PROSPECTUS
UP TO 2,113,355 SHARES OF COMMON STOCK
GASTON FEDERAL BANCORP, INC.
(logo) 245 WEST MAIN AVENUE
P.O. BOX 2249
GASTONIA, NORTH CAROLINA 28053-2249
(704) 868-5200
- -------------------------------------------------------------------------------
Gaston Federal Savings and Loan Association, a mutual savings
association, is reorganizing into the mutual holding company structure. 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. 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 that 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 "Stock Company," and we will refer to Gaston
Federal Holdings, MHC as the "Mutual Company."
- -------------------------------------------------------------------------------
TERMS OF OFFERING
An independent appraiser has estimated that the market value of Stock
Company after giving effect to the reorganization is between $28,900,000 to
$39,100,000. Based on the valuation, the Stock Company will issue between
2,890,000 and 3,910,000 shares of its common stock in the reorganization. The
Stock Company intends to sell 47% of these shares, or between 1,358,300 and
1,837,700 shares, to the public, and issue 53% of these shares, or between
1,531,700 and 2,072,300 shares, to the Mutual Company. We may increase the
shares we issue in the reorganization to up to 4,496,500 shares. If we increase
the shares we issue in the reorganization we will also increase the shares we
sell in the offering to up to 2,113,355 shares. The number of shares we will
issue is subject to approval of the Office of Thrift Supervision. Based on these
estimates, we are making the following offering of shares of common stock.
<TABLE>
<CAPTION>
Adjusted
Minimum Midpoint Maximum Maximum
------- -------- ------- -------
<S> <C> <C> <C> <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 15 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 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 the Bank until the completion or termination of the
offering. We have applied 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 11, 1998
<PAGE>
Gaston Federal Savings & Loan Association
Gastonia, North Carolina
(Map of North Carolina counties appears here)
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING....................................................................4
SUMMARY AND OVERVIEW..............................................................................................6
SELECTED FINANCIAL AND OTHER DATA................................................................................10
RECENT DEVELOPMENTS..............................................................................................12
RISK FACTORS.....................................................................................................15
GASTON FEDERAL HOLDINGS, MHC.....................................................................................19
GASTON FEDERAL BANCORP, INC......................................................................................20
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION......................................................................20
REGULATORY CAPITAL COMPLIANCE....................................................................................21
USE OF PROCEEDS..................................................................................................22
DIVIDEND POLICY..................................................................................................23
MARKET FOR COMMON STOCK..........................................................................................23
CAPITALIZATION...................................................................................................24
PRO FORMA DATA...................................................................................................25
PARTICIPATION BY MANAGEMENT......................................................................................28
THE REORGANIZATION AND OFFERING..................................................................................29
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS...................................................................43
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................................44
BUSINESS OF THE STOCK COMPANY....................................................................................53
BUSINESS OF THE BANK.............................................................................................53
FEDERAL AND STATE TAXATION.......................................................................................71
REGULATION.......................................................................................................72
MANAGEMENT OF THE STOCK COMPANY..................................................................................79
MANAGEMENT OF THE BANK...........................................................................................80
RESTRICTIONS ON ACQUISITION OF THE STOCK COMPANY.................................................................86
DESCRIPTION OF CAPITAL STOCK OF THE STOCK COMPANY................................................................88
TRANSFER AGENT AND REGISTRAR.....................................................................................89
LEGAL AND TAX MATTERS............................................................................................89
EXPERTS ........................................................................................................90
ADDITIONAL INFORMATION...........................................................................................90
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.......................................................................91
GLOSSARY .......................................................................................................G-1
</TABLE>
THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS
AND UNCERTAINTIES. THE STOCK 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.
3
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: WHAT IS THE PURPOSE OF THE OFFERING?
A: We are selling shares of common stock so that we can raise capital to
grow and compete more effectively, and so that our depositors,
employees, management and directors may obtain an equity ownership in
the Bank. As part of the reorganization, you will have the opportunity
to become a stockholder of the Stock Company, which will allow you to
share indirectly in the future earnings and growth 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, so that we receive it on or before 12:00
noon on March 17, 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 aggregate deposit accounts of at least $50
with the Bank on March 31, 1996. Any remaining shares will be
offered to:
o The Stock Company's employee stock ownership plan. Any
remaining shares will be offered to:
o Persons who had aggregate deposit accounts of at least $50
with the Bank on December 31, 1997. Any remaining shares will
be offered to:
o Persons who had deposit accounts with the Bank on February 6,
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.
4
<PAGE>
Q: AS A DEPOSITOR OF THE BANK, WHAT WILL HAPPEN IF I DO NOT ORDER ANY
COMMON STOCK?
A: You are not required to purchase common stock. Your deposit accounts,
certificate accounts and any loans you may have with the Bank 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 SAVINGS AND LOAN ASSOCIATION
245 WEST MAIN AVENUE
P.O. BOX 2249
GASTONIA, NORTH CAROLINA 28053-2249
(704) 868-8155
5
<PAGE>
SUMMARY AND OVERVIEW
THIS IS A SUMMARY OF 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 THE BANK. 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 "STOCK COMPANY" REFER TO GASTON
FEDERAL BANCORP, INC. REFERENCES TO THE "MUTUAL COMPANY" REFER TO GASTON FEDERAL
HOLDINGS, MHC.
THE REORGANIZATION AND OFFERING
The reorganization involves a number of steps, including the following:
o The Bank will establish the Stock Company and the Mutual
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 Stock Company.
o The Stock 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 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 the Bank will
become membership interests in the Mutual Company. As a
result, former members of the Bank who controlled 100% of the
votes eligible to be cast by the Bank's members prior to the
reorganization will, through the Mutual Company, control 53%
of the votes eligible to be cast by the Bank'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. In a standard conversion, a converting mutual
institution or its newly-formed holding company usually sells 100% of its common
stock in a stock offering. A savings institution that converts from the mutual
to stock form of organization using the mutual holding company structure sells
less than half of its shares at the time of the reorganization. By doing so, a
converting institution using the mutual holding company structure will raise
less than half the capital that it would have raised in a standard mutual to
stock conversion. Because of this, the Stock Company and the Bank will not have
their performance impeded by having too much capital to deploy.
The shares that are issued to the mutual holding company may be
subsequently sold to the Bank's depositors if the mutual holding company
converts from the mutual to the stock form of organization. See "Conversion of
the Mutual Company to the Stock Form of Organization." In addition, because the
Mutual Company controls a majority of the Stock 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 Company is a mutual corporation, its actions will
not necessarily always be in the best interests of the Stock Company's
stockholders. In making business decisions, the Mutual Company's Board of
6
<PAGE>
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 Stock Company, the Mutual Company
is also interested in the continued success and profitability of the Bank and
the Stock Company. Consequently, the Mutual Company will act in a manner that
furthers the general interest of all of its constituencies, including, but not
limited to, the interest of the stockholders of the Stock Company. The Mutual
Company believes that the interests of the stockholders of the Stock Company,
and those of the Mutual Company's other constituencies, are in many
circumstances the same, such as the increased profitability of the Stock Company
and the Bank and continued service to the communities in which the Bank
operates.
CONVERSION OF THE MUTUAL COMPANY TO THE STOCK FORM OF ORGANIZATION
Office of Thrift Supervision regulations and the plan of reorganization
permit the Mutual Company to convert from the mutual to the capital stock form
of organization. If the Mutual Company were to convert to the capital stock form
of organization the transaction would probably be structured as follows:
o The Mutual Company and the Stock Company would cease to
exist.
o The Bank would form a new stock holding company.
o The new stock holding company would sell shares of its common
stock in a subscription offering to certain depositors.
o In addition to the shares it would sell in the subscription
offering, the new stock holding company would issue shares of
its common stock to the Stock Company's stockholders in
exchange for their shares of the Stock Company's common stock.
After the conversion, the Stock Company's public stockholders would own
approximately the same percentage of the new stock holding company as they owned
of the Stock Company. Purchasers in the conversion offering would own
approximately the same percentage of the new stock holding company as the Mutual
Company owned in the Stock Company prior to the conversion. If the Mutual
Company waived any dividends paid by the Stock Company prior to the conversion,
however, then the Stock Company's stockholders would receive a smaller
percentage of the new stock holding company's common stock. There can be no
assurance that the Mutual Company will convert to the stock form, and the Board
of Directors has no current plan to do so.
THE COMPANIES
Gaston Federal Bancorp, Inc.
245 West Main Avenue
P.O. Box 2249
Gastonia, North Carolina 28053-2249
(704) 868-5200
After the reorganization the Stock Company will own all of the Bank's
common stock. Purchasers in the offering will own 47% of the Stock Company's
common stock and the Mutual Company will own 53% of the Stock Company's common
stock. Although these percentages may change in the future, the Mutual Company
must always own a majority of the Stock Company's common stock. The holding
company structure will provide us greater flexibility in terms of operations,
expansion and diversification. See page 20.
Gaston Federal Bank
245 West Main Avenue
P.O. Box 2249
Gastonia, North Carolina 28053-2249
(704) 868-5200
7
<PAGE>
We are a community- 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 offering various
FDIC-insured retail deposits to customers through our four branch offices, and
investing those deposits, together with funds generated from operations and
borrowings, in one- to four-family residential, multifamily residential and
commercial real estate loans, construction loans, commercial business loans,
consumer loans, and mortgage-backed and other 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 53 to 71.
THE STOCK OFFERING
The Stock Company is offering for sale between 1,358,300 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 approval of the Office of Thrift Supervision.
STOCK PURCHASE PRIORITIES
The Stock 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. We may offer shares
not purchased in this subscription offering to 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 29 to 42.
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 subscription price per share at
$10.00, the subscription 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
prepared by Feldman Financial Advisors, Inc., Washington, D.C. The independent
valuation states that as of December 11, 1997, the estimated market value of the
Stock Company after giving effect to the reorganization ranged from a minimum of
$28,900,000 to a maximum of $39,100,000. Based on the independent valuation and
the subscription price, the number of shares of common stock that the Stock
Company will issue will range from between 2,890,000 shares to 3,910,000 shares.
The Board of Directors has decided to offer 47% of these shares, or between
1,358,300 shares and 1,837,700 shares, to depositors and the public pursuant to
this Prospectus. The Board determined to sell 47% of the stock in the offering
in order to raise the maximum amount of proceeds while permitting the Stock
Company to issue additional shares of common stock in the future pursuant to the
restricted stock plan and stock option plan that the Stock 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 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 independent valuation
(to up to $44,965,000) and a corresponding increase in the maximum of the
offering range (to up to 2,113,355 shares). The number of shares that we issue
is subject to approval of the Office of Thrift Supervision. We will not notify
subscribers if the maximum of the independent valuation and the maximum of the
offering range are increased by 15% or less. We will, however, notify
subscribers if the maximum of the independent valuation is increased by more
than 15%, or if the minimum of the independent valuation is decreased. THE
INDEPENDENT VALUATION IS NOT A RECOMMENDATION OF AS TO THE ADVISABILITY OF
PURCHASING STOCK, AND YOU SHOULD NOT BUY STOCK BASED ON THE INDEPENDENT
VALUATION.
8
<PAGE>
Termination of the Offering
The subscription offering will terminate at 12:00 noon, local time, on
March 17, 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 Stock Company may terminate any community
offering at any time prior to May 1, 1998, or later if permitted by the Office
of Thrift Supervision.
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 80 to 86.
USE OF THE PROCEEDS RAISED FROM THE SALE OF COMMON STOCK
The Stock 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 the Bank.
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 21 and 22.
DIVIDENDS
The Stock 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 completion of the reorganization.
MARKET FOR THE COMMON STOCK
We have applied to have the Stock Company's common stock listed on the
Nasdaq National Market under the symbol "GBNK." The requirements for listing
include a minimum number of publicly traded shares, a minimum market value of
the Stock Company's common stock, 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 Stock Company will satisfy
these requirements. If we are unable, for any reason, to list the common stock
on the Nasdaq National Market, or to continue to be eligible for listing, then
we intend to list the common stock on the Nasdaq SmallCap Market under the same
symbol, or on the American Stock Exchange, if we qualify under their listing
criteria.
9
<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>
At September 30,
1997 1996
------------- -------
(Dollars in Thousands)
<S> <C> <C>
Total assets...................................................................... $ 173,470 $ 171,953
Loans receivable, net ............................................................ 134,491 130,862
Mortgage-backed securities........................................................ 10,087 12,918
United States government and agency securities held to maturity .................. 10,407 14,751
United States government and agency securities available for sale ................ 2,009 --
Other investments available for sale.............................................. 6,239 5,515
Deposits.......................................................................... 145,444 145,975
Borrowed funds.................................................................... 3,500 3,750
Total equity...................................................................... 20,868 19,084
</TABLE>
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended September 30,
1997 1996
------------- -----------
(Dollars in Thousands)
<S> <C> <C>
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
Noninterest income................................................................ 516 417
Noninterest 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.
10
<PAGE>
Key Operating Ratios and Other Data
<TABLE>
<CAPTION>
At and For the Years
Ended September 30,
-------------------
1997 1996
---- ----
<S> <C> <C>
PERFORMANCE RATIOS:
Return on average assets (net income divided by average total assets) ............ 0.84% 0.30%
Return on average equity (net income divided by average equity) .................. 7.38 2.76
Net interest rate spread.......................................................... 3.24 2.82
Net interest margin............................................................... 3.50 3.03
Average interest-earning assets to average interest-bearing liabilities .......... 109.92 108.29
Noninterest expense to total assets............................................... 2.28 2.70
Noninterest expense 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 noninterest expense 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>
11
<PAGE>
RECENT DEVELOPMENTS
The following tables set forth selected financial data for the Bank at
December 31 and September 30, 1997, as well as a summary of operations and
certain key operating ratios and other data for the three months ended December
31, 1997 and 1996. We prepared this information based on the unaudited
consolidated financial statements of the Bank, which management believes reflect
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial information as of such dates and for such periods.
The summary of operations and key operating ratios and other data for the three
months ended December 31, 1997 and 1996 do not necessarily mean that results for
any other period will be similar.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
At At
December 31, September 30,
1997 1997
------------- -------------
(In Thousands)
<S> <C> <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 3,015 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
Three Months
Ended December 31,
------------------
1997 1996
--------- ---------
(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
Noninterest income.............................................................. 204 288
Noninterest expense ............................................................ 1,028 1,008
--------- ---------
Net operating income before income taxes........................................ 597 632
Income tax expense.............................................................. 219 258
--------- ---------
Net income...................................................................... $ 378 $ 374
========= =========
</TABLE>
12
<PAGE>
Key Operating Ratios and Other Data
<TABLE>
<CAPTION>
At and For the Three
Months Ended December 31,
-------------------------
1997 (1) 1996 (1)
-------- --------
PERFORMANCE RATIOS:
<S> <C> <C>
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
Noninterest expense to total assets............................................... 2.37 2.23
Noninterest expense 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 noninterest expense 138.23 134.13
CAPITAL RATIOS:
Ratio of average equity to average total assets .................................. 12.10 11.28
Equity to assets at end of period................................................. 12.35 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>
- -----------------------------
(1) Annualized where appropriate.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997, AND SEPTEMBER 30, 1997
ASSETS. Total assets decreased by $33,000, from $173.5 million at
September 30, 1997, to $173.4 million at December 31, 1997. Cash and cash
equivalents increased by $271,000, or 5.9%, from $4.6 million at September 30,
1997 to $4.9 million at December 31, 1997. Investment and mortgage-backed
securities decreased by $543,000, or 1.9%, from $28.7 million at September 30,
1997 to $28.2 million at December 31, 1997 due to maturities and principal
repayments. Total loans increased by $39,000 to $134.5 million at December 31,
1997.
Total liabilities decreased by $588,000, or 0.4%, from $152.6 million
at September 30, 1997 to $152.0 million at December 31, 1997. Total deposits
increased by $862,000, or 0.6%, from $145.4 million to $146.3 million due to
continued marketing efforts to attract deposits as a source of funds. Borrowed
money remained constant at $3.5 million. Other noninterest-bearing liabilities
decreased by $1.4 million, or 38.8%, from $3.6 million at September 30, 1997, to
$2.2 million at December 31, 1997. 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 at December 31, 1997, was $21.4 million, as
compared to $20.9 million at September 30, 1997. This represents an increase of
$555,000, or 2.7%. This increase was due to current period
13
<PAGE>
earnings of approximately $378,000 and a $177,000 increase in unrealized gains
on securities held as available for sale.
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED DECEMBER 31, 1997 AND
1996
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 for the quarter ended December 31, 1996 to $1.5 million for
the quarter ended December 31, 1997. Interest income increased $53,000, or 1.7%,
to $3.2 million for the quarter ended December 31, 1997. 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 for the quarter ended December 31, 1997. 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 for the
quarter ended December 31, 1997 increased by $16,000, or 27.1%, from $59,000 to
$75,000. The increase was primarily due to the growth in 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. The Bank's allowance for loan losses
increased from $839,000, or 0.62% of total loans at December 31, 1996, to $1.2
million, or 0.84% of total loans at December 31, 1997.
NONINTEREST INCOME. Noninterest income decreased from $288,000 for the
quarter ended December 31, 1996 to $204,000 for the quarter ended December 31,
1997. 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 investment securities held as available for sale amounted to
$80,000 during the quarter ended December 31, 1997.
NONINTEREST EXPENSE. Noninterest expense increased by $20,000, or 2.0%.
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.
14
<PAGE>
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, the Bank'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 Stock 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.
POTENTIAL EFFECTS OF CHANGES IN INTEREST RATES AND THE CURRENT INTEREST RATE
ENVIRONMENT
Our net income and financial condition are significantly affected by
changes in market interest rates, and our results of operations are
substantially dependent on our net interest income. Net interest income is the
difference between the interest income earned on our interest-earning assets and
the interest expense paid on our interest-bearing liabilities. Because our
interest-bearing liabilities reprice or mature more quickly than our
interest-earning assets, an increase in interest rates would likely 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 Market 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. That is, an increase in interest rates would result in a decrease in the
value of investment securities. At September 30, 1997, our securities portfolio
totaled $28.7 million, and included $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 MULTIFAMILY 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
multifamily 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, multifamily and consumer loans expose a lender to a greater risk of
loss than one- to four-family residential loans.
15
<PAGE>
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 COMPANY. Under regulations of the Office
of Thrift Supervision (the "OTS"), the Plan of Reorganization, and our governing
corporate instruments, a majority of the Stock Company's voting shares must be
owned by the Mutual Company, and the Mutual Company will own 53.0% of the Common
Stock outstanding at the completion of the Offering. The Mutual Company will be
controlled by its executive officers and directors, who initially will consist
of persons who are executive officers and directors of the Stock Company.
Executive officers and directors of the Stock Company will own 6.9% of the
Common Stock outstanding at the completion of the 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 Company and executive officers and
directors as a group would own 59.9% of the Common Stock outstanding at the
conclusion of the Offering. The Mutual Company will elect all members of the
Board of Directors of the Stock Company, and, with certain exceptions, will
control the outcome of matters presented to the stockholders of the Stock
Company for resolution by vote. The situations in which the Mutual 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
Offering (which would require the approval of a majority of the shares other
than shares held by the Mutual Company), any stockholder vote relating to the
Mutual 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 Company and of two-thirds of all shares including shares held by
the Mutual Company), or any other stockholder vote in which the OTS may impose
such a requirement. The Mutual Company, acting through its Board of Directors,
will be able to control the business and operations of the Stock Company and the
Bank and will be able to prevent any challenge to the ownership or control of
the Stock Company by stockholders other than the Mutual Company ("Minority
Stockholders"). Although OTS regulations and the Plan of Reorganization permit
the Mutual 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 Company will occur.
PROVISIONS IN THE STOCK COMPANY'S AND THE BANK'S GOVERNING INSTRUMENTS.
In addition, certain provisions of the Stock Company's charter and bylaws,
particularly a provision limiting voting rights, as well as certain federal
regulations will assist the Stock Company in maintaining its status as an
independent publicly owned corporation. These provisions provide for, among
other things, staggered boards of directors, no cumulative voting for directors,
limits on the calling of special meetings of shareholders, and limits on the
ability to vote Common Stock in excess of 10% of outstanding shares (except as
to shares held by the Mutual Company and the ESOP).
POSSIBLE DILUTION IN OWNERSHIP INTEREST
DIVIDEND WAIVERS BY THE MUTUAL 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 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 Company to Stock Form." The Mutual Company has not determined whether it
will waive dividends declared by the Stock Company. There is no assurance that
the OTS would approve the waiver of dividends should the Mutual Company request
it to do so.
TERMS OF ANY CONVERSION TRANSACTION. If the Mutual Company conducts a
Conversion Transaction, the stock offering that would be conducted as part of
the Conversion Transaction would include maximum purchase limitations
16
<PAGE>
that restrict the amount of stock that a person could purchase. Minority
Stockholders would be likely to receive shares of the resulting entity in
exchange for their shares of Common Stock. Under current OTS policy, the shares
of the resulting entity that Minority Stockholders receive in exchange for their
shares of Common Stock will be included in the maximum purchase limitations that
apply to the stock offering. This means that certain Minority Stockholders may
not be able to exercise subscription rights to purchase shares of common stock
sold in the Conversion Transaction, 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 additional shares of Common
Stock could dilute the interests of prospective stockholders of the Stock
Company following consummation of the Offering, as noted below.
The number of shares to be sold in the Offering 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 Stock 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 Stock Company's consolidated
stockholders' equity and net income. See "Capitalization" and "Pro Forma Data."
The restricted stock 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% of the shares of Common Stock sold
in the Offering. Such shares of Common Stock may be acquired in the open market
with funds provided by the Stock Company, if permissible, or from authorized but
unissued shares of Common Stock. See "Pro Forma Data" and "Management of the
Bank--Recognition Plan."
The Stock Company's stock option plan will reserve for future issuance
pursuant to such plan a number of shares of Common Stock equal to 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
Salaries and benefits expense are likely to increase following the
Offering due to the ESOP and the Recognition Plan. The ESOP is expected to
purchase shares in the Offering and the Bank intends to implement the
Recognition Plan no earlier than six months after the conclusion of the
Offering. Generally accepted accounting principles will require the Stock
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 Stock 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 differs from the cost of such shares, the difference
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.
17
<PAGE>
RELIANCE ON LOCAL ECONOMY
The Bank's four offices are located in Gaston County, North Carolina,
and the Bank originates a large portion of its loans in Gaston County. Per
capita income in Gaston County is below the per capita income for the
Charlotte-Gastonia-Rock Hill Metropolitan Statistical Area (the "Charlotte
MSA"). In addition, income growth and total population growth in Gaston County
is projected to lag behind the income and population growth of the Charlotte MSA
and the state of North Carolina over the next five years. The lower income
levels and lower projected rates of growth in Gaston County could result in an
increase in the number of delinquent or nonperforming loans, reduce the value of
the collateral securing such loans, and otherwise adversely affect the Bank's
lending opportunities, financial condition, and results of operations.
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
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 Stock 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 applied to have the Common Stock listed on the Nasdaq National
Market under the symbol "GBNK." The requirements for listing include a minimum
number of publicly traded shares, 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 Stock Company will satisfy the listing requirements. 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 Stock 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
18
<PAGE>
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 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 it will be able function accurately in the year 2000.
REGULATORY OVERSIGHT AND LEGISLATION
The Bank and the Stock 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 ("FHLB") System and is subject to certain limited
regulations promulgated by the FHLB System. As the holding company of the Bank,
the Stock 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 Stock Company, and our operations.
See "Regulation."
Legislation is proposed periodically providing for a comprehensive
reform of the banking and thrift industries, and has included provisions that
would (i) require federal savings associations to convert to a national bank or
a state-chartered bank or thrift, (ii) require all savings and loan holding
companies to become bank holding companies and (iii) abolish the OTS. It is
uncertain when or if any of this type of legislation will be passed, and, if
passed, in what form the legislation would be passed. As a result, management
cannot accurately predict the possible impact of such legislation on the Bank.
GASTON FEDERAL HOLDINGS, MHC
The Mutual Company will be formed as a federal mutual holding company
and will initially own 53% of the Common Stock. The Stock Company has not yet
been formed, although the OTS has approved an application for the Mutual Company
to become a savings and loan holding company. The Mutual Company will have all
of the powers set forth in its federal charter, and federal law and OTS
regulations. The Mutual 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
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
Company is in existence it must own a majority of the Stock Company's common
stock. Federal law and OTS regulations, and the Plan of Reorganization, permit
the Mutual 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 Company has not
determined whether or not it will do so, and intends to make such a
determination at the time the Stock Company declares a dividend. OTS regulations
require the Mutual 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
Company's Board of Directors will waive dividends paid by the Stock Company if
the Board determines that such a waiver is in the Mutual Company's members' best
interest because, among other reasons: (i) the Mutual Company has no need for
the dividend considering its business operations; (ii) the cash that would be
received could be invested by the Stock Company or the Bank at a more favorable
rate of return; (iii) such waiver may increase the capital of the Bank
19
<PAGE>
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 Company through its principal asset (the Stock Company, and
indirectly, the Bank), which would be available for distribution in the unlikely
event of a voluntary liquidation of the Stock 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 Company. Any waiver of dividends by
the Mutual Company is likely to result in a downward 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 Company's Board of Directors will accept dividends paid by
the Stock Company in an amount necessary to pay the Mutual Company's expenses,
and will accept additional dividends if it determines that accepting such
dividends is in the Mutual Company's members' best interest because, among other
reasons: (i) the Mutual Company may increase its direct ownership of the Stock
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 the Bank's community. Any purchases of Common Stock by the Mutual
Company will increase the percentage of the outstanding shares of Common Stock
held by the Mutual 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 Company's executive office will located at the
administrative offices of the Bank, at 245 West Main Avenue, P.O. Box 2249,
Gastonia, North Carolina 28053-2249. Its telephone number will be (704)
868-5200.
GASTON FEDERAL BANCORP, INC.
The Stock Company will be formed as a federal corporation and will own
100% of the Bank's common stock. The Stock Company has not yet been formed, and,
accordingly, its financial statements are not included in this Prospectus. The
OTS has approved an application for the Stock 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
Stock Company will have all of the powers set forth in its federal charter and
federal law and OTS regulations.
The Stock 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 Stock 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 Stock Company will be subject to
the same restrictions under federal law as the Mutual Company. The Stock Company
has no present plans regarding diversification, acquisitions or expansion. The
Stock 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 Stock 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 (the "SAIF"), 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 offering FDIC-insured deposits to customers
through its branch offices and investing those deposits, together with funds
generated from operations and borrowings, in one- to four-family residential,
multifamily 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.
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<PAGE>
REGULATORY CAPITAL COMPLIANCE
At September 30, 1997, the Bank exceeded each of its regulatory capital
requirements. Set forth below is a summary of the Bank's compliance with the OTS
capital standards as of September 30, 1997, on an historical and pro forma basis
assuming that the indicated number of shares were sold as of such date and
receipt by the Bank of 50% of the net proceeds. For purposes of the table below,
the amount expected to be borrowed by the ESOP and the cost of its shares
expected to be acquired by the Recognition Plan are deducted from pro forma
regulatory capital. See "Management of the Bank."
<TABLE>
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1997, BASED UPON THE SALE OF
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)
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital............. $ 20,868 12.03% $25,569 14.35% $ 26,456 14.77% $ 27,342 15.19% $ 28,362 15.67%
Tangible capital:
Tangible capital (3) 19,890 11.52% 24,591 13.87% 25,478 14.29% 26,364 14.72% 27,384 15.20%
Requirement............ 2,590 1.50 2,660 1.50 2,674 1.50 2,687 1.50 2,702 1.50
-------- ---- ------- ---- -------- ----- -------- ---- -------- -----
Excess............... $ 17,300 10.02% $21,930 12.37% $ 22,804 12.79% $ 23,678 13.22% $ 24,682 13.70%
======== ======= ===== ======== ===== ======== ===== ======== =====
Core capital:
Core capital (3)....... 19,890 11.52% 24,591 13.80% 25,478 14.23% 26,364 14.65% 27,384 15.13%
Requirement(4)......... 5,179 3.00 5,320 3.00 5,347 3.00 5,374 3.00 5,404 3.00
-------- ----- ------- ----- -------- ----- -------- ---- -------- ----
Excess............... $ 14,711 8.52% $19,270 10.80% $ 20,131 11.23% $ 20,991 11.65% $ 21,980 12.13%
======== ===== ======= ===== ======== ===== ======== ===== ======== =====
Risk-based capital:
Risk-based capital (3)(5) 20,800 21.37% 25,501 25.51% 26,388 26.27% 27,274 27.02% 28,294 27.87%
Requirement............ 7,786 8.00 7,997 8.00 8,036 8.00 8,076 8.00 8,122 8.00
-------- ----- ------- ----- -------- ----- -------- ---- -------- ----
Excess............... $ 13,014 13.37% $17,504 17.51% $ 18,351 18.27% $ 19,198 19.02% $ 20,172 19.87%
======== ===== ======= ===== ======== ===== ======== ===== ======== =====
</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 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.
21
<PAGE>
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
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Gross proceeds...................................... $ 13,583 $ 15,980 $ 18,377 $ 21,134
Expenses............................................ (722) (770) (818) (873)
--------- --------- --------- ---------
Estimated net proceeds.............................. $ 12,861 $ 15,210 $ 17,559 $ 20,261
========= ========= ========= =========
</TABLE>
The Stock 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
Stock 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 use such 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 Stock Company intends to
adopt subsequent to the Offering are not funded with authorized but unissued
shares of Common Stock, the Stock 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
Plan."
The Stock 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 Stock
Company will be invested initially in short- and medium-term investments.
The net proceeds retained by the Stock 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 Stock Company and the Bank have no current arrangements, understandings or
agreements regarding any such transactions. Upon completion of the
Reorganization, the Stock Company will be regulated as a mutual holding company
under the Home Owners' Loan Act (the "HOLA") and regulations of the OTS. See
"Regulation --Holding Company Regulation."
Upon completion of the Reorganization, the Board of Directors of the
Stock 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 Stock 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 Stock
Company and its shareholders. In the event the Stock 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 Stock
Company repurchases stock at market prices in excess of the per share book
value, such repurchases may have a dilutive effect upon stockholders' equity per
share of Common Stock.
22
<PAGE>
DIVIDEND POLICY
Upon completion of the Offering, the Board of Directors of the Stock
Company will have the authority to declare dividends on the Common Stock,
subject to statutory and regulatory requirements. The Stock 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 Stock 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 Stock Company, general business
practices and other factors. The Stock Company will not be subject to OTS
regulatory restrictions on the payment of dividends although the source of such
dividends depends in part upon the receipt of dividends from the Bank. The Bank
must provide the OTS with 30 days prior notice of its intention to make a
capital distribution to the Stock 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 Stock 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 Stock 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 Stock Company
and Bank have committed to the OTS that during the one-year period following the
consummation of the Reorganization, the Stock 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 applied to have the Common Stock quoted on the Nasdaq National
Market System under the symbol "GBNK." The requirements for listing include a
minimum number of publicly traded shares, 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 Stock Company will satisfy the listing requirements. 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 Stock 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.
23
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank
at September 30, 1997, and the pro forma consolidated capitalization of the
Stock 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)
--------------------------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits (2)............................ $ 145,444 $145,444 $ 145,444 $ 145,444 $145,444
FHLB advances........................... 3,500 3,500 3,500 3,500 3,500
--------- -------- --------- --------- --------
Total deposits and borrowed funds....... $ 148,944 $148,944 $ 148,944 $ 148,944 $148,944
========= ======== ========= ========= ========
Stockholders' equity:
Preferred Stock, $1.00 par value, 10,000,000
shares authorized; none to be issued (3) -- $ -- $ -- $ -- $ --
Common Stock, $1.00 par value per share:
20,000,000 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 Stock 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 Stock 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 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 Stock 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--Possible 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 stockholders.
24
<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 Stock
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 Company will be
capitalized with $100,000. Actual expenses may vary from those estimated.
Pro forma consolidated net income of the Stock 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 Stock
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 Stock 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 Stock
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.
25
<PAGE>
The following table summarizes historical data of the Bank and pro
forma data of the Stock 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 table below gives effect to the Recognition Plan, which is
expected to be adopted by the Stock Company following the Offering and presented
to stockholders for approval. See "Management of the Bank--Recognition Plan." No
effect has been given in the table 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 Stock Company and presented to stockholders for
approval, nor does stockholders' equity as presented give any effect to the tax
effect of the bad debt reserve and other factors. See "Management of the
Bank--Stock Option Plan."
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
BASED UPON THE SALE FOR $10.00 PER SHARE OF
---------------------------------------------------------
1,358,300 1,598,000 1,837,700 2,113,355
SHARES SHARES SHARES SHARES (1)
----------- ----------- ----------- -----------
(DOLLARS AND NUMBER OF SHARES IN THOUSANDS)
<S> <C> <C> <C> <C>
Gross proceeds...................................... $ 13,583 $ 15,980 $ 18,377 $ 21,134
Expenses............................................ (722) (770) (818) (873)
--------- --------- --------- ---------
Estimated net proceeds............................ 12,861 15,210 17,559 20,261
Common Stock purchased by ESOP (2)................ (1,087) (1,278) (1,470) (1,690)
Common Stock purchased by Recognition Plan (3) (543) (639) (735) (845)
--------- --------- --------- ---------
Estimated net proceeds.......................... $ 11,231 $ 13,293 $ 15,354 $ 17,725
========= ========= ========= =========
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997:
Net income:
Historical........................................ $ 1,432 $ 1,432 $ 1,432 $ 1,432
Pro forma adjustments:
Income on net proceeds............................ 391 463 534 617
ESOP (2).......................................... (70) (82) (94) (108)
Recognition Plan (3).............................. (70) (82) (94) (108)
--------- --------- --------- ---------
Pro forma net income............................ $ 1,683 $ 1,731 $ 1,778 $ 1,833
========= ========= ========= =========
Net income per share:
Historical........................................ $ 0.51 $ 0.44 $ 0.38 $ 0.33
Pro forma adjustments:
Income on net proceeds............................ 0.14 0.14 0.14 0.14
ESOP (2).......................................... (0.02) (0.02) (0.02) (0.02)
Recognition Plan (3).............................. (0.02) (0.02) (0.02) (0.02)
--------- --------- --------- ---------
Pro forma net income per share (2)(3)(4)........ $ 0.61 $ 0.53 $ 0.48 $ 0.43
========= ========= ========= =========
Offering price to pro forma net income per share 16.95x 19.18x 20.75x 23.12x
========= ========= ========= =============
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 form stockholders' equity (5)................ $ 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(3)(4)(5) $ 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%
========= ========= ========= =========
</TABLE>
(FOOTNOTES ON NEXT PAGE)
26
<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 Stock 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 Stock
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, or from authorized
but unissued shares of Common Stock or treasury stock of the Stock
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
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 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
Stock 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) 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."
27
<PAGE>
PARTICIPATION BY MANAGEMENT
The following table sets forth information regarding intended Common
Stock subscriptions by each of the Directors and executive officers of the Bank
and the Stock Company 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,
and 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 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)
---- ------------- --------------- --------------- -----------
<C> <C> <C> <C> <C>
Sen. David W. Hoyle Chairman 25,000 $ 250,000 1.6%
Ben R. Rudisill, II 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, and
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.
28
<PAGE>
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
The Bank's Board of Directors unanimously adopted the Plan and the OTS
has approved the Plan. Pursuant to the Plan, the Bank will reorganize into what
is called a "two-tier" mutual holding company structure. It is a two-tier
structure because it 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) the Bank will form the company as a federal corporation; (ii)
the Bank will form the Mutual Company as a federal mutual holding company; (iii)
the Bank will reorganize into the capital stock form of organization and issue
100% of the Bank's to-be outstanding common stock to the Stock Company; and (iv)
the Stock Company will issue shares of Common Stock to the public and the Mutual
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 Company will be equal to 53% of
the shares issued in the Reorganization. All of these steps are referred to in
this Prospectus as the "Reorganization," and the sale of 47% of the Common Stock
pursuant to this Prospectus is referred to as the "Offering." The two-tier
mutual holding company structure is most easily understood by considering the
following diagram:
------------------ --------------
The Mutual Public
Company Stockholders
(a federal mutual
holding company)
------------------ --------------
| 53% of the | 47% of the
| Common | Common
| Stock | Stock
------------------------------------------------------------
The Stock 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 the Bank to compete
and expand more effectively in the financial services marketplace, and that will
enable the Bank's depositors, employees, management and directors to obtain an
equity ownership interest in the Bank. The new structure will permit the Stock
Company to issue capital stock, which is a source of capital not available to
mutual savings banks, and the Stock Company will take advantage of this new
ability by issuing Common Stock in the Offering. Since the Stock Company is not
offering all of its Common Stock for sale to depositors and possibly the public
in the Offering (but is issuing a
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<PAGE>
majority of its stock to the Mutual 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 Company will be available
for sale in the future in the event of the Mutual Company decides to convert to
the capital stock form of organization in a Conversion Transaction. See
"Regulation--Holding Company Regulation--Conversion of the Mutual Company to
Stock Form."
The Reorganization will also give the Bank greater flexibility to
structure and finance the expansion of our operations, including the potential
acquisition of other financial institutions, and to diversify into other
financial services. The holding company form of organization is expected to
provide additional flexibility to diversify the Bank's business activities
through existing or newly formed subsidiaries, or through acquisitions of or
mergers with other financial institutions, as well as other companies. Although
we have no current arrangements, understandings or agreements regarding any such
opportunities, the Stock Company will be in a position after the Reorganization,
subject to regulatory limitations and the Stock 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 the
Stock Company to distribute capital to its stockholders in the form of dividends
and stock repurchases. Because only a minority of the Common Stock will be
offered for sale in the Offering, the Bank's current mutual form of ownership
and its 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 Company to
obtain majority ownership of the Stock Company and the Bank, which may result in
the perpetuation of the management and Board of Directors of the Bank and the
Stock 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 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 Stock Company will be owned by the Mutual Company, which
is a mutual corporation that will be controlled by members. While this structure
will permit management to focus on the Stock Company's and the Bank's long-term
business strategy for growth and capital redeployment without excessive pressure
from stockholders, it will also serve to perpetuate the existing management and
directors of the Bank. The Mutual Company will be able to elect all members of
the Board of Directors of the Stock Company, and will be able to control the
outcome of all matters presented to the stockholders of the Stock Company for
resolution by vote except for certain matters that must be approved by more than
a majority of stockholders of the Stock Company. No assurance can be given that
the Stock Company will not take action adverse to the interests of the Minority
Stockholders. For example, the Stock 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.
Following the completion of the Reorganization, all members of Bank as
of the effective date of the Reorganization will become members of the Mutual
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 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 Stock Company will
have the power to issue shares of capital stock to persons other than the Mutual
Company, as long as the Mutual Company is in existence, the Mutual Company will
be required to own a majority of the voting stock of the Stock Company. The
Stock Company may issue any amount of non-voting stock to persons other than the
Mutual Company and the Stock Company must own 100%
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<PAGE>
of the voting stock of the Bank. The Bank and the Stock Company may issue any
amount of non-voting stock or debt to persons other than the Mutual Company.
Completion of the Reorganization is subject to the approval of the Plan
of Reorganization by the Bank's members. The Plan of Reorganization is being
presented for a vote of the Bank's members at a special meeting to be held on
March 19, 1998.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE REORGANIZATION AND
OFFERING
The Plan of Reorganization and federal and state regulations require
that the aggregate purchase price of the Common Stock issued in the Offering
must be based on the appraised pro forma market value of the Common Stock, as
determined by an independent valuation. The Bank has retained Feldman Financial,
which has prepared the Independent Valuation. For its services in making such
appraisal, Feldman Financial will receive a fee of $17,500 (which amount does
not include a fee of $5,000 to be paid to Feldman Financial for assistance in
preparation of a business plan). The Bank and the Stock 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 Stock
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 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 Stock Company will issue will range from
2,890,000 shares to 3,910,000 shares, with a midpoint of 3,400,000 shares. The
Bank's Board of Directors determined to offer 47% of such shares in the
Offering, or between 1,358,300 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
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 (the "SEC") 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
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<PAGE>
Offering Range to up to 2,113,355 shares to reflect changes in 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 Upon Purchases of Common
Stock" as to the method of distribution and allocation of additional shares that
may be issued in the event of an increase in the Offering Range to fill unfilled
orders in the Subscription and Community Offerings.
THE INDEPENDENT VALUATION, HOWEVER, IS NOT INTENDED, AND MUST NOT BE
CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING
SUCH SHARES. FELDMAN FINANCIAL DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED
FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID FELDMAN
FINANCIAL VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK. THE
INDEPENDENT VALUATION CONSIDERS THE BANK AS A GOING CONCERN AND SHOULD NOT BE
CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF THE BANK. MOREOVER,
BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A
NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO
ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING SUCH SHARES IN THE OFFERING WILL
THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES AT OR ABOVE THE SUBSCRIPTION
PRICE.
The Independent Valuation will be updated at the time of the completion
of the Offering. If the update to the Independent Valuation at the conclusion of
the Offering results in an increase in the maximum of the Estimated Valuation
Range to more than $44,965,000 and a corresponding increase in the Offering
Range to more than 2,113,355 shares, or a decrease in the minimum of the
Estimated Valuation Range to less than $28,900,000 and a corresponding decrease
in the Offering Range to fewer than 1,358,300 shares, then the Stock 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. If a
resolicitation is commenced, unless subscribers respond affirmatively within a
reasonable period of time, all funds will be promptly returned to subscribers 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 exceed 24 months
following the special meeting of the Bank's members at which the Plan of
Reorganization is presented for member approval, or March 19, 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 Stock 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 Stock 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 Stock 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 begin a new offering,
establish a new
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<PAGE>
Estimated Valuation Range and begin 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 Stock Company is offering
shares of Common Stock to persons other than the Mutual 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 Stock Company also will be authorized to
issue additional Common Stock or preferred stock to persons other than the
Mutual Company, without prior approval of the holders of the Common Stock.
Subject to the preceding paragraph and the limitations set forth in the
"--Limitations Upon Purchases of Common Stock" section, the priorities for the
purchase of shares are as follows:
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each depositor with aggregate
deposit 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 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 Upon Purchases
of Common Stock." 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 or she 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 nontransferable subscription rights to purchase
Common Stock in the Offering on behalf of ESOP participants subject to the
purchase limitations described herein. The ESOP intends to subscribe for 8% of
the Common Stock issued in the Offering, including 8% of the total number of
shares issued if the maximum of the Offering Range is increased.
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent that
there are sufficient shares remaining after satisfaction of subscriptions by
Eligible Account Holders and the ESOP, each depositor with a Qualifying Deposit
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<PAGE>
as of December 31, 1997 (the "Supplemental Eligibility Record Date") who is not
an Eligible Account Holder ("Supplemental Eligible Account Holder") will
receive, 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 Upon
Purchases of Common Stock." 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 whose
subscription remains unfilled in the proportion that the amount of his or her
Qualifying Deposit bears to the total amount of Qualifying Deposits of all
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unfilled.
To ensure proper allocation of stock, each Supplemental Eligible
Account Holder must list on his Order Form all deposit accounts in which he or
she 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 as of
February 6, 1998 ("Other Members") will receive 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 Stock
Company and the Bank, and may begin 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 Stock 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 Stock 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
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<PAGE>
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 use deposit or loan records or such
other evidence provided to it to determine 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 Stock Company, in their sole discretion, may reject
subscriptions, in whole or in part, received from any person.
SYNDICATED COMMUNITY OFFERING
Depending on market conditions, the Common Stock may be offered for
sale (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 begin 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 Stock 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 who submits an Order Form will be required to certify
that the purchase of Common Stock by such person is solely for the purchaser's
own account and there is no agreement or understanding regarding the sale or
transfer of such shares. The Bank intends to pursue any and all legal and
equitable remedies in the event it becomes aware of any such agreement or
understanding, and will not honor orders reasonably believed by the Bank to
involve such an agreement or understanding.
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<PAGE>
PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date, Prospectuses will not be mailed any later than five
days prior to such date or 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 March 17, 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 May
1, 1998, in which event purchasers will be given the right to increase,
decrease, confirm, or rescind their orders. If the minimum number of shares
offered in the Offering (1,358,300 shares) is not sold by the Expiration Date,
the Bank may terminate the Offering and promptly refund all orders for Common
Stock. A reduction in the number of shares below the minimum of the Estimated
Valuation Range will not require the approval of depositors or an amendment to
the Independent Valuation. If the number of shares is reduced below the minimum
of the Estimated Valuation Range, purchasers will be given an opportunity to
increase, decrease, or rescind their orders.
USE OF ORDER FORMS. In order to purchase the Common Stock, each
purchaser must complete an Order Form except for certain persons purchasing in
the Syndicated Community Offering as more fully described below. Any person
receiving an Order Form who desires to purchase Common Stock may do so by
delivering (by mail or in person) to the Bank a properly executed and completed
Order Form, together with full payment for the shares purchased. The Order Form
must be received prior to 12:00 noon, local time on March 17, 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 Stock
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
checks and money orders shall be made payable to "Gaston Federal Bancorp, Inc."
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 May 1, 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
36
<PAGE>
("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 Internal Revenue Service ("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 Common Stock, such plan will not be
required to pay for such shares until consummation of the Offering, provided
that there is in force from the time the order is received a loan commitment to
lend to the ESOP the amount of funds necessary to purchase the number of shares
ordered.
DELIVERY OF STOCK CERTIFICATES. Certificates representing Common Stock
issued in the Offering will be mailed by the Bank to the persons entitled
thereto at the registration address noted on the Order Form, as soon as
practicable following consummation of the Offering. Any certificates returned as
undeliverable will be held by the Bank until claimed by persons legally entitled
thereto or otherwise disposed of in accordance with applicable law. Until
certificates for the Common Stock are available and delivered to purchasers,
purchasers may not be able to sell the shares of stock which they ordered.
Subscribers are at their own risk 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 materials 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 Securities Exchange Act of 1934 (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.
37
<PAGE>
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.
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 owned or controlled
by persons other than Mutual Company at the close of the Offering shall
not exceed 47% of the 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 Company, except that: (i) the Stock 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 held by persons other than
the Mutual 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 Nontax-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 3 of this section,
shares held by any Tax-Qualified Employee Benefit Plan or any
Nontax-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 Stock 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
38
<PAGE>
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 Stock 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
Stock Company, in its sole discretion.
6. In the event of an increase in the total number of shares offered in
the Subscription Offering due to an increase in the maximum of the
Estimated Valuation Range of up to 15% (the "Adjusted Maximum"), the
additional shares will be issued in the following order of priority:
(i) to fill the Employee Plans' subscription to the Adjusted Maximum;
(ii) in the event that there is an oversubscription at the Eligible
Account Holder, Supplemental Eligible Account Holder, or Other Members
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 Stock 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 Stock 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 Stock 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 the Offering," and
"Restrictions on Acquisition of the Stock Company."
39
<PAGE>
RESTRICTIONS ON REPURCHASE OF STOCK BY THE STOCK COMPANY
OTS regulations and policy currently prohibit the Stock Company from
repurchasing any of its shares within three years following the Offering 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 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 transactions by a tax-qualified or nontax qualified employee benefit plan
in an amount reasonable and appropriate to fund such plan.
RESTRICTIONS ON SALE OF STOCK BY DIRECTORS AND OFFICERS
All shares of the Common Stock purchased by directors and officers of
the Bank or the Stock 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 Stock 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 of the Stock Company."
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 Stock 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 FOLLOWING THE
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 Stock Company nor their associates may purchase
shares of the Common Stock, except from a dealer registered with the SEC. This
restriction does not, however, apply to negotiated transactions involving more
than 1% of the outstanding Common Stock, to shares purchased pursuant to stock
option or other incentive stock plans approved by the Stock Company's
shareholders, or to shares purchased by employee benefit plans maintained by the
Stock 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.
40
<PAGE>
FEDERAL AND STATE TAX CONSEQUENCES OF THE REORGANIZATION
The Bank intends to proceed with the Reorganization on the basis of an
opinion from its special counsel, Luse Lehman Gorman Pomerenk & Schick, P.C.,
Washington, D.C., as to certain tax matters that are material to the
Reorganization. The opinion is based, among other things, on certain
representations made by the Bank, including the representation that the exercise
price of the subscription rights to purchase the Common Stock will be
approximately equal to the fair market value of the stock at the time of the
completion of the Reorganization. With respect to the subscription rights, the
Bank has received an opinion of Feldman Financial which, based on certain
assumptions, concludes that the subscription rights to be received by Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members do not
have any economic value at the time of distribution or the time the subscription
rights are exercised, whether or not a Community Offering takes place, and Luse
Lehman Gorman Pomerenk & Schick, P.C.'s opinion is given in reliance thereon.
The Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C., provides
substantially as follows:
1. The change in form from a mutual savings bank ("Mutual Bank")
to a stock savings bank (the "Stock Bank") will qualify as a
reorganization under Section 368(a)(1)(F) of the Internal
Revenue Code, as amended (the "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 Reorganization.
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 Company will constitute a
tax-free exchange of property solely for voting "stock"
pursuant to Section 351 of the Code.
9. The Stock Bank's stockholders will recognize no gain or loss
upon the transfer to the Mutual Holding Company of the Stock
Bank stock they constructively received solely in exchange for
membership interests in the Mutual Company.
10. The Mutual 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 Company.
41
<PAGE>
11. The Mutual 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 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 Reorganization.
14. The Mutual Company and Minority Stockholders will recognize no
gain or loss upon the transfer of Stock Bank stock and cash,
respectively, to the Stock Company in exchange for Common
Stock.
15. The Stock Company will recognize no gain or loss upon its
receipt of Stock Bank stock and cash from the Mutual Company
and Minority Stockholders, respectively, in exchange for
Common Stock.
16. The basis of the Common Stock to Minority Stockholders will be
the Subscription Price and a shareholder's holding period for
Common Stock acquired through the exercise of subscription
rights will begin on the date the rights are exercised.
The opinion of Luse Lehman Gorman Pomerenk & Schick, P.C., unlike a
letter ruling issued by the IRS, is not binding on the IRS and the conclusions
expressed therein may be challenged at a future date. The Internal Revenue
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 Reorganization.
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 depositors, borrowers, the Stock Company
or the Mutual Company.
42
<PAGE>
GASTON FEDERAL SAVINGS AND LOAN ASSOCIATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
The following Consolidated Statements of Operations of the Bank for the
fiscal years ended September 30, 1997 and 1996 have been audited by Cherry,
Bekaert & Holland, L.L.P., independent certified public accountants, whose
report thereon appears elsewhere in this Prospectus. These statements should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
---------------------------------
1997 1996
---------- ----------
(In Thousands)
<S> <C> <C>
INTEREST INCOME:
Loans............................................................ $ 10,826 $ 10,218
Investment securities............................................ 1,321 1,361
Mortgage-backed and related securities........................... 789 939
---------- ----------
Total interest income......................................... 12,936 12,518
INTEREST EXPENSE:
Deposits......................................................... 6,805 7,293
Borrowed funds................................................... 147 88
---------- ----------
Total interest expense........................................ 6,952 7,381
---------- ----------
Net interest income........................................... 5,984 5,137
PROVISION FOR LOAN LOSSES............................................ 293 47
---------- ----------
Net income after provision for loan losses 5,691 5,090
---------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts.............................. 209 189
Gain on sale of securities....................................... 52 --
Other income..................................................... 255 228
---------- ----------
Total noninterest income...................................... 516 417
---------- ----------
NONINTEREST EXPENSES:
Salaries and benefits............................................ 2,228 1,976
Occupancy expense................................................ 465 500
Deposit insurance................................................ 139 1,197
Computer expense................................................. 139 164
Advertising...................................................... 220 144
Professional services............................................ 184 175
Other............................................................ 581 490
---------- ----------
Total noninterest expense..................................... 3,956 4,646
---------- ----------
Income before income taxes........................................... 2,251 861
Provision for income taxes........................................... 819 351
---------- ----------
Net income........................................................... $ 1,432 $ 510
========== ==========
</TABLE>
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Stock 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 noninterest 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.
44
<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 nonreal 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 rates. 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
multifamily 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 nonmortgage 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.
45
<PAGE>
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.
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 Stock 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 0.2%, 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.
46
<PAGE>
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 Stock Company's equity (as compared to the Bank's equity prior to the
Offering) in an amount equal to net Offering proceeds minus (i) the $100,000
used to capitalize the Mutual 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> <C> <C> <C> <C> <C> <C> <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
Noninterest-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
-------- -------
Noninterest-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.
47
<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
------ ---- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <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 noninterest expenses, including salaries and
benefits, occupancy, deposit insurance, advertising, professional services and
other noninterest expenses. Management intends to initially invest the Offering
proceeds in interest earning assets and believes that the Bank and the Stock
Company will derive additional interest income from such sources. However, there
can be no assurances that the overall amount of earnings of the Stock 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.
48
<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.
49
<PAGE>
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 the growth in 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 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 and Multifamily Real Estate, Commercial Business and
Consumer Lending" and "Business of the Bank--Lending Activities--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 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 Stock 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
Stock 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.
50
<PAGE>
Accordingly, future increases and decreases in fair value of Common Stock
committed to be released will have a corresponding effect on compensation
expense related to the ESOP. To the extent that the fair value of the Bank's
ESOP shares differ from the cost of such shares, the differential will be
charged or credited to equity.
PROVISION FOR INCOME TAXES. The Bank's provision for income taxes was
$819,000 and $351,000 for the fiscal years ended September 30, 1997 and 1996.
The higher provision for the fiscal year ended September 30, 1997 related
primarily to an increase in income before income taxes. 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 nondeductible 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 $9.5 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 Stock 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
Stock 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 Stock
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 ("GAAP"),
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.
51
<PAGE>
Nearly all the assets and liabilities of the Bank are financial, unlike most
industrial companies. As a result, the Bank's performance is 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 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 it will be able 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.
52
<PAGE>
BUSINESS OF THE STOCK COMPANY
The Stock Company is currently not an operating company. Following the
Reorganization, in addition to directing, planning and coordinating the business
activities of the Bank, the Stock Company will initially invest net proceeds it
retains primarily in short and medium-term investments. The Stock 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 Stock 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 Stock Company's operations.
Initially, the Stock 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 Stock 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 Stock Company. The Stock Company may use
support staff of the Bank from time to time, if needed. Additional employees
will be hired as appropriate to the extent the Stock Company expands its
business in the future.
BUSINESS OF THE BANK
GENERAL
The Bank operates, and intends to continue to operate, as a
community-oriented financial institution. 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 has 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,
multifamily 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.
53
<PAGE>
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)
Real estate loans:
<S> <C> <C> <C> <C>
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
Multifamily 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.
54
<PAGE>
The Bank offers ARM loans at rates and terms competitive with market
conditions. At September 30, 1997, $34.1 million, or 24.5% of the Bank's total
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 Effects of 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
55
<PAGE>
generally modify the loan so that the term is for a period necessary to complete
construction. Construction loans to 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)
56
<PAGE>
of not less than 1.25. It is also the Bank's policy to obtain personal
guarantees from the principals of its corporate borrowers on its commercial real
estate loans.
The Bank originates a limited number of loans to existing customers to
purchase real estate on which the borrower's principal residence will be
constructed. The Bank does not solicit such land loans and such loans totaled
$41,000 as of September 30, 1997.
Commercial real estate lending affords the Bank an opportunity to
receive interest at rates higher than those generally available from one- to
four-family residential lending. However, loans secured by such properties
usually have higher balances and are more difficult to evaluate and monitor and,
therefore, involve a greater degree of risk than one- to four-family residential
mortgage loans. If the estimate of value proves to be inaccurate, in the event
of default and foreclosure the Bank may be confronted with a property the value
of which is insufficient to assure full repayment. Because payments on such
loans are often dependent on the successful development, operation and
management of the properties, repayment of such loans may be affected by adverse
conditions in the real estate market or the economy. The Bank seeks to minimize
these risks by limiting the maximum loan-to-value ratio and strictly
scrutinizing the financial condition of the borrower, the quality of the
collateral and the management of the property securing the loan. The Bank also
obtains loan guarantees from financially capable parties based on a review of
personal financial statements.
MULTIFAMILY RESIDENTIAL REAL ESTATE LENDING. The Bank originates
mortgage loans secured by multifamily 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 multifamily residential real estate. The majority
of the Bank's multifamily residential real estate loans are secured by apartment
buildings located in the Bank's primary market area. The interest rates for the
Bank's multifamily 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
multifamily 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 multifamily
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 multifamily residential real estate
loans are generally limited to 80%. As part of the criteria for underwriting
multifamily 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
multifamily residential real estate loans.
Multifamily 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.
57
<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
58
<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
----------- ------------- ---------- ----------- -------- -----
(In Thousands)
Amounts Due:
<S> <C> <C> <C> <C> <C> <C> <C>
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 -- 670 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>
59
<PAGE>
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.
<TABLE>
<CAPTION>
Fixed Rates Adjustable Rates Total
(In Thousands)
Real Estate Loans:
<S> <C> <C> <C>
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
Multifamily 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.
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<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
----------- ---------
(In Thousands)
<S> <C> <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 $9.5
million. See Note 8 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 $172,000 and $131,000 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
61
<PAGE>
against income in the current period. Loans may be reinstated to accrual status
when payments are under 90 days past due and, in the opinion of management,
collection of the remaining past due balances can be reasonably expected.
The Bank's Board of Directors is informed monthly of the status of all
mortgage loans delinquent more than 60 days, all consumer and commercial
business loans delinquent more than 30 days, all loans in foreclosure and all
foreclosed and repossessed property owned by the Bank.
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. As of such dates, the Bank had no
restructured loans within the meaning of SFAS No. 15.
<TABLE>
<CAPTION>
At September 30,
-----------------------
1997 1996
-------- ----------
(Dollars in Thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
One- to four-family residential real estate loans......................... $ 876 $ 1,053
Multifamily 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
62
<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.
63
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
At and For the Fiscal Years
Ended September 30,
1997 1996
(Dollars in Thousands)
<S> <C> <C>
Total loans outstanding.............................................. $ 134,491 $ 130,862
=========== ============
Average loans outstanding............................................ $ 132,529 $ 126,503
=========== ============
Allowance at beginning of period..................................... $ 830 $ 786
Provision............................................................ 293 47
Recoveries........................................................... -- --
Charge-offs:
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> <C> <C> <C>
Real estate loans:
One- to four-family residential $ 643 76.50% $ 450 76.72%
Construction......................... 55 4.22 50 5.02
Commercial........................... 105 5.26 88 4.75
Multifamily 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."
64
<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)
Investment Securities:
<S> <C> <C> <C> <C> <C> <C>
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.
65
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for our investment securities portfolio at September 30, 1997 by
contractual maturity. The following table does not take into consideration the
effects of scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
At September 30, 1997
Less than 1 year 1 to 5 years Over 5 to 10 years Over 10 years Total Securities
---------------- ---------------- ------------------- ----------------- ----------------------
Weighed Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield(1) Value Yield(1) Value Yield(1) Value Yield(1) Value Yield(1) Value
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government securities... $ 1,000 5.59% $ 2,503 6.33% $ -- --% $ -- --% $ 3,502 6.12% $ 3,506
U.S. Agency securities. . . . 1,049 5.63 7,617 6.38 -- -- 248 7.58 8,914 6.34 8,928
------- ---- ------- ---- ------- ------- ------ ---- ------- ---- ------
Total. . . . . . . . . . . . $ 2,049 5.63% $10,120 6.38% $ -- --% $ 248 7.58% $12,416 6.28% $12,434
======= ==== ======= ==== ======= === ===== ==== ======= ==== =======
</TABLE>
- ---------------------------
(1) Yields on tax exempt obligations have been computed on a tax equivalent
basis.
66
<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 Stock Company as the sole stockholder of the Bank.
67
<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> <C> <C> <C> <C>
Noninterest 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
(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.
68
<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, 2000 Total
- ------------- ------------------ ------------------ ------------------ ------------------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
2.01-4.0%........ $ 127 $ 45 $ -- $ -- $ 172
4.01-6.0%........ 78,747 9,931 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
---------- ----------
(In Thousands)
<S> <C> <C>
Beginning balance.................................................... $ 145,975 $ 141,432
Net increase (decrease) before interest credited..................... (7,386) (2,751)
Interest credited.................................................... 6,805 7,294
---------- ----------
Net increase (decrease) in savings deposits.......................... (531) 4,543
---------- ----------
Ending balance....................................................... $ 145,444 $ 145,975
========== ==========
</TABLE>
BORROWINGS. Savings deposits are the primary source of funds for the
Bank's lending and investment activities and for its general business purposes.
The Bank has the ability to use advances from the FHLB-Atlanta to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. The
FHLB-Atlanta functions as a central reserve bank providing credit for savings
associations and certain other member financial institutions. As a member of the
FHLB-Atlanta, the Bank is required to own capital stock in the FHLB-Atlanta and
is authorized to apply for advances on the security of such stock and certain of
its mortgage loans and other assets (principally securities that are obligations
of, or guaranteed by, the U.S. Government) provided certain creditworthiness
standards have been met. Advances are made pursuant to several different credit
programs. Each credit program has its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based on the
financial condition of the member institution and the adequacy of collateral
pledged to secure the credit. The maximum outstanding balances of the Bank's
FHLB advances for the fiscal years ended September 30, 1997 and 1996 were $3.8
million and $3.8 million, respectively, the average balances outstanding were
$2.3 million and $1.4 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.
69
<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> <C> <C>
245 West Main Avenue 1971 12,400 $43.4 million
Gastonia, NC 28052-4140
1670 Neal Hawkins Road 1987 5,322 $21.4 million
Gastonia, NC 28056-6429
1535 Burtonwood Drive 1976 4,739 $44.7 million
Gastonia, NC 28054-4011
233 South Main Street 1990 2,372 $36.1 million
Mount Holly, NC 28120-1620
</TABLE>
At September 30, 1997, the net book value of the Bank's office
properties and the Bank's fixtures, furniture, and equipments was $2.1 million.
EMPLOYEES
As of September 30, 1997, the Bank had 57 full-time and 8 part-time
employees, none of whom is represented by a collective bargaining unit. The Bank
believes its relationship with its employees is good.
70
<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 Company, the Stock 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 nondividend 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.
71
<PAGE>
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. The Stock 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 Company will own less than 80% of the outstanding Common
Stock. As such, the Mutual Company will not be permitted to file a consolidated
federal income tax return with the Stock 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 EXAMINATION. The Bank's federal income tax returns have been
audited by the IRS, and are closed, through the fiscal year ended September 30,
1994. The IRS has not notified the Bank of any intention to audit the Bank's
federal income tax returns for any subsequent year.
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 Stock
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, 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 requirements to extend loans to one
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borrower in additional amounts under circumstances limited essentially to loans
to develop or complete residential housing units.
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
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Department of Justice. The Bank received a satisfactory CRA rating under the
current CRA regulations in its most recent federal examination by the OTS.
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 Stock
Company and any nonsavings 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 nonaffiliated 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 systems; 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 noncumulative 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 CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions. See "--Prompt
Corrective Regulatory Action."
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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%, 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 rate 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 and 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 Stock 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. Legislation enacted in 1996
required the Treasury Department to prepare for Congress a comprehensive study
on development of a common charter for federal savings associations and
commercial banks; and provided for the merger of the BIF and the SAIF into a
single deposit insurance fund on January 1, 1999 provided the thrift charter was
eliminated. 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 Stock 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 total
risk-based capital of 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
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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 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 may 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 noninterest-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 Company and the Stock Company are nondiversified
mutual savings and loan holding companies within the meaning of the HOLA, as
amended. As such, the Mutual Company and the Stock 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 Company and the Stock Company and any nonsavings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are
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determined to be a serious risk to the subsidiary savings institution. As
federal corporations, the Stock Company and the Mutual Company are generally not
subject to state business organizations law.
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 Stock 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 nonconforming
activities and divest of any nonconforming investments.
The HOLA prohibits a savings and loan holding company, including the
Stock Company and the Mutual 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
nonsubsidiary savings institution, a nonsubsidiary holding company, or a
nonsubsidiary 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 COMPANY. OTS regulations require the
Mutual Company to notify the OTS of any proposed waiver of its right to receive
dividends. The OTS' reviews dividend waiver notices on a case-by-case basis,
and, in general, does 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 to 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
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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 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 COMPANY TO STOCK FORM. OTS regulations and the
Plan of Reorganization permit the Mutual 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 Stock Company (the "New Holding Company"), the Mutual
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 any 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 decrease 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 Company and (ii)
assets other than Common Stock held by the Mutual 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 Stock Company's stockholders'
equity at the time of the Conversion Transaction less the aggregate amount of
dividends waived by the Mutual Company and the denominator is equal to the Stock
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 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 to be issued in the Offering will be registered with
the SEC under the Exchange Act. The Stock 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 Stock Company may not be
resold without registration or unless sold in accordance with certain resale
restrictions. If the Stock Company meets specified current public information
requirements, each affiliate of the Stock 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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MANAGEMENT OF THE STOCK COMPANY
DIRECTORS OF THE STOCK COMPANY
GENERALLY. The Board of Directors of the Stock Company will initially
consist of the nine persons who are currently directors of the Bank. Directors
of the Stock 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 STOCK COMPANY
The following individuals will be executive officers of the Stock
Company and hold the offices set forth below opposite their names. The
biographical information for each executive officer is set forth under
"Management of the Bank--Directors and Executive Officers of the Bank."
<TABLE>
<CAPTION>
Name Age* Position
<S> <C> <C>
Kim S. Price 41 President and Chief Executive Officer
Paul L. Teem, Jr. 49 Executive Vice President, Secretary and Chief
Operations Officer
Gary F. Hoskins 34 Vice President, Treasurer and Chief Financial Officer
- ---------------------------
*As of September 30, 1997
</TABLE>
None of the executive officers has received remuneration from the Stock
Company. It is not anticipated that the executive officers of the Stock 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 STOCK COMPANY AFTER THE REORGANIZATION
Following the Reorganization, the Board of Directors of the Stock
Company is expected to meet quarterly, or more often as may be necessary. The
directors of the Stock Company will not initially receive fees for serving on
the Stock Company's Board of Directors.
The Board of Directors initially is expected to have, among others, a
standing Executive Committee and Audit Committee. The Stock Company's full Board
of Directors will act as the Nominating Committee, or may appoint a Nominating
Committee. The Stock Company does not intend initially to have a compensation
committee, as it is not anticipated that the officers of the Stock 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 Stock 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
prepared
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by the independent auditors of the Bank, to review and recommend the independent
auditors to be engaged by the Stock Company, to review the internal accounting
controls of the Stock 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 Stock 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
- ---- ------------------ ------------ -------------- ------------
DIRECTORS:
<S> <C> <C> <C> <C>
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 2000
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
</TABLE>
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
- ----------
(1) As of January 31, 1998
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 was the Vice President and Financial Officer of Chelsea House, Inc., a
manufacturer of decorative arts, accessories and furniture from 1976 until her
retirement in 1998.
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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 OTS.
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, nonemployee
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, nonemployee 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
the Bank entered into nonqualified 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 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.
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SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. In February 1992 the Bank
entered into nonqualified 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. 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
NAME AND ENDED COMPENSATION STOCK SARS LTIP COMPENSATION
PRINCIPAL POSITION 9/30(1) SALARY(2) BONUS(3) (4) AWARDS(5) (#)(6) PAYOUTS (7)
- ---------------------- -------- ----------- --------- --------- ---------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C>
Kim S. Price (8) 1997 $ 15,000 $ -- -- -- -- -- $ --
Robert W. Williams, Sr. 1997(9) 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 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 Stock
Company, see "--Recognition 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 Stock
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 36 months. On each anniversary date, the
agreement may be extended for an additional 12 months, so that the remaining
term shall be 36 months. If the agreement is not renewed, the agreement will
expire 36 months following the anniversary date. The current Base Salary for Mr.
Price is $110,000. The Base Salary may be increased but not decreased. In
addition to the Base Salary, the agreement provides for, among other things,
participation in stock benefit plans and other employee and fringe benefits
applicable to executive personnel. The agreement provides for termination by the
Bank for cause at any time. In the event the Bank terminates the executive's
employment for reasons other than for cause, or in the event of the executive's
resignation from the Bank upon (i) failure to re-elect the executive to his
current offices, (ii) a material change in the executive's functions, duties or
responsibilities, or
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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 noncompete 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>
Highest Five-Year Years of Service and Benefit Payable at Retirement(1)
Average -----------------------------------------------------------------------------
Compensation 15 20 25 30 35 40
------------ -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$50,000 $13,500 $18,000 $22,500 $22,500 $22,500 $22,500
$75,000 $20,300 $27,000 $33,800 $33,800 $33,800 $33,800
$100,000 $27,000 $36,000 $45,000 $45,000 $45,000 $45,000
$125,000 $33,800 $45,000 $56,300 $56,300 $56,300 $56,300
$150,000 $40,500 $54,000 $67,500 $67,500 $67,500 $67,500
</TABLE>
- ----------------------------
(1) No additional credit is received for years of service in excess of 25,
however, increases in compensation after 25 years will generally cause
an increase in benefits.
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 nonqualified 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. 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. Williams' 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 Stock 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 nonemployee 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 Stock 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,
officers and employees of the Bank and of the Stock 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 Stock 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
nonqualified 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 Stock
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
nonemployee members of the Stock 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 Stock Company. Nonqualified stock options could also be granted
under the Stock Option Plan, and will be granted to the nonemployee 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 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 restricted stock plan (the "Recognition Plan") for
shareholder approval. The Recognition Plan will provide the directors, officers
and employees of the Stock Company and the Bank with an ownership interest in
the Stock Company in a manner designed to encourage them to continue their
service with the Bank or the Stock Company, as the case may be. 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 Stock 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.
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In the event that additional authorized but unissued shares would be acquired by
the Recognition Plan after the Offering, the interests of existing shareholders
would be diluted. The executive officers and directors will be awarded Common
Stock under the Recognition Plan without having to pay cash for the shares. No
awards under the Recognition Plan would be made until the date the Recognition
Plan is approved by the Stock 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 Stock 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 Stock
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 STOCK 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 Stock Company and the Bank and certain regulatory provisions that may be
deemed to have an "anti-takeover" effect.
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THE MUTUAL HOLDING COMPANY STRUCTURE
Under OTS regulations, the Plan of Reorganization, and the charter of
the Stock Company, at least a majority of the Stock Company's voting shares must
be owned by the Mutual Company. The Mutual Company will be controlled by its
Board of Directors, which will initially consist of the same persons who are
members of the Board of Directors of the Bank and the Stock Company. The Mutual
Company will be able to elect all members of the Board of Directors of the Stock
Company, and as a general matter, will be able to control the outcome of all
matters presented to the stockholders of the Stock Company for resolution by
vote, except for matters that require a vote greater than a majority. The Mutual
Company, acting through its Board of Directors, will be able to control the
business, and operations of the Stock Company and the Bank, and will be able to
prevent any challenge to the ownership or control of the Stock Company by
Minority Stockholders. Accordingly, a change in control of the Stock Company and
the Bank cannot occur unless the Mutual Company first converts to the stock form
of organization. Although OTS regulations and policy and the Plan of
Reorganization permit the Mutual Company to convert from the mutual to the
capital stock form of organization, the Board of Directors has no current plan
to do so.
PROVISIONS OF THE STOCK 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 Stock 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 Stock 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 Stock Company's
Registration Statement filed with the SEC. See "Additional Information."
CLASSIFIED BOARD OF DIRECTORS AND RELATED PROVISIONS. The Stock
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 Stock 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 Stock Company's Charter provides that
there shall be no cumulative voting rights in the election of directors.
AUTHORIZATION OF PREFERRED STOCK. The Stock Company's Charter
authorizes shares of serial preferred stock, without par value. The Stock
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 Stock
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 Stock Company and its stockholders.
RESTRICTIONS ON ACQUISITIONS OF SECURITIES. The Stock Company's Charter
provides that for a period of five years from the effective date of the charter,
no person other than the Mutual 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 Stock Company.
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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.
SPECIAL MEETING OF STOCKHOLDERS. The Stock 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 Stock 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% 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% of any
class of voting stock, or of more than 25% 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 Stock
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% of any class of equity security of the Stock Company.
DESCRIPTION OF CAPITAL STOCK OF THE STOCK COMPANY
COMPANY CAPITAL STOCK
The 30,000,000 shares of capital stock authorized by the Stock
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 Stock Company on a consolidated basis. The balance of the
Subscription Price of Common Stock, less expenses of the 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 Stock 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 Stock 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 Acquisition of the Stock
Company--Provisions of the Stock Company's Charter and Bylaws." If the Stock
Company issues preferred stock subsequent to the Reorganization, holders of the
preferred stock may also possess voting powers.
88
<PAGE>
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 Stock
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 Stock Company will be authorized to issue preferred stock in series and to
fix and state the voting powers, designations, preferences and relative,
participating, optional or other special rights of the shares of each such
series and the qualifications, limitations and restrictions thereof. Preferred
stock may rank prior to the Common Stock as to dividend rights, liquidation
preferences, or both, and may have full or limited voting rights. The holders of
preferred stock will be entitled to vote as a separate class or series under
certain circumstances, regardless of any other voting rights which such holders
may have.
Except as discussed herein, the Stock 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 Stock 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 Stock Company, the
Stock Company's only asset will be the Bank's common stock and $100,000.
Although it is anticipated that the Stock 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 Stock Company. Should the Bank elect to retain its
income, the ability of the Stock Company to pay dividends to its own
shareholders may be adversely affected. Furthermore, if at any time in the
future the Stock 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 Stock 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 Stock 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 Reorganization and Offering will be passed upon for the Bank
and the Stock 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.
89
<PAGE>
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. On August
18, 1997, Butler & Stowe, the independent accountants who were previously
engaged as principal accountants to audit the Bank's financial statements,
resigned and the Bank retained Cherry, Bekaert & Holland, L.L.P., independent
auditors. The change in accountants was approved by the Bank's Board of
Directors. The prior accountant's report on the financial statements as of and
for the fiscal year ended September 30, 1996, did not contain an adverse opinion
or disclaimer of opinion and was not qualified or modified as to uncertainty,
audit scope, or accounting principles. During the Bank's two most recent fiscal
years preceding such resignation there were no disagreements with the former
accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope of procedure, nor were there any other
events that require reporting under SEC regulations.
Feldman Financial has consented to the publication herein of the
summary of its report to the Bank and the Stock Company setting forth its
opinion as to the estimated pro forma market value of the Common Stock upon
Reorganization and its valuation with respect to Subscription Rights.
ADDITIONAL INFORMATION
The Stock 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 Stock Company will register the
Common Stock with the SEC under Section 12(g) of the Exchange Act; and, upon
such registration, the Stock 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 Stock 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 Stock
Company are available without charge from the Bank.
90
<PAGE>
GASTON FEDERAL SAVINGS & LOAN ASSOCIATION
AND SUBSIDIARY
Financial Statements for the years ended
September 30, 1997 and 1996
Contents
<TABLE>
<CAPTION>
<S> <C>
Page
Report of Independent Auditors..................................................................................F-1
Consolidated Statements of Condition............................................................................F-2
Consolidated Statements of Operations............................................................................43
Consolidated Statements of Changes in Equity....................................................................F-3
Consolidated Statements of Cash Flows...........................................................................F-4
Notes to Consolidated Financial Statements......................................................................F-5
</TABLE>
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 statements related to Gaston Federal Bancorp, Inc. and Gaston Federal
Holdings, MHC are not included as they have not begun operations.
91
<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
ASSOCIATE "Associate" of a person means: (i) any
corporation or organization (other than the
Bank or its subsidiaries or the Stock
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 Stock 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 Stock 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 The Bank Insurance Fund of the FDIC
CODE The Internal Revenue Code of 1986, as
amended
COMMON STOCK Common Stock, par value of $1.00 per
share, of Gaston Federal Bancorp, Inc.
COMMUNITY OFFERING The offering for sale to 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
CONVERSION TRANSACTION A mutual-to-stock conversion of
the Mutual Company
ELIGIBLE ACCOUNT HOLDERS Depositors of the Bank with
aggregate 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 The estimated pro forma
market value of the 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
EXCHANGE ACT Securities Exchange Act of 1934, as amended
EXPIRATION DATE 12:00 noon, local time, on March 17, 1998
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FDICIA Federal Deposit Insurance Corporation
Improvement Act of 1991, as amended
G-1
<PAGE>
FHLB The Federal Home Loan Bank
FNMA Federal National Mortgage Association
INDEPENDENT VALUATION The appraisal of the pro forma
market value of the 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 STOCKHOLDERS Stockholders of the Stock
Company other than the Mutual Company
MMDA Money Market Demand Account
MUTUAL COMPANY Gaston Federal Holdings, MHC, a
federal mutual holding 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 between 1,358,300 and
1,837,700 shares of Common Stock, subject to
adjustment to 2,113,355 shares of Common
Stock to depositors and others in the
Subscription Offering and the Community
Offering pursuant to the Prospectus
OFFERING RANGE The offer and sale by the Stock
Company of between 1,358,300 and 1,837,700
shares (subject to adjustment to 2,113,355
shares) of Common Stock in the Offering
pursuant to the Prospectus
ORDER FORM The form for ordering Common Stock
accompanied by a certification concerning
certain matters
OTHER MEMBERS Depositors of the Bank as of
February 6, 1998, who are not Eligible
Account Holders or Supplemental Eligible
Account Holders
OTS Office of Thrift Supervision
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
QUALIFYING DEPOSITS Deposit accounts with aggregate
balances of $50.00 or more as of specified
dates
RECOGNITION PLAN The restricted stock plan to be
submitted for approval at a meeting of the
Stock Company's shareholders to be held no
earlier than six months after the completion
of the Offering
G-2
<PAGE>
REO Real Estate Owned
REORGANIZATION The reorganization of the Bank from the
mutual to the stock form of organization,
the organization of the Stock Company, the
issuance of all of the Bank's common stock
to the Stock Company, the issuance of a
majority of the Common Stock to the Mutual
Company, and the offer and sale of a
minority of the Common Stock in the Offering
pursuant to the Prospectus
SAIF The Savings Association Insurance Fund of
the FDIC
SEC Securities and Exchange Commission
SPECIAL MEETING The Special Meeting of members of
the Bank called for the purpose of approving
the Plan of Reorganization
STOCK 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
STOCK OPTION PLAN The stock option plan for
directors, officers and employees to be
submitted for approval at a meeting of the
Stock Company's shareholders to be held no
earlier than six months after the completion
of the Offering
SUBSCRIPTION OFFERING The offering of nontransferable
rights to subscribe for the Common Stock, in
order of priority, to Eligible Account
Holders, the ESOP, Supplemental Eligible
Account Holders and Other Members
SUBSCRIPTION PRICE The $10.00 price per share at which
the Common Stock will be sold in the
Offering
SUPPLEMENTAL ELIGIBLE Depositors of the Bank with aggregate
ACCOUNT HOLDERS account balances of at least $50 on
December 31, 1997, who are not Eligible
Account Holders
VOTING RECORD DATE The close of business on
February 6, 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.
[Logo Here]
GASTON FEDERAL BANCORP, INC.
(Proposed Holding Company for
Gaston Federal Bank)
UP TO 2,113,355 SHARES
Common Stock
($1.00 par value per share)
SUBSCRIPTION AND
COMMUNITY OFFERING
PROSPECTUS
TRIDENT SECURITIES, INC.
February 11, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED
Until March 17, 1998 or 25 days after the commencement of the offering 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.
- --------------------------------------------------------------------------------
