0.53 $0.47 $0.42
- --------------------------------------------------------------------------------------------------------------------------------
Core net income:
LTM ended September 30, 1997 1,364 1,364 1,364 1,364
Pro forma income on net proceeds 391 463 534 617
Pro forma ESOP adjustment (70) (82) (94) (108)
Pro forma RSP adjustment (70) (82) (94) (108)
----- ------ ------ ------
Pro forma core net income 1,615 1,663 1,710 1,765
----- ------ ------ ------
Pro forma core income per share $0.58 $0.51 $0.45 $0.41
- --------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Total equity at September 30, 1997 20,768 20,768 20,768 20,768
Net proceeds 12,861 15,210 17,559 20,261
Less: ESOP purchase (1,087) (1,278) (1,470) (1,691)
Less: RSP purchase (543) (639) (735) (845)
------ ------- ------- -------
Pro forma stockholders' equity 31,999 34,061 36,122 38,493
------ ------- ------- -------
Pro forma book value per share $11.07 $10.02 $9.24 $8.56
- --------------------------------------------------------------------------------------------------------------------------------
Total assets:
Total assets at September 30, 1997 173,471 173,471 173,471 173,471
Net proceeds 12,861 15,210 17,559 20,261
Less: ESOP purchase (1,087) (1,278) (1,470) (1,691)
Less: RSP purchase (543) (639) (735) (845)
------- ------- ------- -------
Pro forma total assets 184,702 186,764 188,825 191,196
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
IV-3
<PAGE>
Feldman Financial Advisors, Inc.
- -------------------------------
Exhibit IV-4
Comparative Valuation Ratios -- Full Conversion Valuation
Market Price Data as of December 11, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
North
Nationwide Carolina
Comparative Public Thrift Public Thrift
Group Aggregate(1) Aggregate(2)
Valuation Gaston ------------------- ------------------ -------------------
Ratio Symbol Federal Mean Median Mean Median Mean Median
------ ------ ------- ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Price/LTM EPS (3) P/E
-----------
Adj. Maximum (x) 18.1 17.7 17.1 17.5 17.5 18.2 17.1
Maximum 16.6
Midpoint 15.1
Minimum 13.5
-----------
Price/Core EPS (3) P/E
-----------
Adj. Maximum (x) 18.4 18.9 17.7 17.0 18.2 18.3 18.2
Maximum 16.9
Midpoint 15.4
Minimum 13.7
-----------
Price/Book Value P/B
-----------
Adj. Maximum (%) 76.2 137.1 127.6 154.3 140.7 130.8 128.9
Maximum 72.5
Midpoint 68.6
Minimum 64.0
-----------
Price/Tangible Book P/B
-----------
Adj. Maximum (%) 76.2 139.4 127.7 160.1 144.9 131.5 128.9
Maximum 72.5
Midpoint 68.6
Minimum 64.0
-----------
Price/Total Assets P/A
-----------
Adj. Maximum (%) 21.24 18.70 17.49 18.40 16.79 27.29 29.25
Maximum 18.92
Midpoint 16.81
Minimum 14.61
-----------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 348 publicly-traded, non-MHC, non-acquired thrifts nationwide.
(2) Includes 15 publicly-traded, non-MHC, non-acquired thrifts based in North
Carolina.
(3) Price/earnings ratios exclude values greater than 25.
IV-4
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit IV-5
Pro Forma Full Conversion Analysis at Maximum Value
Gaston Federal Savings & Loan Association
Financial Data as of September 30, 1997
<TABLE>
<CAPTION>
Valuation Parameters Symbol Data
- -------------------- ------ ----------
<S> <C> <C> <C>
Net income -- LTM Y $ 1,432,000
Core income -- LTM Y 1,398,200
Net worth B 20,768,000
Tangible net worth B 20,768,000
Total assets A 173,470,000
Expenses in conversion X 1,232,000
Other proceeds not reinvested O 4,692,000
ESOP purchase E 8.0% 3,128,000
ESOP expense (pre-tax) F 10.0% 312,800
RSP purchase M 4.0% 1,564,000
RSP expense (pre-tax) N 20.0% 312,800
Re-investment rate (after-tax) R 3.48%
Tax rate T 36.00%
Shares for EPS S 96.57%
<CAPTION>
Pro Forma Valuation Ratios at Maximum Value
- -------------------------------------------
<S> <C> <C> <C>
Price / LTM earnings P/E 16.59 x
Price / core earnings P/E 16.85 x
Price / book value P/B 72.5%
Price / tangible book P/B 72.5%
Price / assets P/A 18.9%
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Calculation at Maximum Value Based on
- -------------------------------------- --------
<S> <C> <C>
V = (P/E / S)*((Y-R*(O+X)-(F+N)*(1-T))) = $35,261,388 [LTM earnings]
-----------------------------------
1 - (P/E / S) * R
V = (P/E / S)*((Y-R*(O+X)-(F+N)*(1-T))) = $35,166,837 [Core earnings]
-----------------------------------
1 - (P/E / S) * R
V = P/B * (B - X - E - M) = $39,100,000 [Book value]
---------------------
1 - P/B
V = P/B * (B - X - E - M) = $39,100,000 [Tangible book]
---------------------
1 - P/B
V = P/A * (B - X - E - M) = $39,099,767 [Total assets]
---------------------
1 - P/A
</TABLE>
Pro Forma Valuation Range
- -------------------------
Minimum = $34,000,000 x 0.85 = $28,900,000
Midpoint = $34,000,000 x 1.00 = $34,000,000
Maximum = $34,000,000 x 1.15 = $39,100,000
Adj. Max. = $34,000,000 x 1.15 = $44,965,000
IV-5
EXHIBIT 99.3
<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
------------------------------------
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
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
<PAGE>
SUMMARY OF PROPOSED REORGANIZATION
This summary does not purport to be complete and is qualified in its
entirety by the more delailed 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
for Reorganization expected to enhance the Association's ability to
and Offering expand through 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
Community Offering for 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
<PAGE>
in the Subscription Offering, with a preference first
to natural persons residing in Gaston County, North
Carolina.
Subscription Rights Each Eligible Account Holder shall be given
of Eligible Account non-transferable rights to subscribe for up to
Holders $250,000 of 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 1% 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.
Subscription Rights The Association's Tax-Qualified Employee Plans shall be
of Tax-Qualified given non-transferable rights to subscribe for up to
Employee Plans 8% of 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
of Supplemental after satisfaction of subscriptions by Eligible Account
Eligible Account Holders and the Tax-Qualified Employee Plans, each
Holders Supplemental 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 1% 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 pro 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
of Other Members remaining 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
2
<PAGE>
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 1% 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
Limitations $250). 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 1% 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
Community Offerings Date"). 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
for Shares being 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
THE PLAN
3
<PAGE>
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. We will send you a copy of the Plan if you write to the Secretary of
the Association, at the address given above, and request a copy of the Plan.
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
4
<PAGE>
for each separate account and they would together be entitled to cast 500 votes
on the basis of the joint account. 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
5
<PAGE>
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.
ss.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.
6
<PAGE>
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.
7
<PAGE>
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
--- -------
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.
- --------------------------------------------------------------------------------
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
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.
- --------------------------------------------------------------------------------
<PAGE>
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.
______________________________
Date
______________________________
Signature
NOTE: Only one signature is required
in the case of a joint account.
- --------------------------------------------------------------------------------
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN
THE ENCLOSED ENVELOPE.
- --------------------------------------------------------------------------------
EXHIBIT 99.4
<PAGE>
GASTON FEDERAL BANCORP, INC.
PROPOSED HOLDING COMPANY FOR
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
GASTONIA, NORTH CAROLINA
AND
GASTON FEDERAL HOLDINGS, MHC
PROPOSED MUTUAL HOLDING COMPANY FOR
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
GASTONIA, NORTH CAROLINA
PROPOSED MARKETING MATERIALS
<PAGE>
I. Press Release
A. Explanation
B. Schedule
C. Distribution List
D. Press Release Examples
II. Advertisements
A. Explanation
B. Schedule
C. Advertisement Examples
III. Question and Answer Brochure
A. Explanation
B. Quantity and Method of Distribution
C. Example
IV. Officer and Director Support Brochure
A. Explanation
B. Method of Distribution
C. Example
V. IRA Mailing
A. Explanation
B. Quantity and Method of Distribution
C. IRA Mailing Example
VI. Counter Cards and Lobby Posters
A. Explanation
B. Quantity
VII. Invitations
A. Explanation
B. Quantity - Method of Distribution
C. Examples
VIII. Letters
A. Explanation
B. Method of Distribution
C. Examples
IX. Proxygram
A. Explanation
B. Example
<PAGE>
I. Press Releases
A. Explanation
In an effort to assure that all customers, community members and other
interested investors receive prompt accurate information in a
simultaneous manner, the Bank will forward press releases to area
newspapers, radio stations, etc. at various points during the
Conversion and Reorganization process.
Only press releases approved by Issuer's Counsel and the Office of
Thrift Supervision will be forwarded for publication in any manner.
B. Schedule
1. Approval of Conversion and Reorganization
2. Close of Stock Offering
<PAGE>
National and Local Distribution List
------------------------------------
The Bank should provide a supplemental distribution list that includes all local
newspapers that it considers to be within its market area.
(TO BE PROVIDED)
<PAGE>
Press Release FOR IMMEDIATE RELEASE
---------------------
For More Information Contact:
Kim S. Price
President and Chief Executive Officer
Gaston Federal Savings and Loan Association
(704) 868-5200
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
-------------------------------------------
REORGANIZATION FROM MUTUAL FORM OF OWNERSHIP TO THE MUTUAL
----------------------------------------------------------
HOLDING COMPANY FORM OF OWNERSHIP APPROVED
------------------------------------------
Kim S. Price, President and Chief Executive Officer of Gaston Federal
Savings and Loan Association (the "Bank"), Gastonia, North Carolina-, announced
today that the Bank has received approval from the Office of Thrift Supervision
and the Securities and Exchange Commission to reorganize from the mutual form of
ownership to the mutual holding company form of organization. As part of the
Reorganization, the Bank will become a wholly-owned subsidiary of Gaston Federal
Bancorp, Inc. (the "Company"), to serve as the holding company of the Bank.
Pursuant to a plan of conversion and reorganization, the Company will
issue up to 3,910,000 shares, subject to adjustment, of its common stock. The
majority of the Company's stock will be issued to Gaston Federal Holdings, MHC,
a federal mutual holding company, and sell a minority of its common stock to the
public pursuant to the company's prospectus. The stock will be offered at $10.00
per share on a priority basis to certain depositors of the bank as of March 31,
1996, the Bank's Employee Stock Ownership Plan, certain depositors of the Bank
as of December 31, 1997, and employees, officers and directors of the Bank who
are not Eligible Account Holders or Supplemental Eligible Account Holders.
Subject to prior rights of holders of subscription rights and based on
availability, shares may be offered in a Community Offering, if conducted, to
certain members of the general public. The Subscription and Community Offering
(together, the
<PAGE>
"Offering") will be managed by Trident Securities, Inc. of Raleigh, North
Carolina. Prospectuses describing, among other things, the terms of the Offering
will be mailed to certain customers of the Bank on or about February _____,
1998.
As a result of the reorganization, the Bank will operate as a
subsidiary of the Company. According to Mr. Price, "Our day to day operations
will not change as a result of the reorganization and deposits will continue to
be insured by the FDIC up to the applicable legal limits."
Customers or members of the community with questions concerning the
reorganization should call the Stock Information Center at (704)_____________,
or visit the Bank's main office at 245 West Main Avenue, Gastonia, North
Carolina 28053.
This is neither an offer to sell nor a solicitation of an offer to buy the stock
of Gaston Federal Bancorp, Inc. The offer is made only by the Prospectus. The
shares of Common Stock are not deposits or savings accounts and will not be
insured by the Federal Deposit Insurance Corporation or any other government
agency.
<PAGE>
Press Release FOR IMMEDIATE RELEASE
---------------------
For More Information Contact:
Kim S. Price
President and Chief Executive Officer
Gaston Federal Savings and Loan Association
(704) 868-5200
GASTON FEDERAL BANCORP, INC. COMPLETES REORGANIZATION AND STOCK SALE
Gastonia, North Carolina - (_______, 1998) Kim S. Price, President and
Chief Executive Officer of Gaston Federal Savings and Loan Association (the
"Bank"), announced today that Gaston Federal Bancorp, Inc. (the "Company"), the
holding company for the Bank, will complete its stock offering on _________,
1998 in connection with the Bank's Conversion and Reorganization from the mutual
form of organization to the mutual holding company form of organization.
__________ shares were sold at $10.00 per share in connection with the stock
offering.
On ________, 1998, the Bank's Plan of Conversion and Reorganization was
approved by the Bank's voting depositors at a Special Meeting.
Mr. Price indicated that the board of the Bank want to express their
thanks for the response to the stock offering and that the Bank looks forward to
continuing to serve the needs of its customers and the community as a stock
institution. The offering was managed by Trident Securities, Inc. The stock is
expected to commence trading on the Nasdaq National Market System under the
symbol "______" on ___________, 1998.
<PAGE>
II. Advertisements
A. Explanation
The intended use of the attached advertisement "A" is to notify the
Bank's customers and members of the local community that the Conversion
and Reorganization offering is underway.
The intended use of advertisement "B" is to remind the Bank's customers
and members of the local community of the closing date of the stock
offering.
B. Media Schedule
1. Advertisement A - To be run immediately following regulatory
approval and run as often as weekly thereafter.
2. Advertisement B - To be run during the last week of the
subscription offering.
The Bank may, depending upon the response from customers and the
community, choose to run fewer ads or no ads at all.
<PAGE>
Advertisement (A)
- --------------------------------------------------------------------------------
This announcement is neither an offer to sell nor a solicitation of an offer
to buy these securities. The offer is made only by the Prospectus. These
shares have not been approved or disapproved by the Securities and
Exchange Commission, the Federal Deposit Insurance Corporation, nor has such
commission, or corporation passed upon the accuracy or adequacy of the
prospectus. Any representation to the contrary is unlawful.
NEW ISSUE _______, 1998
________ SHARES
These shares are being offered pursuant
to a Plan of Conversion and Reorganization whereby
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
Gastonia, North Carolina will
convert from the mutual form of ownership
to the mutual holding company form of organization
and become a wholly-owned subsidiary of
GASTON FEDERAL BANCORP, INC.
COMMON STOCK
---------------
PRICE $10.00 PER SHARE
---------------
TRIDENT SECURITIES, INC.
For a copy of the prospectus call ( ) ________.
Copiesof the Prospectus may be obtained in any State in which this announcement
is circulated from the undersigned or such other brokers and dealers
as may legally offer these securities in such state.
- --------------------------------------------------------------------------------
<PAGE>
Advertisement (B)
- --------------------------------------------------------------------------------
ATTENTION: GASTON FEDERAL SAVINGS
AND LOAN'S ELIGIBLE DEPOSITORS
_____________, IS THE DEADLINE TO
ORDER STOCK OF GASTON FEDERAL BANCORP, INC.
Eligible depositors of Gaston Federal Savings and Loan Association
have the opportunity to invest in Gaston Federal Savings
and Loan by subscribing for common stock in its proposed holding company
GASTON FEDERAL BANCORP, INC.
A Prospectus relating to these securities is
available at our office or by calling our
Stock Information Center at ( ) _____________.
This announcement is not an offer to sell or a
solicitation of an offer to buy the stock of Gaston Federal Bancorp, Inc.
The offer is made only by the Prospectus.
The shares of Common Stock are not deposits or savings accounts
and will not be insured by the Federal Deposit Insurance Corporation
or any other government agency.
<PAGE>
III. Question and Answer Brochure
A. Explanation
The Question and Answer brochure is an essential marketing piece in any
Conversion and Reorganization. It serves to answer some of the most
commonly asked questions in "plain, everyday language". Although most
of the answers are taken verbatim from the Prospectus, it saves a
prospective investor from searching for the answer to a simple
question.
B. Method of Distribution
There are four primary methods of distribution of the Question and
Answer brochure. However, regardless of the method the brochures are
always accompanied by a Prospectus.
1. A Question and Answer brochure is sent out in the initial
mailing to all eligible account holders of the Bank.
2. Question and Answer brochures are available at the Bank.
3. Question and Answer brochures are distributed in information
packets at community meetings.
4. Question and Answer brochures are sent out in a standard
information packet to all interested investors who phone the
Stock Information Center requesting information.
<PAGE>
QUESTIONS AND ANSWERS CONCERNING
THE PLAN OF MUTUAL HOLDING
COMPANY REORGANIZATION
Gaston Federal Savings and Loan Association
Gastonia, North Carolina
Questions and Answers Regarding the Subscription and Community Offering
MUTUAL HOLDING COMPANY REORGANIZATION
Gaston Federal Savings and Loan Association's Board of Directors have
unanimously adopted a Plan of Reorganization pursuant to which Gaston Federal
Savings and Loan Association (the "Bank") will reorganize from a federally
chartered mutual savings and loan into the mutual holding company form of
ownership. As part of the Reorganization, the Bank will become a wholly owned
subsidiary of a stock holding company, Gaston Federal Bancorp, Inc. (the
"Company") and the Holding Company will become a subsidiary of the Mutual
Holding Company. In conjunction with this Reorganization, the Holding Company
will offer 47% of its common stock in a stock offering to certain depositors of
the Bank. The remaining stock, which will not constitute less than a majority of
the common stock, will be owned by the Mutual Holding Company.
The Reorganization is subject to approval by the Bank's depositors and
the appropriate regulatory authorities. Complete details on the Reorganization
are contained in the Prospectus and Proxy Statement.
1. Q. WHAT WILL BE THE EFFECT OF THE REORGANIZATION?
A. The Bank will create a Holding Company named Gaston Federal
Bancorp, Inc. (the "Company") and a Mutual Holding Company as
part of the Reorganization. Gaston Federal Bancorp, Inc. will
own 100% of the Bank's stock. The Mutual Holding Company will
own no less than 53% of the stock of the Company. Stockholders
will own no more than 47% of the Company. Qualifying
depositors will receive subscription rights to purchase stock
in the Company.
2. Q. WHAT IS THE REASON FOR THE CONVERSION AND REORGANIZATION?
A. The Board of Directors of Gaston Federal Savings and Loan
Association has studied the issue of Mutual Holding Company
Reorganizations for quite some time. With the many regulatory
changes our industry faces today, the Board felt that being in
the Mutual Holding Company form of ownership provided us with
greater regulatory and capital structure flexibility to meet
our future challenges.
The Reorganization will permit the Holding Company to issue
capital stock, which is a source of capital not available to
mutual savings banks. If the Bank elected to
<PAGE>
undertake a standard conversion, applicable regulations would
have required a greater amount of stock to be sold, resulting
in the raising of an amount of capital that could not be
effectively utilized by the Bank.
The Reorganization will also provide the Bank with additional
flexibility to structure and finance the expansion of it's
operations including the possible acquisition of other
financial institutions. At the same time, Gaston Federal
Savings and Loan Association's mutual form of ownership and
it's desire to remain an independent savings bank will be
preserved. It is very important to the Bank to remain a
community oriented institution focused on providing a high
quality of service to our customers.
3. Q. WILL THE REORGANIZATION HAVE ANY EFFECT ON MY SAVINGS ACCOUNT
OR LOAN ACCOUNT WITH THE BANK?
A. No. CUSTOMERS WILL BE SERVED IN THE SAME OFFICES BY THE SAME
STAFF. The Reorganization will not affect the amount, interest
rate or withdrawal rights of deposit accounts, which will
continue to be insured by the Federal Deposit Insurance
Corporation to the maximum legal limit. Likewise, the loan
accounts and rights of borrowers will not be affected.
4. Q. WILL THERE BE CHANGES IN DIRECTORS, OFFICERS OR EMPLOYEES
OF THE BANK AS A RESULT OF THE REORGANIZATION?
A. No. Officers and employees of the Bank will continue in their
current capacities. The directors of the Bank will serve as
the initial directors of the Holding Company.
5. Q. DOES THE COMPANY ANTICIPATE PAYING CASH DIVIDENDS ON THE
HOLDING COMPANY'S COMMON STOCK?
A. The Company intends to pay cash dividends at an initial annual
rate of $___ per share. The Holding Company's ability to pay
dividends will depend on the net proceeds retained from the
Offerings and on dividends received from the Bank, which is
subject to various regulatory restrictions on the payment of
dividends.
6. Q. HOW WILL THE PROCEEDS FROM THE OFFERINGS BE USED?
A. Net proceeds from the sale of the Stock are estimated to be
between $13.6 million and $21.1 million. The Holding Company
plans to contribute to the Bank 50% of the net proceeds from
the Offerings and retain the remainder of the net proceeds.
The Holding Company intends to use a portion of the net
proceeds retained by it to make a loan directly to an employee
stock ownership plan (the "ESOP") to enable the ESOP to
purchase 8% of the common stock. The remainder of the net
proceeds retained by the Holding Company will initially be
invested in short-term interest-bearing deposits and
marketable securities. Funds retained by the Holding Company
may be used to support the future expansion of operations and
for other business or
<PAGE>
investment purposes, including the acquisition of other
financial institutions and/or branch offices, although there
are no current plans, arrangements, understandings or
agreements regarding such expansion or acquisitions. Subject
to applicable limitations, such funds also may be used in the
future to repurchase shares of common stock. Funds contributed
to the Bank from the Holding Company will be used for general
business purposes. The proceeds will be used to support the
Bank's lending and investment activities and thereby enhance
the Bank's capabilities to service the borrowing and other
financial needs of the communities it serves.
VOTING - YOUR VOTE IS IMPORTANT
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION'S DEPOSITORS (AS DEFINED BELOW) ARE
BEING ASKED TO APPROVE THE PLAN OF REORGANIZATION, WHICH WAS ADOPTED BY THE
BOARD OF DIRECTORS OF THE BANK AND APPROVED BY FEDERAL REGULATORS. A COPY OF THE
PLAN OF REORGANIZATION MAY BE OBTAINED FROM ANY BANK OFFICE OR BY CALLING THE
STOCK INFORMATION CENTER.
VOTING ON THE PLAN DOES NOT AFFECT DEPOSIT OR LOAN ACCOUNTS AT THE BANK, AND
DOES NOT OBLIGATE DEPOSITORS TO PURCHASE STOCK IN THE OFFERINGS.
7. Q. WHICH CUSTOMERS OF THE BANK ARE BEING ASKED TO VOTE ON THE
PLAN?
A. Depositors of the Bank, as of the Voting Record Date, will be
eligible to vote on the Plan. The Voting Depositors have been
provided with Proxy Cards and Proxy Statements describing the
Plan.
Each depositor, as of the Voting Record Date, will be entitled
to cast one vote for each $100 or fraction thereof of the
withdrawable value of any savings accounts in the Bank as of
_____________, 1998, the Voting Record Date. Depositors
eligible to vote are called "Voting Depositors". The maximum
number of votes eligible to be cast by any depositor may not
exceed 1,000. Approval of the Plan requires the affirmative
vote of a majority of the total votes eligible to be cast.
THE BOARD OF DIRECTORS URGE DEPOSITORS TO VOTE FOR THE PLAN.
NOT VOTING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE
PLAN. Without sufficient favorable votes, the Reorganization
cannot be completed. In that event, funds submitted by
investors in connection with the Offerings would be promptly
returned, with interest.
8. Q. HOW DO I VOTE BY PROXY?
A. Please read the Proxy Statement that you receive. You may vote
by completing, signing and returning the Proxy Card in the
Proxy Return Envelope provided. PLEASE RESPOND PROMPTLY.
9. Q. WHY HAVE I RECEIVED MORE THAN ONE PROXY CARD?
<PAGE>
A. If you have more than one deposit account at the Bank, you
could receive more than one informational packet and each
packet should contain a separate Proxy Card, depending on the
ownership structure of your accounts. PLEASE VOTE, SIGN AND
PROMPTLY RETURN ALL PROXY CARDS.
10. Q. AM I OBLIGATED TO PURCHASE STOCK IF I VOTE IN FAVOR OF THE
PLAN?
A. No. Voting in no way obligates you to subscribe for stock. To
subscribe for stock, you must submit your order on a separate
order form along with the appropriate payment.
THE OFFERINGS
INVESTMENT IN COMMON STOCK INVOLVES CERTAIN RISKS. BEFORE MAKING AN INVESTMENT
DECISION, PLEASE CAREFULLY READ THE ENCLOSED PROSPECTUS, INCLUDING THE SECTION
ENTITLED "RISK FACTORS."
11. Q. WHO MAY PURCHASE CONVERSION STOCK IN THE OFFERINGS?
A. The Offerings consist of (i) a SUBSCRIPTION OFFERING to
certain past and current depositors of the Bank and (ii)
COMMUNITY OFFERING, IF ANY, to certain residents of Gaston
County, North Carolina.
The common stock is being offered in the following order of
priority: (i) depositors of the Bank with account balances of
$50 or more as of the close of business on March 31, 1996
("Eligible Account Holders"); (ii) the Bank's Employee Stock
Option Plan; (iii) depositors of the Bank with account
balances of $50 or more as of the close of business on
December 31, 1997 ("Supplemental Eligible Account Holders");
(iv) other depositors as of February __, 1998, the voting
record date; and (v) certain members of the general public
with preference to permanent residents of Gaston County, North
Carolina.
To the extent that shares remain available for purchase, a
Community Offering, if any, may commence without notice at any
time after the commencement of the Subscription Offering and
may terminate at any time without notice but may not terminate
later than _______, 1998. The right of any person to purchase
shares in the Community Offering, if any, is subject to the
absolute right of the Board to accept or reject such purchases
in whole or in part. Preference will be given in the Community
Offering to permanent residents of Gaston County, North
Carolina.
12. Q. WHAT IS THE PRICE PER SHARE?
A. The shares of Conversion Stock are being offered at a Purchase
Price of $10.00 per share. All subscribers will pay the same
price per share.
13. Q. WHEN MUST ONE PLACE AN ORDER FOR SHARES OF STOCK?
<PAGE>
A. Eligible depositors wishing to exercise their subscription
rights must return a completed Stock Order Form to GASTON
FEDERAL SAVINGS AND LOAN ASSOCIATION, together with full
payment or appropriate instructions authorizing a withdrawal
from a GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION deposit
account, on or prior to the close of the Subscription Offering
which will be 12:00 noon, Eastern time on _________, 1998, the
expiration date of the Subscription Offering.
14. Q. HOW DOES ONE PAY FOR STOCK DURING THE OFFERING?
A. First, one may pay for stock with cash (if delivered in person
to a GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION office) or by
check or money order. Subscription funds will earn interest at
the Bank's passbook rate from the day the Bank receives them
until the completion or termination of the Reorganization.
Second, one may authorize the bank to withdraw funds from a
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION savings account or
certificate of deposit without early withdrawal penalty. These
funds will continue to earn interest at the rate in effect for
the account until completion of the offering at which time
funds will be withdrawn for the stock purchase. Funds
remaining in this account (if any) will continue to earn at
the contractual rate unless the withdrawal reduces the account
balance below the applicable minimum in which case the
depositor will receive interest at the passbook rate. A hold
will be placed on the depositor's account for the amount
specified for stock payment. Such subscribers will not have
access to these funds from the day the Bank receives the stock
order until the completion or termination of the
Reorganization. Please refer to question 25 for IRA Stock
Purchase instructions.
15. Q. HOW MANY SHARES OF STOCK WILL BE OFFERED?
A. Gaston Federal Bancorp, Inc. is offering between 1,358,000 and
1,837,000 shares of its common stock at a price of $10.00 per
share. The Offering may be increased to 2,113,355 shares
without notice to you if market or financial conditions change
prior to completion of the offering.
16. Q. WHAT IS THE MINIMUM AND MAXIMUM NUMBER OF SHARES WHICH MAY
BE SUBSCRIBED FOR DURING THE OFFERING PERIOD?
A. The minimum number of shares that may be purchased is 25 (or
$250). The maximum number of shares that may be subscribed for
is $25,000 (or $250,000), subject to purchase limitations as
disclosed in the Prospectus.
17. Q. MUST ONE PAY A COMMISSION ON THE STOCK SUBSCRIBED FOR DURING
THIS OFFERING?
<PAGE>
A. No. Subscribers will not pay a commission on stock purchased
in the Subscription Offering, or the Community Offering, if
any.
18. Q. WILL SUBSCRIBERS RECEIVE INTEREST ON FUNDS SUBMITTED FOR STOCK
SUBSCRIPTIONS?
A. Yes. GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION will pay its
current passbook rate from the date funds are received (with a
completed Stock Order Form) during the Subscription and
Community Offerings until completion of the Reorganization.
19. Q. HOW MUCH STOCK DO THE DIRECTORS AND OFFICERS OF GASTON
FEDERAL SAVINGS AND LOAN ASSOCIATION INTEND TO SUBSCRIBE FOR
THROUGH THE SUBSCRIPTION OFFERING?
A. Directors and executive officers intend to subscribe for
$2,300,000 in stock. The purchase price paid by directors and
officers will be the same as that paid by customers and the
general public.
20. Q. ARE THE SUBSCRIPTION RIGHTS TRANSFERABLE TO ANOTHER PARTY?
A. No. Pursuant to federal regulations, Subscription Rights
granted to Eligible Account Holders and Supplemental Eligible
Account Holders may be exercised only by the person(s) to whom
they are granted. Any person found to be transferring or
selling Subscription Rights will be subject to forfeiture of
such rights and other penalties.
21. Q. IF A DEPOSITOR CLOSED AN ACCOUNT SEVERAL MONTHS AGO WILL
THEY STILL BE ELIGIBLE TO SUBSCRIBE FOR STOCK?
A. If they were an account holder with at least $50 on deposit on
March 31, 1996, the Eligibility Record Date, or the
Supplemental Eligibility Record Date, they may be eligible to
subscribe for stock regardless of whether or not they continue
to hold a GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION account.
22. Q. MAY ONE OBTAIN A LOAN FROM GASTON FEDERAL SAVINGS AND LOAN
ASSOCIATION USING STOCK AS COLLATERAL TO PAY FOR SHARES?
A. No. Federal regulations do not allow the Bank to make loans
for this purpose, but other financial institutions may make a
loan for this purpose.
23. Q. WILL THE FDIC (FEDERAL DEPOSIT INSURANCE CORPORATION) INSURE
THE SHARES OF STOCK?
A. No. The shares will not be insured by the FDIC. No stock is
insured. However, the FDIC will continue to insure savings
accounts and certificates of deposit up to the applicable
limits allowed by law.
<PAGE>
24. Q. WILL THERE BE A MARKET FOR THE STOCK FOLLOWING THE CONVERSION?
A. GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION has never issued
stock before, and consequently there is no established market
for its common stock. The Bank intends to seek approval to
have the common stock listed on the NASDAQ National Market
System. Trident Securities, Inc. intends to make a market in
the common stock on the NASDAQ System (to be revised).
However, purchasers of common stock should recognize that no
assurance can be given that an active and liquid trading
market will develop or, if developed, will be maintained.
25. Q. CAN ONE PURCHASE STOCK USING FUNDS IN A GASTON FEDERAL SAVINGS
AND LOAN ASSOCIATION IRA ACCOUNT?
A. If one wishes to utilize Individual Retirement Account
deposits held at GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
to subscribe for stock, potential subscribers are encouraged
to call the GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION Stock
Information Center for assistance. There will be no early
withdrawal or IRS penalties incurred by these transactions,
but additional paperwork will be necessary. The deadline for
using a Gaston Federal IRA will be one week prior to the
expiration of the offering.
26. Q. HOW DOES ONE OBTAIN FURTHER INFORMATION CONCERNING THE STOCK
OFFERING?
A. All interested investors are invited to call the Stock
Information Center for further information or for a copy of
the Prospectus, Stock Order Form, Proxy Statement and Proxy
Card. The Stock Information Center will be set up so that it
can assist customers in their purchase of stock and answer
their questions concerning the Reorganization.
THIS INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY GASTON FEDERAL BANCORP, INC. COMMON STOCK. OFFERS TO BUY OR
TO SELL MAY BE MADE ONLY BY THE PROSPECTUS. IF YOU ARE CONSIDERING PURCHASING
STOCK, YOU SHOULD READ THE PROSPECTUS PRIOR TO MAKING AN INVESTMENT DECISION.
COPIES OF THE PROSPECTUS MAY BE OBTAINED BY CALLING THE STOCK INFORMATION CENTER
AT ( ) _______________.
THE SHARES OF GASTON FEDERAL BANCORP, INC. COMMON STOCK BEING OFFERED
IN THE OFFERINGS AND THE EXCHANGE ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE
NOT INSURED BY THE SAVINGS BANK INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
<PAGE>
IV. Officer and Director Brochure
A. Explanation
An Officer and Director Brochure merely highlights in brochure form the
purchase commitments shown in the Prospectus.
B. Quantity
An Officer and Director brochure is proposed to be sent out in the
initial mailing to all the customers and stockholders of the Bank along
with the Prospectus. Alternatively, the information contained in this
brochure may be combined with the Question and Answer brochure.
<PAGE>
DIRECTOR AND EXECUTIVE OFFICER
INTENDED PURCHASES
Number of
Name Aggregate Purchase Price Shares
---- ------------------------ ------
B. Frank Matthews, II $200,000 20,000
Sen. David W. Hoyle 250,000 25,000
Martha B. Beal 250,000 25,000
James J. Fuller 100,000 10,000
William H. Keith 50,000 5,000
Charles D. Massey 250,000 25,000
Ben R. Rudisill, III 250,000 25,000
Kim S. Price 250,000 25,000
Robert W. Williams 250,000 25,000
Paul L. Teem, Jr. 250,000 25,000
Gary F. Hoskins 200,000 20,000
------- ------
All directors and $2,300,000 230,000
executive officers of
the Bank as a
group (11 persons)
<PAGE>
V. IRA Mailing
A. Explanation
A special IRA mailing is proposed to be sent to all IRA customers of
the Bank in order to alert the customers that funds held in an IRA can
be used to purchase stock. Since this transaction is not as simple as
designating funds from a certificate of deposit like a normal stock
purchase, this letter informs the customer that this process is
slightly more detailed and involves a personal visit to the Bank.
B. Quantity
One IRA letter is proposed to be mailed to each IRA customer of the
Bank. These letters would be mailed following regulatory approval of
the Conversion and Reorganization and after each customer or
stockholder has received the initial mailing containing a Proxy
Statement and a Prospectus.
C. Example - See following page.
<PAGE>
Gaston Federal Savings and Loan Association Letterhead
________, 1998
Dear Individual Retirement Account Participant:
As you know, Gaston Federal Savings and Loan Association (the "Bank")
is in the process of converting from the mutual form of ownership to the stock
form of ownership whereby the Bank will become a wholly-owned subsidiary of
Gaston Federal Bancorp, Inc. (the "Company") which will own all of the stock of
the Bank. Through the Conversion and Reorganization, certain current and former
customers have a priority right to purchase shares of common stock of the
Company in a Subscription Offering. The Company currently is offering up to
1,837,700 shares, subject to adjustment, of the Company at a price of $10.00 per
share.
As the holder of an individual retirement account ("IRA") at the Bank,
you have an opportunity to become a stockholder in the Company using some or all
of the funds being held in your IRA. If you desire to purchase shares of common
stock of the Company through your IRA, the Bank can assist you in self-directing
those funds. This process can be done without an early withdrawal penalty and
generally without a negative tax consequence to your retirement account.
If you are interested in receiving more information on self-directing
your IRA, please contact our Stock Information Center at ( ) ____________.
Because it takes several days to process the necessary IRA forms, a response is
required by ___________, 1998 to accommodate your interest.
Sincerely,
Kim S. Price
President and Chief Executive Officer
This letter is neither an offer to sell nor a solicitation of an offer to buy
Gaston Federal Bancorp, Inc. Common Stock. The offer is made only by the
Prospectus, which was recently mailed to you. THE SHARES OF GASTON FEDERAL
BANCORP, INC. COMMON STOCK ARE NOT DEPOSITS AND WILL NOT BE INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
<PAGE>
VI. Counter Cards and Lobby Posters
A. Explanation
Counter cards and lobby posters serve two purposes: (1) As a notice to
the Bank's customers and members of the local community that the stock
sale is underway and (2) to remind customers and members of the local
community of the end of the Subscription and Community Offerings.
B. Quantity
Approximately 2 - 3 Counter cards may be used in each branch location.
Approximately 1 - 2 Lobby posters may be used at each branch office.
C. Example
<PAGE>
C. POSTER
OR
COUNTER CARD
Gaston Federal Bancorp, Inc.
Proposed Holding Company for
Gaston Federal Savings and Loan Association
"STOCK OFFERING MATERIALS
AVAILABLE HERE"
Subscription and Community Offerings End
_______, 1998
<PAGE>
VII. Invitations
A. Explanation
In order to educate customers and the public about the stock offering,
the Bank may hold several Community Meetings in various locations. In
an effort to target a group of interested investors Trident will
request that each Director and Officer of the Bank submit a list of
prospective investors that he/she would like to invite to a Community
Meeting.
Prospectuses are given to each prospect at the Community meeting.
B. Quantity and Method of Distribution
An invitation is mailed to each prospect.
<PAGE>
The Directors, Officers & Employees
of
Gaston Federal Savings and Loan Association
cordially invite you
to attend a brief presentation
regarding the stock offering of
Gaston Federal Bancorp, Inc.
Please join us at
Place
Address
on
Date
at Time
for hors d'oeuvres
R.S.V.P.
( ) -----------------
<PAGE>
VIII. Letters
A. Explanation
Once the application for Conversion and Reorganization has received
regulatory approval, the Bank may send out a series of up to three
letters to targeted prospects. These letters are used to help
facilitate the marketing effort to this group. All prospects will
receive a Prospectus as soon as they are available.
B. Method of Distribution
Each prospect is sent a series of up to three letters during the
Subscription and Community Offerings.
C. Examples
1. Introductory letter
2. A. Thank you letter
or
B. Sorry you were unable to attend letter
3. Final reminder letter
<PAGE>
Example 1
(Introductory Letter) (non-eligible prospects)
(Gaston Federal Savings and Loan Association Letterhead)
_______, 1998
Name
Address
City, State, Zip
Dear Name:
You have probably read recently in the newspaper that Gaston Federal
Savings and Loan Association (the "Bank") will soon be converting from the
mutual holding company form of organization to stock form as part of our
Reorganization as a mutual holding company. This Conversion and Reorganization
is the biggest step in the history of the Bank in that it allows customers,
community members, employees, officers and directors the opportunity to
subscribe for stock in our new holding company - Gaston Federal Bancorp, Inc.
(the "Company").
I have enclosed a Prospectus and a Stock Order Form that will allow you
to subscribe for shares and possibly become a charter stockholder of the Company
should you so desire. In addition, we will be holding several presentations for
friends of the Bank in order to review the Conversion and Reorganization and the
merits of becoming a charter stockholder of the Company. You will receive an
invitation shortly.
I hope that if you have any questions you will feel free to call me or
the Bank's Stock Information Center at ( ) _____________. I look forward to
seeing you at our presentation.
Sincerely,
Kim S. Price
President and Chief Executive Officer
The shares of Common Stock offered in the Conversion and Reorganization are not
deposits and are not insured by the Federal Deposit Insurance Corporation or any
other governmental agency.
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE
OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
<PAGE>
Example 2A
(Thank You Letter)
(Gaston Federal Savings and Loan Association Letterhead)
___________, 1998
Name
Address
City, State, Zip
Dear Name:
On behalf of the Board of Directors and management of Gaston Federal
Savings and Loan Association, I would like to thank you for attending our recent
presentation regarding the stock offering by Gaston Federal Bancorp, Inc. We are
enthusiastic about the stock offering and look forward to completing the
Subscription and Community Offerings on or about _______, 1998.
I hope that you will join me in being a charter stockholder, and once
again thank you for your interest.
Sincerely,
Kim S. Price
President and Chief Executive Officer
The shares of Common Stock offered in the Conversion and Reorganization are not
savings accounts or deposits and are not insured by the Federal Deposit
Insurance Corporation, the Bank Insurance Fund or any other governmental agency.
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE
OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
<PAGE>
Example 2B
(Sorry You Were Unable to Attend)
(Gaston Federal Savings and Loan Association Letterhead)
_______________, 1998
Name
Address
City, State, Zip
Dear Name:
I am sorry you were unable to attend our recent presentation regarding
Gaston Federal Savings and Loan Association's Conversion and Reorganization. The
Board of Directors and management are committed to building long term
stockholder value, and as a group we are investing over $2,300,000 of our own
funds in Gaston Federal Bancorp, Inc. We are enthusiastic about the stock
offering and look forward to completing the Subscription and Community Offerings
on or about _______, 1998.
We have established a Stock Information Center to answer any questions
regarding the stock offering. Should you require any assistance between now and
_______, I encourage you either to stop by any office of Gaston Federal Savings
and Loan Association or to call our Stock Information Center at ( )__________.
I hope you will join me in becoming a charter stockholder of Gaston
Federal Bancorp, Inc.
Sincerely,
Kim S. Price
President and Chief Executive Officer
The shares of Common Stock offered in the Conversion and Reorganization are not
savings accounts or deposits and are not insured by the Federal Deposit
Insurance Corporation, the Bank Insurance Fund or any other governmental agency.
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE
OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
<PAGE>
Example 3
(Final Reminder Letter)
(Gaston Federal Savings and Loan Association Letterhead)
___________, 1998
Name
Address
City, State, Zip
Dear Name:
Just a quick note to remind you that the deadline is quickly
approaching for subscribing for stock in Gaston Federal Bancorp, Inc., the
proposed holding company for Gaston Federal Savings and Loan Association. I hope
you will join me in becoming a charter stockholder in Gastonia's newest publicly
owned financial institution holding company.
The deadline for subscribing for shares to become a charter stockholder
is _______, 1998. If you have any questions, I hope you will call our Stock
Information Center at ( ) __________________.
Once again, I look forward to having you join me as a stockholder of
Gaston Federal Bancorp, Inc.
Sincerely,
Kim S. Price
President and Chief Executive Officer
The shares of Common Stock offered in the Conversion and Reorganization are not
savings accounts or deposits and are not insured by the Federal Deposit
Insurance Corporation, the Bank Insurance Fund or any other governmental agency.
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE
OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
<PAGE>
IX. Proxygram
A. Explanation
A proxygram is used when the majority of votes needed to adopt the Plan
of Conversion and Reorganization is still outstanding. The proxygram is
mailed to those "target vote" depositors who have not previously
returned their signed proxy.
Target vote depositors are determined by the Conversion Agent.
B. Example
<PAGE>
B. Example
- --------------------------------------------------------------------------------
P R O X Y G R A M
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
YOUR VOTE ON OUR PLAN OF CONVERSION AND REORGANIZATION HAS NOT BEEN RECEIVED.
YOUR VOTE IS VERY IMPORTANT, PARTICULARLY SINCE FAILURE TO VOTE IS EQUIVALENT TO
VOTING AGAINST THE PLAN.
VOTING FOR THE CONVERSION AND REORGANIZATION WILL NOT AFFECT THE INSURANCE OF
YOUR ACCOUNT. IT WILL CONTINUE TO BE INSURED UP TO $100,000 BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION.
YOU MAY PURCHASE STOCK IF YOU WISH, BUT VOTING DOES NOT OBLIGATE YOU TO BUY
STOCK.
PLEASE ACT PROMPTLY! SIGN THE ENCLOSED PROXY CARD AND MAIL, OR DELIVER, THE
PROXY CARD TO GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION TODAY. PLEASE VOTE ALL
PROXY CARDS RECEIVED.
WE RECOMMEND THAT YOU VOTE "FOR" THE PLAN OF CONVERSION AND REORGANIZATION.
THANK YOU.
THE BOARD OF DIRECTORS AND MANAGEMENT OF
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
- --------------------------------------------------------------------------------
IF YOU RECENTLY MAILED THE PROXY,
PLEASE ACCEPT OUR THANKS AND DISREGARD THIS REQUEST.
FOR FURTHER INFORMATION CALL ( ) __________.
<PAGE>
(Gaston Federal Loan Letterhead)
____________, 1998
Dear Valued Customer:
Gaston Federal Savings and Loan Association ("Gaston Federal" or the
"Association") is pleased to announce that it has received regulatory approval
to proceed with the Reorganization of Gaston Federal from a federal mutual
savings association into the mutual holding company form of ownership. This
Reorganization is the most significant event in the history of Gaston Federal in
that it allows customers, community members, directors and employees an
opportunity to own stock in Gaston Federal Bancorp, Inc., the proposed holding
company for the Association.
Since 1904, the Association has successfully operated as a mutual
company. We want to assure you that the Reorganization will not affect the
terms, balances, interest rates or existing FDIC insurance coverage deposits at
the Association, or the terms or conditions of any loans to existing borrowers
under their individual contract arrangements with the Association. Let us also
assure you that the Reorganization will not result in any changes in the
management, personnel or the Board of Directors of the Association.
As one of our valued members, you have the opportunity to invest in the
Association's future by purchasing stock in Gaston Federal Bancorp, Inc. without
paying a sales commission.
If you decide to exercise your subscription rights to purchase shares,
you must return the properly completed stock order form together with full
payment for the subscribed shares so that it is received by the Association not
later than 12:00 p.m. Local Time on ______________, 1998.
Enclosed is a proxy card. Your Board of Directors solicits your vote
"FOR" the Association's Plan of Reorganization. A vote in favor of the Plan does
not obligate you to purchase stock. Please sign and return your proxy card
promptly; your vote is important to us.
We have also enclosed a Prospectus and Proxy Statement which fully
describes the Association, its management, board and financial strength and the
Plan of Reorganization. Please review it carefully before you vote or invest.
For your convenience we have established a Stock Information Center. If you have
any questions, please call the Stock Information Center collect at_____________.
We look forward to continuing to provide quality financial services to
you in the future.
Sincerely,
Kim S. Price
President and CEO
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Gaston Federal Bancorp, Inc. common stock offered in the
reorganization, nor does it constitute the solicitation of a proxy in connection
with the reorganization. Such offers and solicitations of proxies are made only
by means of the Prospectus and Proxy Statement. There shall be no sale of stock
in any state in which any offer, solicitation of an offer or sale of stock would
be unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
<PAGE>
(Gaston Federal Letterhead)
____________, 1998
Dear Interested Investor:
Gaston Federal Savings and Loan Association ("Gaston Federal" or the
"Association") is pleased to announce that it has received regulatory approval
to proceed with the Reorganization of Gaston Federal from a federal mutual
savings association into the mutual holding company form of ownership. This
reorganization is the most significant event in the history of the Association
in that it allows customers, community members, directors and employees an
opportunity to own stock in Gaston Federal Bancorp, Inc., the proposed holding
company for the Association.
Since 1904, the Association has successfully operated as a mutual
company. We want to assure you that the Conversion will not affect the terms,
balances, interest rates or existing FDIC insurance coverage on the Association
deposits, or the terms or conditions of any loans to existing borrowers under
their individual contract arrangements with the Association.
Let us also assure you that the Conversion will not result in any
changes in the management, personnel or the Board of Directors of the
Association.
Enclosed is a Prospectus which fully describes the Association, its
management, board and financial strength. Please review it carefully before you
make an investment decision. If you decide to invest, please return to the
Association a properly completed stock order form together with full payment for
shares at your earliest convenience but not later than 12:00 p.m. Local Time on
_________, 1998. For your convenience we have established a Stock Information
Center. If you have any questions, please call the Stock Information Center
collect at ___________.
We look forward to continuing to provide quality financial services to
you in the future.
Sincerely,
Kim S. Price
President and CEO
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Gaston federal Bancorp, Inc. common stock offered in the
reorganization nor does it constitute the solicitation of a proxy in connection
with the reorganization. Such offers and solicitations of proxies are made only
by means of the Prospectus and Proxy Statement. There shall be no sale of stock
in any state in which any offer, solicitation of an offer or sale of stock would
be unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
<PAGE>
(Gaston Federal Letterhead)
____________, 1998
Dear Friend:
Gaston Federal Savings and Loan Association ("Gaston Federal" or the
"Association") is pleased to announce that we have received regulatory approval
to proceed with The Reorganization of Gaston Federal from a federal mutual
savings association into the mutual holding company form of ownership. This
Reorganization is the most significant event in the history of Gaston Federal in
that it allows customers, community members, directors and employees an
opportunity to own stock in Gaston Federal Bancorp, Inc., the proposed holding
company for the Association.
Since 1904, the Association has successfully operated as a mutual
company. We want to assure you that the Reorganization will not affect the
terms, balances, interest rates or existing FDIC insurance coverage on the
Association deposits, or the terms or conditions of any loans to existing
borrowers under their individual contract arrangements with the Association.
Let us also assure you that the Reorganization will not result in any
changes in the management, personnel or the Board of Directors of the
Association.
Our records indicate that you were a depositor of the Association on
March 31, 1996, but that you were not a member on January____, 1998. Therefore,
under applicable law, you are entitled to subscribe for Common Stock in Gaston
Federal Bancorp, Inc.'s Subscription Offering. Orders submitted by you and
others in the Subscription Offering are contingent upon the current members'
approval of the Plan of Reorganization at a special meeting of members to be
held on __________ and upon receipt of all required regulatory approvals. Since
you are no longer a current member, you are not entitled to vote at the special
meeting of members.
If you decide to exercise your subscription rights to purchase shares,
you must return the properly completed stock order form together with full
payment for the subscribed shares so that it is received at the Association not
later than 12:00 p.m. Local Time on __________.
Enclosed is a Prospectus which fully describes the Association, its
management, board and financial strength. Please review it carefully before you
invest. For your convenience we have established a Stock Information Center. If
you have any questions, please call the Stock Information Center collect at
_________________.
We look forward to providing quality financial services to you in the
future.
Sincerely,
Kim S. Price
President and CEO
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Gaston Fedral Bancorp, Inc. common stock offered in the
reorganization, nor does it constitute the solicitation of a proxy in connection
with the reorganization. Such offers and solicitations of proxies are made only
by means of the Prospectus and Proxy Statement. There shall be no sale of stock
in any state in which any offer, solicitation of an offer or sale of stock would
be unlawful. THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL
AGENCY.
<PAGE>
(Gaston Federal Letterhead)
___________, 1998
Dear Member:
As a qualified member of Gaston Federal Savings and Loan Association
("Gaston Federal" or the "Association"), you have the right to vote upon the
Association's proposed Plan of Reorganization and also generally have the right
to subscribe for shares of common stock of Gaston Federal Bancorp, Inc., the
proposed holding company for Gaston Federal through the mutual to stock
conversion of the Association. However, the proposed plan of Reorganization
provides that Gaston Federal Bancorp, Inc. will not offer stock in any state in
which compliance with the securities laws would be impracticable for reasons of
cost or otherwise. Unfortunately, the securities laws of your state would
require Gaston Federal Bancorp, Inc. to register its common stock and /or its
employees in order to sell the common stock to you. Such registration would be
prohibitively expensive or otherwise impracticable in light of the few members
residing in your state.
You may vote on the proposed Plan of Reorganization and we urge you to
read the enclosed Summary Proxy Statement and execute the enclosed Revocable
Proxy. Questions regarding the execution of the Revocable Proxy should be
directed to Gaston Federal's Stock Information Center at _________.
Sincerely,
Kim S. Price
President and CEO
This does not constitute an offer to sell, or the solicitation of an offer to
buy, shares of Gaston Federal Bancorp, Inc. common stock offered in the
reorganization, nor does it constitute the solicitation of a proxy in connection
with the reorganization. Such offers and solicitations of proxies are made only
by means of the Prospectus and Proxy Statement. There shall be no sale of stock
in any state in which any offer, solicitation of an offer or sale of stock would
be unlawful.
THE STOCK WILL NOT BE INSURED BY THE FDIC OR ANY GOVERNMENTAL AGENCY.
<PAGE>
(Trident Letterhead)
____________,1998
To Members and Friends of Gaston Federal Savings and Loan Association:
At the request of Gaston Federal Bancorp, Inc. (the "Holding Company")
and Gaston Federal Savings and Loan Association ("Gaston Federal") we have
enclosed their Prospectus and a Stock Order Form for your use should you decide
to subscribe for shares of Common Stock of the Holding company being issued in
connection with the Reorganization of Gaston Federal from a federally mutual
savings association into the mutual holding company form of ownership.
If you decide to exercise your subscription rights to purchase shares,
you must return the properly completed Stock Order Form together with full
payment for the subscribed shares (or appropriate instructions authorizing
withdrawal in such amount from your authorized deposit account(s) at Gaston
Federal) so that it is received at a Gaston Federal office no later than 12:00
noon, Local Time on ____________, 1998.
The Holding Company has asked us to forward these documents to you in
view of certain requirements of the securities laws in your state. Should you
have any questions you may contact the Stock Information Center at ___________.
Sincerely,
TRIDENT SECURITIES, INC.
The shares of common stock offered in the conversion are not savings
accounts or deposits and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy
stock. The offer will be made only by the Prospectus. There shall be no sale of
stock in any state in which any offer, solicitation of an offer or sale of stock
would be unlawful.
EXHIBIT 99.5
<PAGE>
GASTON FEDERAL BANCORP, INC.
NUMBER OF SHARES
Fill in the number of shares you wish to purchase and the total amount due. No
fractional shares will be issued. The minimum purchase is _____ shares.
METHOD OF PAYMENT
Check the appropriate box(es). You may pay by check, bank draft or money order
and/or authorize withdrawal from your Gaston Federal Savings and Loan
Association savings or certificate account(s). If paying by certified or
teller's check, please make it payable to Gaston Federal Savings and Loan
Association. Your funds will earn interest at the Association's certificate rate
per annum until the offering is completed. If paying by withdrawal, please list
the appropriate account number(s); these designated funds will continue to earn
interest from a savings or certificate account at the same account rate and
cannot be withdrawn by you until the Closing Date, as defined on the front page
of the Prospectus.
STOCK REGISTRATION
Print the name(s) in which you want the stock registered. See the reverse side
of this form for registration guidelines.
Enter the social security number (or tax I.D. number) of the registered owner.
Only one number is required.
Indicate the manner in which you wish to take ownership by checking the
appropriate box. If necessary, check other and note ownership such as
corporation, estate or trust. If stock is purchased for a trust, the date of the
trust agreement and trust title must be included.
NASD AFFILIATION
Please refer to the National Association of Securities Dealers, Inc. (NASD)
affiliation section and check the box if applicable. Under the guidelines of the
NASD, members of the NASD and their associates are subject to certain
restrictions on the transfer of securities purchased in accordance with
subscription rights and to certain reporting requirements upon the purchase of
such securities, as established by the NASD.
_____ Check here and initial below if you are a member of the NASD or a person
associated with an NASD member or a member of the immediate family of any such
person to whose support such person contributes directly or indirectly or if you
have an account in which an NASD member or person associated with an NASD member
has a beneficial interest. I agree (i) not to sell, transfer or hypothecate the
stock for a period of 150 days following issuance, and (ii) to report this
purchase order in writing to the applicable NASD member I am associated with
within one day of the payment for the stock. (Initials)_________
ACKNOWLEDGMENT
Sign and date the form. When purchasing as a custodian, corporate officer, etc.,
add your full title to your signature. An additional signature is required only
when payment is by withdrawal from an account that requires more than one
signature to withdraw funds.
DEADLINE
This form along with the Form of Acknowledgment, properly executed and with the
correct payments must be received by ____ _.m., North Carolina Time,
___________, 1997 and will be deemed received upon the date and the time of
delivery of the form to our office. Please submit your order using the enclosed
postage-paid envelope or hand-delivering to Gaston Federal Savings and Loan
Association.
TELEPHONE INFORMATION
Please enter both a daytime and evening telephone number where you may be
reached in the event we cannot execute your order as given.
Daytime Phone ( ) ____________________
Evening Phone ( ) ____________________
STOCK ORDER FORM
NUMBER OF SHARES OFFERING PRICE TOTAL AMOUNT DUE
_____________ X $ 10.00 =______________
-----------------
_____ Enclosed is a certified teller's check, bank draft, or money order
PAYABLE TO GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION for
$___________.
_____ I authorize withdrawal from the following Gaston Federal Savings and
Loan Association account(s):
Account Number(s) Amount
$
$
Total Withdrawal $
_______________________________________________________________________________
Name(s) in which your stock is to be registered
_______________________________________________________________________________
Name(s) in which your stock is to be registered
_______________________________________________________________________________
Address
_______________________________________________________________________________
City County
_______________________________________________________________________________
State Zip Code
_______________________________________________________________________________
Social Security # or Tax ID #
_______ Individual _______ Joint Tenants _______ Tenants in Common
_______ Uniform Gift or Transfer to Minors
_______ Other __________________________________________________________
I (we) acknowledge receipt of the Prospectus and the terms and conditions
described therein. I (we) understand that, after receipt by Gaston Federal
Savings and Loan Association, this order may not be modified or withdrawn
without the consent of Gaston Federal Savings and Loan Association. Further, I
(we) certify that my (our) purchase does not conflict with the purchase
limitations in the Plan of Reorganization, and that the shares being purchased
are for my (our) account only and that there is no present agreement or
understanding regarding any subsequent sale or transfer of such shares. Under
penalties of perjury, I (we) certify that: (1) the Social Security number or
Taxpayer Identification number given above is correct; and (2) I am not subject
to backup withholding. INSTRUCTIONS: YOU MUST CROSS OUT #2 ABOVE IF YOU HAVE
BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE THAT YOU ARE SUBJECT TO
WITHHOLDING BECAUSE OF UNDER-REPORTING INTEREST OR DIVIDENDS ON YOUR TAX RETURN.
I ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED AND IS NOT GUARANTEED BY GASTON FEDERAL SAVINGS AND LOAN
ASSOCIATION OR ANY FEDERAL OR STATE GOVERNMENT OR AGENCY.
If anyone asserts that this security is federally insured or guaranteed, or is
as safe as an insured deposit, I should call the Southeast Regional Director of
the Office of Thrift Supervision, Atlanta, Georgia at (404) 888-0771.
I further certify that, before purchasing the Common Stock of Gaston Federal
Bancorp, Inc., I received a Prospectus. The Prospectus that I received contains
disclosure concerning the nature of the security being offered and describes the
risks involved in the investment. See the "Risk Factors" section of the
Prospectus. In executing this Stock Order Form I affirm that I have read the
Prospectus and am aware of the risks associated with investing in Gaston Federal
Bancorp, Inc. Common Stock.
____________________________________________________________
Signature Date
____________________________________________________________
Additional Signature (if required) Date
FOR ASSISTANCE, PLEASE CALL THE STOCK INFORMATION CENTER,
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION,
AT (803) ___-____ FROM 9:00 A.M. TO 5:00 P.M., NORTH CAROLINA TIME,
MONDAY THROUGH FRIDAY.
<PAGE>
GUIDELINES FOR REGISTERING STOCK
For reasons of clarity and standardization, the stock transfer industry
has developed uniform stock ownership registration which we will use in issuing
your stock certificate. Common ownership registrations are explained below. If
you have any questions about how your Gaston Federal Bancorp, Inc. common stock
should be registered, see your legal advisor.
To ensure correct registration, please follow the instructions for the
ownership you select.
- --------------------------------------------------------------------------------
GENERAL INSTRUCTION: o Include the first name, middle initial, and last
name of each person listed. Avoid the use of an
initial in place of the first name.
o Do not use titles such as Mr., Mrs., Dr., etc.
o Omit words that do not affect ownership rights such
as special account, personal property, etc.
- --------------------------------------------------------------------------------
INDIVIDUAL: Instructions: Print the first name, middle initial,
and last name of the person in whose name the stock
is to be registered. You may not list beneficiaries
for this ownership.
- --------------------------------------------------------------------------------
JOINT TENANTS: Joint Tenancy with Right of Survivorship identifies
two or more persons as owners of the stock. Upon the
death of one of the owners, ownership automatically
passes to the surviving tenant(s).
Instructions: Print the first name, middle initial,
and last name of each co-tenant. You may not list
beneficiaries for this ownership.
- --------------------------------------------------------------------------------
UNIFORM GIFTS TO For residents of certain states, stock may be held in
MINORS/UNIFORM the name of a custodian for the benefit of a minor
MINORS: under the Uniform Transfers to Minors Act. For
residents of most other states, stock may be held in
a similar type of TRANSFERS TO ownership under the
Uniform Gifts to Minors Act of the individual states.
For either ownership, the minor is the actual owner
of the stock with the adult custodian being
responsible for the investment until the minor
reaches legal age.
Instructions: If you are a North Carolina resident
and wish to register stock in this ownership check
Uniform Transfers to Minors Act. For other states,
see your legal advisor if you are unsure about the
correct registration of your stock.
On the first NAME line, print the first name, middle
initial, and last name of the custodian, with the
abbreviation CUST after the name
Print the first name, middle initial, and last name
of the minor on the second NAME line. Only one
custodian and one minor may be designated.
Please indicate the minor's social security number in
the signature block.
- --------------------------------------------------------------------------------
OTHER: Generally, fiduciary relationships (such as
Conservatorship, Legal Trust, Guardianship, etc.) are
established under a form of trust agreement or are
pursuant to a court order. Without a legal document
establishing a fiduciary relationship, your stock may
not be registered in a fiduciary capacity.
Instructions: On the first NAME line, print the first
name, middle initial, and last name of the fiduciary
if the fiduciary is an individual. If the fiduciary
is a corporation, list the corporate title on the
first NAME line. Following the name, print the
fiduciary title such as conservator, personal
representative, etc.
On the second NAME line, print either the name of the
maker, donor or testator OR the name of the
beneficiary. Following the name, indicate the date
and type of legal document establishing the fiduciary
relationship (agreement, court order, etc.) (Use the
space marked OTHER if necessary). Please contact us
if you have any questions.
EXAMPLE OF A FIDUCIARY REGISTRATION:
John D. Smith Trustee for Tom A. Smith Under
Agreement Dated 06/09/74.
PLEASE NOTE THAT TOTTEN TRUST AND PAYABLE ON DEATH
OWNERSHIPS MAY NOT BE USED IN REGISTERING STOCK.
For example, stock cannot be registered as John Doe
Trustee for Jane Doe or John Doe Payable on Death to
Jane Doe.
- --------------------------------------------------------------------------------
NASD AFFILIATION: Please refer to the NASD AFFILIATION statement on the
face of this form. If applicable, initial where
indicated and check the box. the National Association
of Securities Dealers, Inc. Interpretation With
Respect to Free-Riding and Withholding (the
Interpretation) restricts the sale of a hot issue
(securities that trade at a premium in the
aftermarket) to NASD members, persons associated with
NASD members (i.e., an owner, director, officer,
partner, employee or agent of a NASD member) and
certain members of their families. Such persons are
required to indicate that they will comply with
certain conditions required for an exemption from the
restrictions.
- --------------------------------------------------------------------------------
