<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from __________________ to _____________________
Commission File Number: 0-23971
GASTON FEDERAL BANCORP, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C>
FEDERAL 56-2063438
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
245 WEST MAIN AVENUE, GASTONIA, NORTH CAROLINA 28053
(Address of Principal Executive Office) (Zip Code)
</TABLE>
(704) 868-5200
(Issuer's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of Class)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES x NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended September 30,
1999 were $17.6 million.
As of November 30, 1999, there were issued and outstanding 4,328,634
shares of the Registrant's Common Stock. The aggregate value of the voting stock
held by non-affiliates of the Registrant, computed by reference to the closing
price of the Common Stock as of November 30, 1999 ($12.375) was $19.1 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
September 30, 1999 (Parts II and IV).
2. Sections of the Proxy Statement for the 2000 Annual Meeting of
Stockholders (Part III).
<PAGE> 2
PART I
ITEM 1. BUSINESS
GASTON FEDERAL BANCORP, INC.
Gaston Federal Bancorp, Inc. (the "Company") was formed on March 18, 1998,
for the purpose of acting as the holding company for Gaston Federal Bank (the
"Bank"). The Company's assets consist primarily of the outstanding capital stock
of the Bank and cash and investments of $5.7 million. At September 30, 1999,
1,986,489 shares of the Company's common stock, par value $1.00 per share, were
held by the public, and 2,383,145 shares were held by Gaston Federal Holdings,
MHC (the "Mutual Company"), the Company's parent mutual holding company. The
Company's principal business is overseeing and directing the business of the
Bank and investing the net stock offering proceeds retained by it.
The Company's executive office is located at 245 West Main Avenue, P.O. Box
2249, Gastonia, North Carolina 28053-2249. Its telephone number at this address
is (704) 868-5200.
GASTON FEDERAL BANK
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 bank 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.
The Bank's executive office is located at 245 West Main Avenue, P.O.
Box 2249, Gastonia, North Carolina 28053-2249. Its telephone number at that
address is (704) 868-5200.
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 200,000, 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.
LENDING ACTIVITIES
General. At September 30, 1999, the Bank's net loans receivable
totaled $168.0 million, or 70.4% 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. 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.
<PAGE> 3
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,
1999 1998 1997
----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family .............. $129,332 73.42% $105,526 73.50% $106,422 76.50%
Construction ..................... 11,176 6.34 10,573 7.36 5,869 4.22
Commercial ....................... 7,266 4.13 8,076 5.63 7,318 5.26
Multifamily residential .......... 2,414 1.37 3,771 2.63 6,514 4.68
-------- ------ -------- ------ -------- ------
Total real estate loans ....... 150,188 85.26 127,946 89.12 126,123 90.66
Commercial business loans ........ 14,356 8.15 6,629 4.62% 5,558 4.00
Consumer loans:
Home equity lines of credit ...... 8,867 5.03 6,764 4.71 5,651 4.06
Loans on deposits ................ 995 0.56 1,052 0.73 688 0.49
Other ............................ 1,737 0.99 1,173 0.82 1,091 0.78
-------- ------ -------- ------ -------- ------
Total consumer loans ............. 11,599 6.58 8,989 6.26 7,430 5.34
-------- ------ -------- ------ -------- ------
Total loans ...................... 176,143 100.00% 143,564 100.00% 139,111 100.00%
====== ====== ======
Less:
Loans in process ................. 6,205 5,152 2,990
Deferred loan origination fees ... 385 501 520
Allowance for loan losses ........ 1,509 1,411 1,110
-------- -------- --------
Total loans, net ................. $168,044 $136,500 $134,491
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At September 30,
1996 1995
----------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family .............. $104,363 76.72% $ 93,694 75.74%
Construction ..................... 6,827 5.02 5,667 4.58
Commercial ....................... 6,458 4.75 5,051 4.08
Multifamily residential .......... 6,843 5.03 7,367 5.96
-------- ------ -------- ------
Total real estate loans ....... 124,491 91.52 111,779 90.36
Commercial business loans ........ 5,160 3.79 6,030 4.87
Consumer loans:
Home equity lines of credit ...... 4,747 3.49 4,154 3.36
Loans on deposits ................ 709 0.52 672 0.54
Other ............................ 923 0.68 1,075 0.87
-------- ------ -------- ------
Total consumer loans ............. 6,379 4.69 5,901 4.77
-------- ------ -------- ------
Total loans ...................... 136,030 100.00% 123,710 100.00%
====== ======
Less:
Loans in process ................. 3,812 2,994
Deferred loan origination fees ... 526 422
Allowance for loan losses ........ 830 786
-------- --------
Total loans, net ................. $130,862 $119,508
======== ========
</TABLE>
<PAGE> 4
One- to Four-Family Real Estate Lending. Historically, the Bank has
concentrated its lending activities on the origination of loans secured by a
first mortgage on existing one- to four-family residences located in its primary
market area. At September 30, 1999, $129.3 million, or 73.4% of the Bank's
total loan portfolio, consisted of one- to four-family residential real estate
loans. The Bank originated $17.4 million, $21.3 million and $12.6 million of
one- to four-family residential mortgage loans during the fiscal years ended
September 30, 1999, 1998 and 1997, 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 or bi-weekly 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 FHLMC ("Freddie Mac"). 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 implemented a residential wholesale correspondent lending
program in 1998. This program enables 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 the
Sate of 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 shorter-term 15-year fixed rate loans. During 1999,
the objectives of the program were met. While the Bank still continues to offer
this program, it will only purchase adjustable rate products at above market
interest rates. This revised strategy, by design, has eliminated new loan volume
from the program.
The Bank offers adjustable-rate mortgage ("ARM") loans at rates and
terms competitive with market conditions. At September 30, 1999, $37.1 million,
or 28.7% of the Bank's total one- to four-family residential loan
portfolio, was subject to periodic interest rate adjustments. Substantially all
of the Bank's ARM loan originations meet the underwriting standards of
Freddie Mac even though the Bank originates ARM loans primarily for its own
portfolio. The Bank's ARM loans typically provide for an interest rate
which adjusts every year after an initial term of one, three, five, seven or ten
years based on the one year Treasury constant maturity index and are typically
based on a 30-year amortization schedule. 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%,
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 initial term 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. 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.
During 1999, the Bank began originating and selling mortgages to
investors on a servicing released basis. This allows the Bank to provide
competitive mortgage products to its market area including 15- and 30-year
fixed-rate loans and long-term fixed-rate FHA and VA products. The sale of
long-term fixed-rate loans helps the Bank manage its interest rate risk. The
Bank also benefits by being able to book fee income it earns on these loans
during the period in which the loan is sold.
<PAGE> 5
The Bank 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 also originates commercial
construction loans to local builders on a very limited basis and only to those
with a very satisfactory financial condition. The Bank's construction
loans are generally secured by property located in the Bank's primary
market area. At September 30, 1999, construction loans amounted to $11.2
million, or 6.4% 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 12 month
construction term; if the construction is not complete after 12 months, the Bank
will 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 to the Bank, the location of the property
and prior sales of homes in the development. At September 30, 1999, speculative
construction loans amounted to $2.7 million.
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 a
property's value at completion of the project, the estimated cost of the
project, and the amount of time that might be needed to sell out 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 located within its market area, doing business with
contractors with whom it has established relationships and who have been
thoroughly underwritten by the Bank and requiring personal guarantees from the
principals of its corporate borrowers.
<PAGE> 6
Commercial Real Estate Lending. The Bank originates mortgage loans for
the acquisition and refinancing of commercial real estate properties. At
September 30, 1999, $7.3 million, or 4.1% 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 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, or adjust
based on the Bank's Prime Rate, and are originated to amortize in a
maximum of 20 years.
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) 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.
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, 1999, $2.4 million, or 1.4% 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, or
adjust based on the Bank's Prime Rate, and are originated to amortize in a
maximum of 20 years.
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
<PAGE> 7
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.
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, 1999, consumer loans
amounted to $11.6 million, or 6.6% of the total loan portfolio.
At September 30, 1999, the largest component of the consumer loan
portfolio consisted of home equity lines of credit, which totaled $8.9 million,
or 5.0% of the total loan portfolio. At September 30, 1999, unused commitments
to extend credit under home equity lines of credit totaled $12.4 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 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, 1999, 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 an evaluation of the proposed collateral for the loan. The Bank
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. At September 30, 1999, the Bank had $14.4
million of commercial business loans which represented 8.2% of the total loan
portfolio. As of September 30, 1999, unsecured commercial business loans totaled
$692,000.
<PAGE> 8
In addition, the Bank's portfolio of commercial business loans as
of September 30, 1999 includes residential acquisition and development loans
("A&D loans"). The Bank's A&D loans are originated to local developers for
the purpose of developing land for resale as residential by installing roads,
sewers, water and other utilities. The Bank originated a very limited number of
A&D loans for the development of commercial real estate. These loans are
generally made to established customers of the Bank with very satisfactory
financial condition. A&D loans are secured by a lien on the property, and are
typically 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, 1999 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)
<S> <C> <C> <C> <C> <C> <C>
Amounts Due:
Within 1 year ......... $ 225 $ 2,699 $ 1 $ 0 $ 5,684 $ 8,609
Over 1 to 2 years ..... 123 0 105 0 1,670 1,898
Over 2 to 3 years ..... 276 0 244 22 2,159 2,701
Over 3 to 5 years ..... 1,281 0 276 193 4,119 5,869
Over 5 to 10 years .... 17,738 0 954 585 4,349 23,626
Over 10 to 20 years ... 64,916 3,714 5,686 1,614 7,898 83,828
Over 20 years ......... 44,773 4,763 0 0 76 49,612
-------- -------- -------- -------- -------- --------
Total amount due ...... $129,332 $ 11,176 $ 7,266 $ 2,414 $ 25,955 $176,143
======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans for which
final payment is not due until after September 30, 2000. 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)
<S> <C> <C> <C>
Real Estate Loans:
One- to four-family residential .... $ 92,020 $ 37,087 $129,107
Construction ....................... 8,477 0 8,477
Commercial real estate ............. 513 6,752 7,265
Multifamily residential ............ 0 2,414 2,414
-------- -------- --------
Total real estate loans ............... 101,010 46,253 147,263
Commercial and consumer ............... 6,282 13,989 20,271
-------- -------- --------
Total loans ........................ $107,292 $ 60,242 $167,534
======== ======== ========
</TABLE>
<PAGE> 9
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, and its loan officers call on local
businesses soliciting commercial products. 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.
All loans (i) of $600,000 or more, or (ii) in any amount to borrowers
with existing exposure to the Bank of $600,000 or more, or (iii) in any amount
that when added to the borrower's existing exposure to the Bank cause such total
exposure to be $600,000 or more, must be approved by the Board of Directors of
the Bank. Loans of less than $600,000 may be approved by a majority vote of the
Bank's Loan Committee, consisting of the Bank's President, Chief Credit Officer,
Mortgage Center Manager, and three senior lending officers. In addition,
individual lending officers may approve loans individually or jointly with other
lending officers within the loan approval limits delegated by the Board of
Directors of the Bank.
<PAGE> 10
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,
-----------------------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Total loans receivable at beginning of period ... $ 143,564 $ 139,111 $ 136,030
Total loan originations:
One- to four-family residential .............. 17,427 21,282 12,608
Construction ................................. 8,552 10,701 7,536
Commercial real estate ....................... 0 1,265 1,747
Multifamily .................................. 150 0 0
Commercial business and consumer ............. 27,234 19,456 9,430
--------- --------- ---------
Total loans originated .......................... 53,363 52,704 31,321
Loans purchased ................................. 38,262 8,835 0
Loans sold ...................................... (13,136) (9,600) 0
Principal repayments ............................ (45,910) (47,486) (28,240)
--------- --------- ---------
Net loan activity ............................... 32,579 4,453 3,081
--------- --------- ---------
Total loans receivable at end of period ......... $ 176,143 $ 143,564 $ 139,111
========= ========= =========
</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, 1999, the Bank
had loan commitments (excluding undisbursed portions of interim construction
loans of $6.2 million) of $704,000 and unused lines of credit of $19.3 million.
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. Fees collected on
loans originated and sold to investors are recognized in the period in which the
loan is sold. The Bank recognized $232,000, $231,000 and $172,000 of deferred
loan fees during the fiscal years ended September 30, 1999, 1998 and 1997,
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 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.
<PAGE> 11
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,
----------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate loans:
One- to four-family residential ............................ $ 94 $ 970 $ 876 $1,053 $ 778
Multifamily residential .................................... 0 177 183 141 0
Commercial real estate ..................................... 0 91 0 0 0
Commercial business and consumer ............................... 0 0 0 0 0
Total nonaccrual loans ......................................... 94 1,238 1,059 1,194 778
Accruing loans which were contractually past due 90 days or more 0 0 0 0 0
------ ------ ------ ------ ------
Total nonperforming loans ...................................... 94 1,238 1,059 1,194 778
Real estate owned .............................................. 259 247 247 258 426
------ ------ ------ ------ ------
Total nonperforming assets ..................................... $ 353 $1,485 $1,306 $1,452 1,204
====== ====== ====== ====== =====
Nonaccrual loans and loans 90 days past due as a
percentage of net loans .................................... 0.06% 0.91% 0.79% 0.91% 0.65%
Nonaccrual loans and loans 90 days past due as a
percentage of total assets ................................. 0.04% 0.60% 0.61% 0.69% 0.47%
Total nonperforming assets as a percentage of total assets ..... 0.15% 0.71% 0.75% 0.84% 0.73%
</TABLE>
Interest income that would have been recorded for the fiscal years
ended September 30, 1999, 1998 and 1997 had nonaccruing loans been current in
accordance with their original terms amounted to $10,000, $77,000 and $42,000,
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. Generally,
foreclosed assets are held for sale and such assets are 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. At September 30, 1999, the Bank had $259,000 of
real estate acquired in settlement of loans.
Restructured Loans. Under Generally Accepted Accounting Principals
("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, 1999.
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 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.
<PAGE> 12
As of September 30, 1999, the aggregate amount of the Bank's
assets classified as substandard was $599,000, no assets were classified as
doubtful or loss, and the aggregate amount not classified but designated special
mention was $1.3 million. As of September 30, 1998, the aggregate amount of the
Bank's assets classified as substandard was $2.1 million, no assets were
classified as doubtful or loss, and the aggregate amount not classified but
designated special mention was $384,000. 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.
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, 1999, the Bank had an allowance for loan losses of
$1.5 million. Management believes that the amount maintained in the allowance at
September 30, 1999 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.
<PAGE> 13
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,
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding.......................... $ 176,143 $ 143,564 $ 139,111 $ 136,030 $123,710
========= ========= ========= ========= ========
Average loans outstanding........................ $ 166,343 $ 143,555 $ 137,149 $ 131,671 $119,527
========= ========= ========= ========= ========
Allowance at beginning of period................. $ 1,411 $ 1,110 $ 830 $ 786 $ 726
Provision........................................ 105 300 293 47 60
Recoveries....................................... 1 6 0 0 0
Charge-offs:
Consumer loans................................. 8 5 13 3 0
--------- --------- --------- --------- --------
Allowance at end of period....................... $ 1,509 $ 1,411 $ 1,110 $ 830 $ 786
========= ========= ========= ========= ========
Allowance for loan losses as a percentage
of total loans outstanding..................... 0.86% 0.98% 0.80% 0.61% 0.64%
========= ========= ========= ========= ========
Net loans charged off as a percentage of total
loans outstanding.............................. -- % -- % 0.01% --% -- %
Ratio of allowance to nonperforming loans........ 1,605.32% 113.97% 104.82% 69.51% 101.03%
========= ========= ========= ========= ========
</TABLE>
<PAGE> 14
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,
1999 1998 1997
---------------------- ---------------------- ----------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential... $ 700 73.42% $ 699 73.5% $ 643 76.50%
Construction ..................... 100 6.34 125 7.36 55 4.22
Commercial ....................... 225 4.13 200 5.63 105 5.26
Multifamily residential .......... 75 1.37 75 2.63 100 4.68
Commercial and consumer ............ 409 14.74 312 10.88 207 9.34
------ ----- ------ ---- ------ -----
Total allowance for loan losses .... $1,509 100.00% $1,411 100.00% $1,110 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At September 30,
1996 1995
---------------------- ----------------------
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... $ 450 76.72% $ 436 75.74%
Construction ..................... 50 5.02 50 4.58
Commercial ....................... 88 4.75 75 4.08
Multifamily residential .......... 75 5.03 75 5.96
Commercial and consumer ............ 167 8.48 150 9.64
------ ----- ------ -----
Total allowance for loan losses..... $ 830 100.00% $ 786 100.00%
====== ====== ====== ======
</TABLE>
<PAGE> 15
INVESTMENT ACTIVITIES
The Bank purchases investment securities with excess liquidity arising
when investable funds exceed loan demand. The Bank's investment policies
generally limit investments to U.S. Government and agency securities, municipal
bonds, certificates of deposit, investment grade 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. 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.
<PAGE> 16
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,
--------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
Net Net
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gain(Loss) Value Cost Gain(Loss) Value
--------- ----------- ------- --------- ----------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Government and agency securities held to maturity . $12,498 $ (497) $12,001 $15,228 $ 371 $15,599
U.S. Government and agency securities available for sale 9,256 (97) 9,159 15,047 156 15,203
Municipal bonds - held to maturity ..................... 367 0 367 360 8 368
Municipal bonds - available for sale ................... 5,737 (373) 5,364 680 15 695
------- ------- ------- ------- ------ -------
Total investment securities ............................... $27,858 $ (967) $26,891 $31,315 $ 550 $31,865
======= ======= ======= ======= ====== =======
Mortgage-backed securities:
FHLMC held to maturity ................................. $ 1,646 $ (13) $ 1,633 $ 3,039 $ 72 $ 3,111
FNMA held to maturity .................................. 1,416 (15) 1,401 2,353 27 2,380
GNMA held to maturity .................................. 764 6 770 966 43 1,009
FNMA available for sale ................................ 2,485 (72) 2,413 1,457 24 1,481
GNMA available for sale ................................ 8,015 (233) 7,782 4,809 45 4,854
SBA available for sale ................................. 6,043 (71) 5,972 1,825 190 2,015
------- ------- ------- ------- ------ -------
Total mortgage-backed securities .......................... $20,369 $ (398) $19,971 $14,449 $ 401 $14,850
======= ======= ======= ======= ====== =======
Other Investments available for sale:
US League Asset Management Fund ........................ $ 0 $ 0 $ 0 $ 1,459 $ 37 $ 1,496
Federated Government Trust ............................. 0 0 0 1,163 135 1,298
FHLMC common stock ..................................... 25 1,136 1,161 44 2,184 2,228
Other equity securities ................................ 93 0 93 0 0 0
------- ------- ------- ------- ------ -------
Total other investments ................................... $ 118 $ 1,136 $ 1,254 $ 2,666 $2,356 $ 5,022
======= ======= ======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
At September 30,
------------------------------------
1997
------------------------------------
Net
Amortized Unrealized Fair
Cost Gain(Loss) Value
--------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Investment Securities:
U.S. Government and agency securities held to maturity . $10,407 $ 18 $10,425
U.S. Government and agency securities available for sale 1,988 22 2,010
Municipal bonds - held to maturity ..................... 0 0 0
Municipal bonds - available for sale ................... 0 0 0
------- ------ -------
Total investment securities ............................... $12,395 $ 40 $12,435
======= ====== =======
Mortgage-backed securities:
FHLMC held to maturity ................................. $ 5,238 $ 94 $ 5,332
FNMA held to maturity .................................. 3,588 (18) 3,570
GNMA held to maturity .................................. 1,261 30 1,291
FNMA available for sale ................................ 0 0 0
GNMA available for sale ................................ 0 0 0
SBA available for sale ................................. 0 0 0
------- ------ -------
Total mortgage-backed securities .......................... $10,087 $ 106 $10,193
======= ====== =======
Other Investments available for sale:
US League Asset Management Fund ........................ $ 1,375 $ 14 $ 1,389
Federated Government Trust ............................. 3,036 228 3,264
FHLMC common stock ..................................... 44 1,542 1,586
Other equity securities ................................ 0 0 0
------- ------ -------
Total other investments ................................... $ 4,455 $1,784 $ 6,239
======= ====== =======
</TABLE>
<PAGE> 17
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, 1999 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, 1999
--------------------------------------------------------------------------------------
Less than 1 year 1 to 5 years Over 5 to 10 years
------------------------ ------------------------ ------------------------
Weighed Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield(1) Value Yield(1) Value Yield(1)
------ ---- ------ ---- ------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government securities $ 999 6.50% $ 0 0.00% $ 0 0.00%
U.S. Agency securities ... 502 5.62 8,254 6.22 11,999 6.38
Municipal securities ..... 0 0.00 1,221 5.99 2,269 6.15
------ ---- ------ ---- ------- ----
Total .................... $1,501 6.21% $9,475 6.19% $14,268 6.34%
====== ==== ====== ==== ======= ====
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1999
------------------------------------------------------------------------
Over 10 years Total Securities
------------------------ -----------------------------------------
Weighted Weighted
Carrying Average Carrying Average Market
Value Yield(1) Value Yield(1) Value
------ ---- ------- ---- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. Government securities $ 0 0.00% $ 999 6.50% $ 1,004
U.S. Agency securities ... 0 0.00 20,755 6.30 20,156
Municipal securities ..... 2,614 7.04 6,104 6.50 5,731
------ ---- ------- ---- -------
Total .................... $2,614 7.04% $27,858 6.35% $26,891
====== ==== ======= ==== =======
</TABLE>
- - --------------------
(1) Yields on tax exempt obligations have been computed on a tax equivalent
basis.
<PAGE> 18
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.
From time to time, 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
seeks business checking accounts and promotes individual retirement accounts
("IRAs") and Self Employment Plan retirement accounts to businesses.
The following table sets forth information concerning the Bank's time
deposits and other interest-bearing deposits at September 30, 1999.
<TABLE>
<CAPTION>
At September 30, 1999 At September 30, 1998 At September 30, 1997
--------------------- --------------------- ---------------------
Average Average Average
Interest Interest Interest
Category Balance Rate Balance Rate Balance Rate
- - -------- ------- ---- ------- ---- ------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand $ 6,481 0.00 $ 5,878 0.00 $ 3,023 0.00
Interest bearing demand .. 11,916 1.60 10,913 2.40 11,666 1.80
Money market demand ...... 13,709 2.10 11,929 2.40 14,240 3.04
Savings accounts ......... 23,869 3.20 20,558 3.40 14,197 2.90
Certificates of deposit .. 103,450 5.20 94,623 5.40 102,318 5.80
-------- ---- -------- ---- -------- ----
Total Deposits ........... $159,425 4.10% $143,901 4.30% $145,444 5.00%
======== ==== ======== ==== ======== ====
</TABLE>
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, 1999.
<TABLE>
<CAPTION>
Maturity Period Certificates of Deposit
- - --------------- -----------------------
(In Thousands)
<S> <C>
Within three months.................... $6,551
Three to six months.................... 4,974
Six through twelve months.............. 3,195
Over twelve months..................... 3,008
------
Total jumbo certificates of deposit. $17,728
=======
</TABLE>
<PAGE> 19
Time Deposits by Rates. The following table sets forth the amount of time
deposits in the Bank categorized by rates at the dates indicated.
<TABLE>
<CAPTION>
As of September 30,
------------------------------------------
1999 1998 1997
-------- ------- --------
(In Thousands)
Interest Rate
<S> <C> <C> <C>
2.00-4.00% ................................. $ 759 $ 399 $ 172
4.01-6.00% ................................. 102,279 91,641 92,311
6.01-8.00% ................................. 412 2,583 9,835
-------- ------- --------
$103,450 $94,623 $102,318
======== ======= ========
</TABLE>
Time Deposits by Maturities. The following table sets forth the amount of
time deposits in the Bank categorized by rates and maturities at September 30,
1999.
<TABLE>
<CAPTION>
After
Interest Rate September 30, 2000 September 30, 2001 September 30, 2002 September 30, 2002 Total
- - ------------- ------------------ ------------------ ------------------ ------------------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
2.01-4.0%.............. $ 759 $ 0 $ 0 $ 0 $ 759
4.01-6.0%.............. 84,148 12,862 4,683 586 102,279
6.01-8.0%.............. 258 154 0 0 412
------------ ------------ ------------ ------------ ------------
Total.................. $ 85,165 $ 13,016 $ 4,683 $ 586 $ 103,450
============ ============ ============ ============ ============
</TABLE>
Deposit Activity. The following table set forth the deposit activity
of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance................................... $ 143,901 $ 145,444 $ 145,975 $ 141,432 $ 129,681
Net increase (decrease) before interest credited.... 9,102 (8,215) (7,386) (2,751) 5,649
Interest credited................................... 6,422 6,672 6,855 7,294 6,102
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in savings deposits......... 15,524 (1,543) (531) 4,543 11,751
------------ ------------- ------------ ------------ ------------
Ending balance...................................... $ 159,425 $ 143,901 $ 145,444 $ 145,975 $ 141,432
============ ============ ============ ============ ============
</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, 1999, 1998 and 1997 were
$35.5 million, $19.5 million and $3.8 million, respectively, the average
balances outstanding were $28.7 million, $7.9 million and $2.3 million,
respectively, and the weighted average interest rates were 5.2%, 5.50% and
6.28%, respectively. The Bank's outstanding balances of FHLB advances as of
September 30, 1999, 1998 and 1997, were $35.5 million, $19.5 million and $3.5
million, respectively.
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
<PAGE> 20
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.
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 shorter term
commercial business loans, (3) emphasizing the origination of adjustable rate
home equity lines of credit, and (4) investing in shorter term investment
securities. 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, The Bank has measured its 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 3% (100 to 300 basis points) increases and
decreases in market interest rates.
<PAGE> 21
The following table presents NPV at September 30, 1999, as calculated
by the OTS, which is based upon quarterly information voluntarily provided to
the OTS by the Bank.
Percentage Change in Net Portfolio Value
<TABLE>
<CAPTION>
Changes Board
in Market Projected Policy
Interest Rates Change (1) Limit (2)
-------------- ---------- ---------
(basis points)
<S> <C> <C>
+300 -35.00% -40.00%
+200 -24.00% -30.00%
+100 -12.00% -15.00%
0 0.00% 0.00%
-100 10.00% -15.00%
-200 20.00% -30.00%
-300 29.00% -40.00%
</TABLE>
- - -------------------------
(1) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(2) Limits are established by the Bank's 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.
EMPLOYEES
As of September 30, 1999, the Bank had 61 full-time and 7 part-time
employees, none of whom is represented by a collective bargaining unit. The Bank
believes its relationship with its employees is good.
REGULATION
As a federally chartered SAIF-insured stock savings bank, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. The Bank is a member of the Federal Home Loan Bank ("FHLB") system.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The Bank also is subject to
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") governing reserves to be maintained against deposits and certain
other matters. The OTS examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors on any deficiencies that they may
find in the Bank's operations. The FDIC also examines the Bank in its role as
the administrator of the SAIF. The Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws,
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents. Any change in such regulation, whether
by the FDIC, OTS, or Congress, could have a material adverse impact on the
Company, the Bank, the Mutual Company, the Company's parent mutual holding
company, 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.
<PAGE> 22
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 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 has expanded the qualified thrift lender 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. The Bank satisfied the qualified
thrift lender test at September 30, 1999.
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, 1999, exceeded the then applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
Community Reinvestment Act and Fair Lending Laws. Savings association
share a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to complete with the Fair Lending
Laws could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice. The Bank received a
satisfactory CRA rating under the current CRA regulations in its most recent
federal examination by the OTS.
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.
<PAGE> 23
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."
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
<PAGE> 24
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 30, 1999, the Bank met each of its capital requirements, in each case
on a fully phased-in basis.
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. The Company cannot determine
whether, or in what form, such legislation may eventually be enacted and there
can be no assurance that any legislation that is enacted would not adversely
affect the Bank and the Company.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has 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 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, 1999, 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, 1999, 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
<PAGE> 25
Generally. The Mutual Company and the Company are nondiversified mutual
savings and loan holding companies within the meaning of the HOLA, as amended.
As such, the Mutual Company and the Company are registered with the OTS and are
subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Mutual
Company and the Company and any nonsavings institution subsidiaries. Among other
things, this authority permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings institution. As
federal corporations, the Company and the Mutual 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 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 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 permit
the Mutual Company to convert from the mutual to the capital stock form of
organization (a "Conversion Transaction"). In a Conversion Transaction a new
holding company would be formed as the successor to the Company (the "New
Holding Company"), the Mutual Company's
<PAGE> 26
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 the Company's public
stockholders ("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
Shares of the Company's Common Stock are registered with the SEC under
Section 12(g) of the Exchange Act. The Company is also subject to the proxy
rules, tender offer rules, insider trading restrictions, annual and periodic
reporting, and other requirements of the Exchange Act.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank are 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 September 30 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, 1999, was approximately
$705,000.
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, 1999, 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.
<PAGE> 27
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, 1999, the Bank had no net
operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The Mutual Company owns less than 80% of the
outstanding Common Stock. As such, the Mutual Company is not permitted to file a
consolidated federal income tax return with the Company and the Bank. The
corporate dividends-received deduction is 80% in the case of dividends received
from corporations with which a corporate recipient does not file a consolidated
return, and corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf.
STATE TAXATION
State of North Carolina. Under North Carolina law, the corporate income
tax is 7.50% 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 institution's (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.
ITEM 2. PROPERTIES
The following table sets forth certain information regarding the Bank's
offices at September 30, 1999, all of which are owned by the Bank.
<TABLE>
<CAPTION>
Approximate
Location Year Opened Square Feet Deposits
- - -------- ----------- ----------- --------
<S> <C> <C> <C>
245 West Main Avenue 1971 12,400 $ 46,016,000
Gastonia, North Carolina 28052-4140
1670 Neal Hawkins Road 1987 5,322 22,657,000
Gastonia, North Carolina 28056-6429
1535 Burtonwood Drive 1976 2,372 49,097,000
Gastonia, North Carolina 28054-4011
233 South Main Street 1990 4,739 40,845,000
Mount Holly, North Carolina 28120-1620
Total Deposits $159,425,000
</TABLE>
At September 30, 1999, the net book value of the Bank's office
properties and the Bank's fixtures, furniture, and equipments was $2.5 million.
ITEM 3. 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.
<PAGE> 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The "Common Stock and Related Matters" section of the Company's Annual
Report to Stockholders is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are contained in the Company's Annual Report
to Stockholders and is incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
The "Proposal I-Election of Directors" section of the Registrant's
definitive proxy statement for its 2000 annual meeting of stockholders (the
"Proxy Statement") is incorporated herein by reference. In addition, see Item 1.
"Executive Officers of the Registrant" for information concerning the Bank's
executive officers.
ITEM 10. EXECUTIVE COMPENSATION
The "Proposal I-Election of Directors" section of the Registrant's
Proxy Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The "Proposal I-Election of Directors" section of the Registrant's
Proxy Statement is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The "Proposal I-Election of Directors" section of the Registrant's
Proxy Statement is incorporated herein by reference.
<PAGE> 29
PART IV
ITEM 13. EXHIBITS, LIST, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The exhibits and financial statement schedules filed as a part of this
Form 10-KSB are as follows:
(A) Report of Independent Auditors
(B) Consolidated Statements of Condition
(C) Consolidated Statements of Operations
(D) Consolidated Statements of Comprehensive Income
(E) Consolidated Statements of Changes in Equity
(F) Consolidated Statements of Cash Flows
(G) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to
Consolidated Financial Statements.
(b) Reports on Form 8-K
The Company has not filed a Current Report on Form 8-K during the
fourth quarter of the fiscal year ended September 30, 1999.
(c) Exhibits
<TABLE>
<CAPTION>
<S> <C> <C>
3.1 Stock Holding Company Charter of Gaston Federal Bancorp, Inc. (incorporated
herein by reference to the Company's registration statement on SB-2, file No.
333-42951 ("Form SB-2"))
3.2 Bylaws of Gaston Federal Bancorp, Inc. (incorporated herein by reference to
the Company's Form SB-2)
4 Form of Stock Certificate of Gaston Federal Bancorp, Inc. (incorporated herein
by reference to the Form SB-2)
10.1 Employment Agreement with Kim S. Price (incorporated herein by reference to
the Company's Form SB-2)
10.2 Deferred Compensation and Income Continuation Agreement (incorporated herein
by reference to the Company's Form SB-2)
10.3 Employee Stock Ownership Plan (incorporated herein by reference to the
Company's Form SB-2)
10.4 Supplemental Executive Retirement Plan (incorporated herein by reference to
the Company's Form SB-2)
13 1999 Annual Report to Stockholders
21 Subsidiaries of the Company
</TABLE>
<PAGE> 30
<TABLE>
<CAPTION>
<S> <C> <C>
23.1 Consent of Cherry Bekaert & Holland, L.L.P.
27 EDGAR Financial Data Schedule
</TABLE>
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GASTON FEDERAL BANCORP, INC.
Date: December 28, 1999 By: /s/ Kim S. Price
------------------ -----------------------------------
Kim S. Price
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By: /s/Kim S. Price By: /s/Gary F. Hoskins
-------------------------------------------- --------------------------------------------
Kim S. Price Gary F. Hoskins
President, Chief Executive Officer and Senior Vice President, Treasurer and
Director (Principal Executive Officer) Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: December 28, 1999 Date: December 28, 1999
-------------------------------------------- --------------------------------------------
By: /s/David W. Hoyle By: /s/Ben R. Rudisill, II
-------------------------------------------- --------------------------------------------
David W. Hoyle Ben R. Rudisill, II
Chairman Vice Chairman
Date: December 28, 1999 Date: December 28, 1999
-------------------- --------------------------------------------
By: /s/Martha B. Beal By: /s/Charles D. Massey
-------------------------------------------- --------------------------------------------
Martha B. Beal Charles D. Massey
Director Director
Date: December 28, 1999 Date: December 28, 1999
-------------------- --------------------------------------------
By: /s/James J. Fuller By: /s/Eugene R. Matthews, II
-------------------------------------------- --------------------------------------------
James J. Fuller Eugene R. Matthews, II
Director Director
Date: December 28, 1999 Date: December 28, 1999
-------------------- --------------------------------------------
By: /s/ William H. Keith By: /s/Robert W. Williams, Sr.
-------------------------------------------- --------------------------------------------
William H. Keith Robert W. Williams, Sr.
Director Director
Date: December 28, 1999 Date: December 28, 1999
-------------------------------------------- -------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
LETTER TO SHAREHOLDERS
Fellow Shareholders:
Net income totaled $2.2 million, or $0.50 per share for the year ended September
30, 1999, as compared to $1.9 million for 1998. The business plan and strategy
we developed in conjunction with our April 9, 1998, mutual-to-stock conversion
is clearly the blueprint for our financial performance and success in 1999. Our
goal to reposition the balance sheet to reflect lower-cost funding sources in
the form of demand deposits and higher interest margins in the form of increased
commercial and consumer loan outstandings is well underway. This is evidenced by
our growth in each of these areas.
During fiscal 1999, total deposits grew by $15.5 million, or 10.8%. Demand
deposits and statement savings, our focus areas, grew by $4.8 million, or 12.7%.
Our marketing campaign, combined with a sales incentive program, and a cultural
shift toward sales are primarily responsible for these accomplishments. We will
continue to place significant emphasis on these areas going forward.
On the asset side, our attention was centered on three primary goals:
1) Fully invest the capital raised in the 1998 stock conversion in quality
moderate-term loans.
2) Reduce the interest rate risk exposure of long-term fixed rate mortgage
loans.
3) Grow the higher-yielding more interest-sensitive commercial and consumer loan
portfolios.
We have achieved quite a bit of success in each of these areas. The capital
raised from our 1998 offering was fully invested in short- and moderate-term
residential loans with the strategy that we would reinvest the principal and
interest payments from these loans into higher-yielding and faster-repricing
commercial and consumer loans over the next several years as we develop those
business lines. I am pleased to report that we have made considerable progress
in developing the commercial and consumer loan portfolios during 1999. Our
commercial loans grew by $7.7 million, or 116.6%, to $14.4 million, while our
consumer portfolio grew by $2.5 million, or 28.5%, to $11.6 million outstanding
at September 30, 1999. Our ability to attract and hire quality experienced
commercial bankers and an experienced Chief Credit Officer has enabled us to
accomplish this.
We reduced our exposure to the effects of rising interest rates by selling $13.1
million of long-term (predominantly 30-year) fixed-rate mortgage loans during
1999. In total we have sold $22.7 million in fixed-rate mortgage loans since our
stock conversion. These proceeds were reinvested in shorter-term mortgages and
commercial and consumer loans.
The quality of our loan portfolio is of utmost importance and we are happy to
report that our credit quality remains very high with only 0.06% of loans as
nonperforming. This improved from an already favorable 0.91% in 1998.
During the coming years, we will continue to emphasize commercial and consumer
loan growth but will shift our residential mortgage emphasis to a mortgage
banking philosophy. This philosophy, which has now been implemented, will curb
lower margin residential mortgage outstandings. We will continue to nurture the
consumer banking relationships associated with mortgage lending while creating a
larger source of noninterest income from fees associated with mortgage banking.
Operating noninterest income has increased by $301,000, or 44.2%, in 1999. This
increase is attributable to a very successful year from our financial services
subsidiary, Gaston Financial Services, Inc., which contributed $92,000 in net
income to the Bank, as compared to $54,000 in 1998. Gaston Financial Services'
improvement is attributable to our shift to a sales culture along with a
significant amount of education and
<PAGE> 2
training of our staff on how and when our customers should be referred to an
investment professional. Additional success in noninterest income has been
derived through our growth in demand deposit accounts, which are traditional
sources of noninterest fee revenue.
We have made significant progress in capital management and capital leverage
during 1999. We repurchased 211,400 shares of our stock during 1999. This
reduced our total shares outstanding to 4,369,634. Our capital-to-assets ratio
at September 30, 1999, was 16.7%, as compared to 20.0%, at September 30, 1998.
Asset growth is the primary reason for this improvement. We are continuing to
pursue aggressively opportunities to grow through acquisitions or branch
purchases. However, to date we have not been afforded an opportunity which we
feel fits with our geographic and strategic growth plan. In lieu of this, we
have embarked on a de novo branching plan to accomplish our growth and leverage
goals. In this regard, in October 1999, we opened a loan production office in
Shelby, North Carolina; and, in Dallas, North Carolina, our fifth full-service
branch office is under construction and should be fully operational in March
2000. Additionally, we have identified a site for our sixth full-service banking
office, which we hope to announce in February 2000.
During the past year we have made substantial capital investments in
infrastructure, including the branch expansion previously discussed. In
addition, we have made significant investments in technology to ensure that our
computer systems are fully Year 2000 (Y2K) compliant. These Y2K measures
included investments in hardware and software, as well as investments of time,
training and energy. We have taken every precaution to retain our customers'
complete confidence in our ability to handle their financial matters securely in
the Year 2000 and beyond. We also have made investments in new technology for
telecommunications to enhance our Gaston Federal Bank Service 24 telephone
banking system and have purchased the technology necessary to reduce our
transaction processing time and, ultimately, to increase the speed with which we
deliver service to our customers. We have been engaged in the planning,
research, and interview process with providers of Internet Banking systems for
most of the last half of 1999. We expect to rollout an Internet Banking product
to our customers sometime in the Year 2000. While these infrastructure
investments are expensive, we are convinced they are necessary to provide the
service level and consumer "touch points" necessary to drive the growth of our
customer base.
While physical and technological assets are important to our continuing success,
both management and our board of directors believe that our employees are our
most valuable asset. Their ability to provide a high level of personalized
customer service is the most important ingredient for the success of our
organization. We have taken great measures to train and communicate this culture
throughout our organization in 1999. We have a very talented staff who clearly
understand and are dedicated to our mission. Both they and I pledge to continue
to strive for continuous improvement in our service levels and performance. We
welcome your comments and suggestions and hope that you will allow us to
demonstrate our commitment by serving your banking needs.
Sincerely,
/s/ David W. Hoyle /s/ Kim S. Price
Chairman of the Board President and CEO
<PAGE> 3
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth certain financial and other data of
Gaston Federal Bancorp, Inc. (the "Company"), or, prior to April 9, 1998, Gaston
Federal Bank (the "Bank") at the dates and for the periods indicated. For
additional information about the Company, reference is made to "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and related notes included
elsewhere herein.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------
(In Thousands) 1999 1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED CONSOLIDATED FINANCIAL CONDITION DATA
Total assets ........................................................ $237,453 $208,003 $173,470 $171,953
Loans receivable, net ............................................... 168,044 136,501 134,491 130,862
Mortgage-backed and related securities .............................. 19,992 14,707 10,087 12,918
United States government and agency securities held to maturity ..... 12,499 15,228 10,407 14,751
United States government and agency securities available for sale ... 9,159 15,203 2,009 --
Other investments available for sale ................................ 6,618 5,716 6,239 5,515
Deposits ............................................................ 159,425 143,900 145,444 145,975
Borrowed funds ...................................................... 35,500 19,500 3,500 3,750
Total equity ........................................................ 39,709 41,570 20,868 19,084
SELECTED CONSOLIDATED OPERATING DATA:
Interest income ..................................................... $ 15,238 $ 13,927 $ 12,936 $ 12,518
Interest expense .................................................... 7,888 7,126 6,952 7,381
-------- -------- -------- --------
Net interest income ................................................. 7,350 6,801 5,984 5,137
Provision for loan losses ........................................... 105 300 293 47
-------- -------- -------- --------
Net interest income after provision for losses ...................... 7,245 6,501 5,691 5,090
Noninterest income .................................................. 2,373 956 516 417
Noninterest expense (1) ............................................. 6,259 4,567 3,956 4,646
-------- -------- -------- --------
Income before income taxes .......................................... 3,359 2,890 2,251 861
Income tax expense .................................................. 1,198 1,004 819 351
-------- -------- -------- --------
Net income .......................................................... $ 2,161 $ 1,886 $ 1,432 $ 510
======== ======== ======== ========
PERFORMANCE RATIOS:
Return on average assets (net income divided by average total assets) 0.96% 0.98% 0.84% 0.30%
Return on average equity (net income divided by average equity) ..... 5.19 6.47 7.38 2.76
Net interest rate spread ............................................ 2.71 3.16 3.24 2.82
Net interest margin ................................................. 3.27 3.54 3.50 3.03
Average interest-earning assets to average interest-bearing
liabilities ........................................................ 119.41 114.01 109.92 108.29
Noninterest expense to total assets ................................. 2.64 2.20 2.28 2.70
Noninterest expense to average total assets ......................... 2.78 2.38 2.31 2.74
ASSET QUALITY RATIOS:
Nonperforming assets to total assets ................................ 0.15% 0.71% 0.75% 0.84%
Nonperforming loans to total loans .................................. 0.06 0.91 0.76 0.88
Nonperforming loans to total assets ................................. 0.04 0.60 0.61 0.69
Allowance for loan losses to total loans at the end of period ....... 0.86 0.98 0.80 0.61
Allowance for loan losses to nonperforming loans .................... 1,605.32 113.97 104.82 69.51
Net interest income after provision for loan losses to total
noninterest expense ................................................ 115.75 142.35 143.82 109.58
CAPITAL RATIOS:
Ratio of average equity to average total assets ..................... 18.51% 15.16% 11.34% 10.92%
Equity to assets at period end ...................................... 16.72 19.99 12.03 11.10
Dividend payout ratio (2) .......................................... 43.40 23.90 -- --
OTHER DATA:
Number of real estate loans outstanding ............................. 1,858 1,841 1,999 2,038
Number of deposit accounts .......................................... 14,419 13,432 13,760 13,795
Number of full service offices ...................................... 4 4 4 4
</TABLE>
- - -----------------------
(1) Includes a nonrecurring expense of $867 for the year ended September 30,
1996 for a one-time premium to recapitalize the Savings Association
Insurance Fund.
(2) The Dividend payout ratio is not relevant for periods prior to the
Reorganization in April 1998.
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS
Gaston Federal Bancorp, Inc. was formed on March 18, 1998, for the
purpose of acting as the Holding Company for Gaston Federal Bank. The Company's
assets consist primarily of the outstanding capital stock of the Bank, deposits
held at the Bank, and investments. As of September 30, 1999, there were
1,986,489 shares of the Company's common stock held by the public and 2,383,145
shares held by Gaston Federal Holdings, MHC, the Company's parent mutual holding
company. The publicly held common stock of the Company currently trades on the
Nasdaq National Market System under the symbol GBNK. The Company's principal
business is overseeing and directing the business of the Bank and investing the
net stock offering proceeds retained by it.
The Bank was organized in 1904 as a state-chartered building and loan
association. The Bank has since evolved into a community-oriented savings bank
engaged primarily in the business of offering FDIC-insured deposits to customers
through its branch offices and investing those deposits in residential,
commercial, and consumer loans and investment securities.
All of the Bank's full service offices are located in the North
Carolina 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 Charlotte, North Carolina. 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.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this document contains
forward-looking statements. The forward looking statements contained in the
following sections are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected in the
forward-looking statements. Important factors that might cause such a difference
include, but are not limited to, those discussed. Readers should not place undue
reliance on these forward-looking statements, as they reflect management's
analysis as of the date of this report. The Company has no obligation to update
or revise these forward-looking statements to reflect events or circumstances
that occur after the date of this report. Readers should carefully review the
risk factors described in other documents the Company files from time to time
with the SEC, including quarterly reports on Form 10-QSB and current reports
filed on Form 8-K.
GENERAL
The Company'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 Company's provision for loan losses, securities sales, and
service charges on its deposit accounts. The Company'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 and actions of regulatory and
governmental authorities.
MANAGEMENT OF MARKET RISK
<PAGE> 5
Generally. The Company's most significant form of market risk is
interest-rate risk, as the majority of the Company's assets and liabilities are
sensitive to changes in interest rates. The principal objective of the Company'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 Company'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
Company seeks to reduce the vulnerability of its operations to changes in
interest rates. The Company's Asset/Liability Committee is comprised of the
Company's senior management and members of the Board of Directors. Senior
management is responsible for reviewing with the Board of Directors its
activities and strategies, the effect of those strategies on the Company's net
interest margin, the fair value of the portfolio, and the effect that changes in
interest rates will have on the Company's portfolio and the Company's exposure
limits.
In recent years, the Company has utilized the following strategies to
manage interest rate risk: (1) emphasize the origination and retention of one-
to four-family residential, adjustable-rate mortgage loans ("ARMs") and
fixed-rate loans with maturities of 15 years or less, (2) emphasize the
origination and retention of shorter-term commercial business loans, (3)
emphasize the origination of adjustable-rate home equity lines of credit, and
(4) invest in shorter-term investment securities.
Net Portfolio Value. The Office of Thrift Supervision ("OTS") 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 Bank'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 3% (100 to 300 basis
points) increases and decreases in market interest rates.
The following table presents the Bank's NPV at September 30, 1999, as
calculated by the OTS, which is based upon quarterly information that is
voluntarily provided to the OTS.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE IN NET PORTFOLIO VALUE
Changes Board
in Market Projected Policy
Interest Rates Change (1) Limit (2)
-------------- ---------- ---------
(basis points)
<S> <C> <C>
+ 300 -35.00% -40.00%
+ 200 -24.00% -30.00%
+ 100 -12.00% -15.00%
0 0.00% 0.00%
-100 10.00% -15.00%
-200 20.00% -30.00%
-300 29.00% -40.00%
</TABLE>
- - -------------------------
(1) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(2) Limits are established by the Bank's Board of Directors.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes in NPV require 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. Accordingly,
although the NPV table provides an indication of the Bank's interest rate risk
exposure at a particular point
<PAGE> 6
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
Assets. Total assets for the fiscal year ended September 30, 1999,
increased by $29.5 million, or 14.2% from $208.0 million to $237.5 million. The
change in assets was primarily due to a $31.5 million increase in net loans
outstanding. Mortgage loans secured by one-to-four family dwellings increased by
$23.8 million, or 22.6%, while nonmortgage loans increased by $10.3 million, or
66.2%. Cash and cash equivalents, investment securities, and mortgage-backed and
related securities decreased by $3.8 million, or 6.2%, due to the increased loan
demand, normal maturities and principal payments, calls, and prepayments.
Management plans to continue to grow its asset base with an increased emphasis
on higher-yielding nonmortgage loans and adjustable-rate mortgage loans.
Total assets for the fiscal year ended September 30, 1998, increased by
$34.5 million, or 19.9%, from $173.5 million to $208.0 million. This increase in
assets was primarily due to the $18.5 million in net proceeds received from the
Company's stock offering completed April 9, 1998, as part of the Bank's mutual
holding company reorganization (the "Reorganization") and a $16.0 million
increase in investment and mortgage-backed securities that were funded by
Federal Home Loan Bank ("FHLB") advances. In addition to the increase in assets,
there were also material changes in the Company's asset portfolio mix. Cash and
cash equivalents increased $9.2 million, or 198.3%, from $4.6 million to $13.8
million. This increase was primarily due to the receipt of $9.7 million from the
sale of long-term fixed-rate loans in August 1998. Also, nonmortgage loans
increased by $2.4 million, or 18.5%, from $13.0 million to $15.4 million, while
the mortgage loan portfolio remained stable at $121.1 million.
Liabilities. Total liabilities for the fiscal year ended September 30,
1999, increased by $31.3 million, or 18.8%, from $166.4 million to $197.7
million. The change in liabilities was primarily due to a $16.0 million increase
in borrowed money and a $15.5 million increase in total deposits. Borrowed money
increased from $19.5 million to $35.5 million, or 82.1%, while deposits
increased from $143.9 million to $159.4 million, or 10.8%. Funds generated from
borrowed money and deposits were used to fund the purchase and origination of
loans and to engage in various wholesale leverage strategies. Management plans
to continue to aggressively market its retail deposit products to the local
community and to continue pursuing attractive opportunities to leverage the
Company's capital.
Total liabilities for the fiscal year ended September 30, 1998,
increased $13.8 million, or 9.0% , from $152.6 million to $166.4 million. This
change in liabilities was primarily due to a $16.0 million increase in borrowed
money from $3.5 million to $19.5 million. The borrowed money was used to
purchase investment and mortgage backed securities. Also, as part of the
Reorganization, depositors withdrew approximately $8.4 million in existing Bank
deposits to purchase stock in the Company. While a significant portion of these
deposits was replaced as a result of aggressive marketing, total deposits
decreased by $1.5 million, or 1.1%, from $145.4 million to $143.9 million.
Equity. Total equity for the fiscal year ended September 30, 1999,
decreased from $41.6 million to $39.7 million, or 4.5%. This decrease was due,
in part, to a $2.9 million repurchase of common stock, the payment of $938,000
in cash dividends, and a $1.4 million reduction of accumulated unrealized gains
on available for sale securities. These reductions in capital were offset by
$2.2 million in net income for the year. Management plans to continue to
repurchase its publicly traded common stock at prices that are considered by
management to be attractive.
Total equity for the fiscal year ended September 30, 1998, increased by
$20.7 million, or 99.2%,
<PAGE> 7
from $20.9 million to $41.6 million. The primary reasons for the increase in
equity are the receipt of $18.5 million in net proceeds from the Reorganization
and the $1.9 million in net income for the fiscal year.
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 Company for the years ended September 30, 1999,
1998, and 1997. 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.
<TABLE>
<CAPTION>
For The Years Ended September 30,
1999 1998
--------------------------------------------------------------------------------------
AVERAGE INTEREST AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING
(DOLLARS IN THOUSANDS) BALANCE PAID RATE BALANCE PAID RATE BALANCE
- - ------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1)..... $158,534 $ 11,999 7.57% $136,491 $ 11,020 8.07% $132,529
Investment securities.... 32,010 1,833 5.73 24,058 1,471 6.11 18,226
Interest-earning deposits 3,500 226 6.46 13,376 802 6.00 1,049
Mortgage-backed securities 20,750 1,181 5.69 9,692 634 6.54 11,612
------ ----- ---- ----- --- ---- ------
Total interest-earning assets $214,794 $15,239 7.09 183,617 $ 13,927 7.58 163,416
Noninterest-earning assets. 10,126 8,608 ======== 7,751
------ ----- -----
Total assets............... $224,920 $192,225
======== ========
Interest-bearing liabilities,:
Demand deposit accounts.. $ 17,413 $ 194 1.11% $ 16,214 $ 281 1.73% 12,905
Money market demand account 13,152 397 3.02 20,974 580 2.77 14,296
Savings accounts......... 22,624 717 3.17 19,607 663 3.38 14,037
Certificates of deposit.. 98,030 5,099 5.20 96,400 5,170 5.36 105,119
Borrowed funds........... 28,658 1,481 5.17 7,852 432 5.50 2,309
------ ----- ---- ----- --- ---- -----
Total interest-bearing liabilities $179,877 $ 7,888 4.39 161,047 7,126 4.42% 148,666
------- ========
Noninterest-bearing liabilities 3,420 2,032 3,098
----- ----- -----
Total liabilities.......... 183,297 163,079 151,764
Total equity............... 41,623 29,146 19,403
------ ------ ------
Total liabilities and
retained earnings........ $224,920 $192,225 $171,167
======== ======== ========
Net interest income........ $ 7,351 $ 6,801
======= =======
Interest rate spread (2)... 2.71% 3.16%
==== ====
Net yield on interest-earning
assets (3)............... 3.42% 3.70%
==== ====
Ratio of average interest-earning
assets to interest-bearing
liabilities.............. 119.41% 114.01%
====== ======
</TABLE>
<TABLE>
<CAPTION>
1997
------------------
INTEREST
EARNED/ YIELD/
PAID RATE
------------------
Interest-earning assets:
<S> <C> <C>
Loans receivable (1)..... $ 10,826 8.17%
Investment securities.... 1,232 6.76
Interest-earning deposits 89 8.48
Mortgage-backed securities 789 6.79
--- ----
Total interest-earning assets 12,936 7.92
Noninterest-earning assets.
Total assets............... $171,167
========
Interest-bearing liabilities,:
Demand deposit accounts.. 243 1.88%
Money market demand account 429 3.00
Savings accounts......... 387 2.76
Certificates of deposit.. 5,746 5.47
Borrowed funds........... 147 6.37
--- ----
Total interest-bearing liabilities 6,952 4.68%
-----
Noninterest-bearing liabilities
Total liabilities..........
Total equity...............
Total liabilities and
retained earnings........
Net interest income........ $ 5,984
========
Interest rate spread (2)... 3.24%
====
Net yield on interest-earning
assets (3)............... 3.66%
====
Ratio of average interest-earning
assets to interest-bearing
liabilities.............. 109.92%
======
</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.
<PAGE> 8
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 FOR THE YEAR ENDED
SEPTEMBER 30, 1999 VS SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 TO SEPTEMBER 30, 1997
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------ ------
RATE/ RATE/
(IN THOUSANDS) VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
- - ----------------------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities and other interest-earning assets $(106) $ (32) $(76) $ (214) $1,245 $(145) $(137) $963
Mortgage-backed and related securities 723 (82) (94) 547 (130) (43) 7 (166)
Loan portfolio........................ 1,780 (689) (112) 979 324 (126) (4) 194
----- ---- ---- --- --- ---- -- ---
Total interest income............. 2,397 (803) (282) 1,312 1,438 (313) (133) 991
----- ---- ---- ----- ----- ---- ---- ---
Interest expense:
Deposits.............................. (6) (245) (36) (287) 318 (410) (19) (111)
Borrowed funds........................ 1,145 (26) (69) 1,049 353 (20) (48) 285
----- --- --- ----- --- --- --- ---
Total interest expense.............. 1,139 (270) (107) 762 671 (429) (68) 174
----- ---- ---- --- --- ---- --- ---
Net interest income................... $ 1,259 $(534) $ (175) $ 550 $ 767 $ 115 $ (65) $817
======= ===== ====== ======= ===== ===== ===== ====
</TABLE>
RESULTS OF OPERATIONS
General. The earnings of the Company depend primarily on its level of
net interest income, which is the difference between interest earned on the
Company'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 Company'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 Company'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.
Net Income. Net income for the fiscal year ended September 30, 1999,
increased by $275,000, or 14.6%, to $2.2 million. This change was primarily due
to a $549,000 increase in net interest income, a $1.1 million increase in the
gain on sale of assets, and a $301,000 increase in operating noninterest income.
These increases were offset, in part, by a $1.7 million increase in noninterest
expenses.
Net income for the fiscal year ended September 30, 1998, increased by
$454,000, or 30.3%, from $1.4 million to $1.9 million. The increase was
primarily due to a $866,000 increase in net interest income and an increase of
$391,000 in noninterest income. The effects of these increases were partially
offset by a $610,000 increase in noninterest expenses.
Interest Income. Interest income for the fiscal year ended September
30, 1999, increased by $1.3 million, or 9.4%, to $15.2 million. This change was
primarily due to a $1.0 million, or 8.9%, increase in interest earned on loans
outstanding. This increase was primarily attributable to a $22.0 million, or
16.1% increase in average loans outstanding from $136.5 million to $158.5
million, the effects of which were offset by a 50 basis point reduction in the
yield from 8.07% to 7.57%. The decrease in yield was primarily due to the lower
interest rate environment that resulted in the refinancing of many existing
higher-yielding loans and the origination of new loans at lower interest rates.
Management plans to continue to prudently grow the
<PAGE> 9
Company's loan portfolio with an emphasis on higher-yielding nonmortgage loans
and adjustable-rate mortgage loans.
Interest earned on mortgage-backed and related securities increased by
$547,000, or 86.3%, due to an $11.1 million, or 114.1%, increase in the average
outstanding balance from $9.7 million to $20.8 million, the effects of which
were offset by a 74 basis point decrease in yield from 6.43% to 5.69%.
Mortgage-backed securities increased during the year primarily due to the
execution of leverage strategies, which were funded by FHLB advances. Interest
earned on investment securities and interest-earning deposits decreased by
$214,000, or 9.4%, due to a $1.9 million, or 5.1%, decrease in the average
outstanding balance from $37.4 million to $35.5 million and a 30 basis point
decrease in yield from 6.10% to 5.80%. The decrease in yield was primarily
caused by a lower interest rate environment which resulted in faster prepayments
on higher-yielding securities, downward adjustments on adjustable-rate
securities, and the reinvestment of matured and called securities at lower
interest rates.
Interest income for the fiscal year ended September 30, 1998, increased
by $1.0 million, or 7.8%, from $12.9 million to $13.9 million. This increase was
due to a $963,000 increase in income from investment securities and a $243,000
increase in income from loans, the effects of which were partially offset by a
$166,000 decrease in income from mortgage-backed securities. The increase in
income from investment securities was primarily attributable to an $18.1
million, or 93.8%, increase in the average balance of investment securities from
$19.3 million to $37.4 million, the effects of which were offset by a 75 basis
point decrease in the average yield from 6.85% to 6.10%. The increase in the
Company's investment portfolio was due, in part, to the purchase of $26.2
million in investment securities using proceeds received from the stock
conversion and FHLB advances. The sale and maturity of $8.1 million in
investment securities offset this increase. The decrease in the yield on
investments was primarily due to the fact that many higher-yielding investments
have either matured or were called, while additional securities were purchased
in a lower interest rate environment. The decrease in income from
mortgage-backed securities was attributable to a $1.9 million, or 16.4%,
decrease in the average balance of mortgage backed securities from $11.6 million
to $9.7 million. The decrease in the average balance of mortgage-backed
securities was primarily the result of faster prepayments due to falling
interest rates. The decrease in market rates also resulted in a 36 basis point
decrease in the yield on mortgage-backed securities from 6.79% to 6.43%.
Interest income from the Company's loan portfolio increased by $243,000, or
2.2%, from $10.8 million to $11.0 million. This increase was primarily due to a
$4.0 million, or 3.0%, increase in the average balance of loans from $132.5
million to $136.5 million, the effects of which were partially offset by a 10
basis point reduction in the yield to 8.07% from 8.17%. The decrease in yield
was primarily due to the lower interest rate environment.
Interest Expense. For the fiscal year ended September 30, 1999,
interest expense increased by $761,000, or 10.7% from $7.1 million to $7.9
million. This change was due to a $1.0 million increase in interest expense on
borrowed money, the effects of which were offset by a $287,000 decrease in
interest paid on deposits. The increase in interest expense on borrowed money
was due to a $20.8 million increase in the average balance from $7.9 million to
$28.7 million, the effects of which were offset by a 33 basis point decrease in
the interest rate paid on borrowed funds. Interest paid on deposits decreased as
a result of a $2.0 million reduction in the average outstanding balance from
$153.2 million to $151.2 million and 13 basis point reduction in the rate paid
from 4.37% to 4.24%. The average outstanding balance of deposits in 1998
included the effects of approximately $113 million in deposits held in escrow in
connection with the mutual holding company reorganization completed in April
1998.
Interest expense increased by $174,000, or 2.5%, to $7.1 million for
the fiscal year ended September 30, 1998, from $6.9 million for the prior fiscal
year. This increase was due to the net effect of a $285,000 increase in interest
expense on borrowings and a $111,000 decrease in interest expense on deposits.
The increased expense on borrowed money was primarily due a $5.4 million
increase in the average balance of borrowings from $2.3 million to $7.9 million,
the effects of which were offset by an 87 basis point reduction in the rate paid
on borrowings from 6.37% to 5.50%. Interest expense on deposits decreased as a
result of a 28 basis point decrease in the rate paid on deposits from 4.65% to
4.37%. The benefit of the lower cost of deposits was offset by a $6.8 million
increase in the average balance of deposit accounts.
<PAGE> 10
Provision for Loan Losses. The Company 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 Company
assesses the allowance for loan losses on a quarterly basis and makes provisions
for loan losses monthly in order to maintain the adequacy of the allowance.
The Company provided $105,000 and $300,000 in loan loss provisions for
the fiscal years ended September 30, 1999 and 1998, respectively. The reduction
in the provision for loan losses was primarily the result of the decrease in
nonperforming loans from $1.2 million to $94,000. The Company's allowance for
loan losses was $1.5 million and $1.4 million, or 1,605% and 114% of
nonperforming assets, for the fiscal years ended September 30, 1999 and 1998,
respectively. Management will make future loan loss provisions based on
available information including changes in economic conditions, changes in the
loan portfolio mix and performance, and regulatory requirements.
The Company provided $300,000 and $293,000 in loan loss provisions
during the fiscal years ended September 30, 1998 and 1997, respectively. The
increase was primarily due to the strong loan volume during the year. At
September 30, 1998 and 1997, the Company's allowance for loan losses was $1.4
million and $1.1 million, respectively, and the Company's nonperforming loans
were $1.2 million and $1.1 million, respectively. The Company's allowance for
loan losses as a percentage of total nonperforming loans at September 30, 1998
and 1997, was 114.0% and 104.8%, respectively.
Noninterest Income. Noninterest income is composed of service charges
on deposit accounts, gains on sale of assets, and other income. For the fiscal
year ended September 30, 1999, noninterest income increased by $1.4 million, or
148.3%, from $956,000 to $2.4 million. The primary reasons for the change were a
$1.1 million increase in gain on sale of assets, a $108,000 increase in service
charges on deposit accounts, and a $193,000 increase in other income. The gain
on sale of assets included a $90,000 gain on sale of $13.1 million in long-term
fixed-rate mortgage loans and a $1.3 million gain on sale of $6.4 million in
investments. The increase in service charges on deposit accounts resulted from
an aggressive marketing program to increase fee generating demand deposit
accounts. Other income increased due to fees generated as a result of strong
loan demand and increased commissions generated on the sale of uninsured
investment products by the Bank's wholly-owned subsidiary.
Noninterest income increased by $440,000, or 85.3%, to $956,000 for the
fiscal year ended September 30, 1998, from $516,000 for the prior fiscal year.
The primary reasons for the increase were a $114,000 increase in the gain on
sale of assets, a $52,000 increase in service charges on deposit accounts, and a
$274,000 increase in other income. The increase in deposit fees resulted, in
part, from management's emphasis on fee generating demand deposit accounts. The
increase in the gain on sale of assets was primarily due to the sale of $9.7
million of long-term fixed rate loans at a gain of $80,000 in order to reduce
the Bank's interest rate risk. Other income increased due to a higher level of
loan demand due to falling interest rates and increased commissions on the sale
of uninsured securities products.
Noninterest Expenses. Noninterest expense is composed of salaries and
benefits, office occupancy, deposit insurance, data processing, advertising,
professional services, and other expenses. For the fiscal year ended September
30, 1999, noninterest expense increased $1.7 million, or 37.1%, from $4.6
million to $6.3 million. The primary reason for the change was a $1.5 million
increase in salary and benefits. There were also modest increases in
professional services, data processing, and other noninterest expenses, the
effects of which were partially offset by small decreases in office occupancy,
deposit insurance, and advertising. The increase in salary and benefits was
primarily due to a $1.0 million nonrecurring expense associated with the award
of common stock in accordance with the Gaston Federal Bank 1999 Recognition and
Retention Plan approved by the shareholders in April 1999. Also, there was an
increase in the number of employees
<PAGE> 11
resulting, in part, from the preparation of the opening of the Shelby Loan
Production Office and the implementation of extended drive-thru hours at each of
the branch office locations. Professional services increased as a result of the
additional expenses associated with operating a publicly traded company and data
processing expenses increased due to the purchase of updated software and
hardware and the added expense of preparing and testing for Year 2000 readiness.
Noninterest expenses increased by $600,000, or 15.0%, to $4.6 million
for the fiscal year ended September 30, 1998, from $4.0 million for the prior
fiscal year. The increase was primarily due to a $248,000 increase in
compensation and benefits and a $324,000 increase in other noninterest expenses.
The increase in compensation and benefits was primarily due to an increase in
the number of personnel in order to operate the Company more like a commercial
bank. Other noninterest expenses increased, in part, due to the addition of
three automated teller machines, the implementation of a debit card program,
branch office improvements, and increased expenditures for computers and
technology.
Provision for Income Taxes. The Company's provision for income taxes
was $1.2 million and $1.0 million for the fiscal years ended September 30, 1999,
and 1998, respectively. The change was due to a $470,000 increase in income
before taxes and a slight increase in the effective tax rate from 34.7% to
35.7%.
The Company's provision for income taxes was $1.0 million and $819,000
for the fiscal years ended September 30, 1998 and 1997. The increase was due to
a $600,000 increase in income before taxes and a reduction in the effective tax
rate from 36.4% to 34.7%. The effective tax rate decreased due to the increase
in state tax-exempt investments and bank-qualified tax-exempt municipal
securities.
CAPITAL RESOURCES AND LIQUIDITY
The Company'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 Company's primary sources of internally generated funds
are principal and interest payments on loans receivable, cash flows generated
from operations, and cash flows generated by investments. External sources of
funds include increases in deposits and FHLB advances.
The Company 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, 1999, the Company's liquidity, as measured for
regulatory purposes, was in excess of the minimum OTS requirement.
At September 30, 1999, the Company had loan commitments (excluding
undisbursed portions of interim construction loans of $6.2 million) of $704,000
and unused lines of credit of $19.3 million. The Company believes that it has
adequate resources to fund loan commitments as they arise. If the Company
requires funds beyond its internal funding capabilities, additional advances
from the FHLB are available. At September 30, 1999, approximately $85.2 million
of time deposits were scheduled to mature within a year, and the Company expects
that a portion of these time deposits will not be renewed upon maturity.
<PAGE> 12
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 Company's operations. Nearly
all the assets and liabilities of the Company are financial, unlike most
industrial companies. As a result, the Company's performance is directly
impacted by changes in interest rates, which are indirectly influenced by
inflationary expectations. The Company'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 Company'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 Company's assets and liabilities are critical to the
maintenance of acceptable performance levels.
IMPACT OF NEW ACCOUNTING STANDARDS
In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which,
establishes accounting and reporting requirements for derivative instruments,
including derivative instruments imbedded other contracts. The provisions of the
Statement are effective for fiscal years beginning after June 15, 2000. The
Company expect that adopting the provisions of SFAS No. 133 will not have a
material impact on the consolidated financial statements of the Company.
YEAR 2000 CONSIDERATIONS
Like many financial institutions, the Bank relies upon computers for
conducting its daily operations. There is concern among industry experts that on
January 1, 2000, computers will be unable to "read" the new year and, as a
consequence, there may be widespread computer malfunctions. Since the Bank
processes all of its loan, deposit, and accounting operations on an internal
data processing system, the Year 2000 issue could have a material adverse effect
on the operations of the Bank if proper modifications and conversions are not
made in a timely manner. As a result, Management has successfully completed a
comprehensive review of its computer systems to identify items that could be
affected by the Year 2000, developed and implemented a Year 2000 Plan to modify
or replace the affected systems, and tested all systems for Year 2000 readiness.
While the Bank has completed its Year 2000 Plan, there can be no
assurance that the mission critical systems of the Bank or other companies and
vendors on which the Bank's systems may rely will be fully operational. The
failure of outside entities to adequately address the Year 2000 issue could have
an adverse effect on the Bank's ability to conduct its business. In an effort to
reduce the potential adverse effects in such a scenario, workaround procedures
have been developed for all third party vendors and are detailed in the
Company's Year 2000 Business Resumption Contingency Plan.
STOCK REPURCHASE PLANS
In October 1998, the Company was authorized to repurchase up to 105,668
shares, or 5.0% of the publicly held common stock as part of its capital
management strategy. The repurchase was completed in May 1999 at a weighted
average price of $13.45 per share.
In April 1999, the Company was authorized to repurchase up to 84,534
shares of the publicly held common stock in accordance with the Gaston Federal
Bank 1999 Recognition and Retention Plan. The repurchase was completed in July
1999 at a weighted average price of $13.78 per share.
In April 1999, the Company was authorized to repurchase up to 211,335
shares of the publicly held common stock in accordance with the Gaston Federal
Bank 1999 Stock Option Plan. As of December 6, 1999, the Company has repurchased
68,398 shares of its common stock at a weighted average price of $12.81 per
share.
<PAGE> 13
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
September 30,
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 4,206,884 $ 2,697,028
Interest-earning bank balances 8,375,733 11,100,936
------------- -------------
Cash and cash equivalents 12,582,617 13,797,964
Investment securities
Available-for-sale 15,777,462 20,919,033
Held-to-maturity (fair value of $12,367,959 in 1999 and $15,967,677 in 1998) 12,865,176 15,588,173
Mortgage-backed and related securities
Available-for-sale 16,166,636 8,350,179
Held-to-maturity (fair value of $3,804,134 in 1999 and $6,448,878 in 1998) 3,825,092 6,357,370
Loans, net 168,044,032 136,500,519
Premises and equipment 2,503,082 2,247,437
Accrued interest receivable 1,244,381 1,238,225
Federal Home Loan Bank stock 1,775,000 1,300,121
Deferred income taxes 709,795 --
Other assets 1,959,932 1,704,466
------------- -------------
Total assets $ 237,453,205 $ 208,003,487
============= =============
LIABILITIES AND EQUITY
Deposits $ 159,424,778 $ 143,900,772
Advances from borrowers for taxes and insurance 760,857 728,061
Accrued interest payable 549,783 428,868
Advances from Federal Home Loan Bank 35,500,000 19,500,000
Deferred income taxes -- 415,589
Other liabilities 1,509,197 1,460,068
------------- -------------
Total liabilities 197,744,615 166,433,358
Commitments and contingencies
Stockholders' Equity
Preferred stock, 10,000,000 shares authorized, none issued -- --
Common stock, $1.00 par value, 20,000,000 shares authorized,
issued and outstanding 4,581,034 in 1999 and 4,496,500 in 1998 4,581,034 4,496,500
Additional paid-in-capital 16,650,944 15,721,070
Unallocated common stock held by Employee Stock Ownership Plan (1,493,434) (1,615,539)
Retained earnings, substantially restricted 22,653,309 21,430,004
Accumulated unrealized gain on securities available-for-sale, net of tax 176,226 1,538,094
Treasury stock of 211,400 shares at cost (2,859,489) --
------------- -------------
Total equity 39,708,590 41,570,129
------------- -------------
Total liabilities and equity $ 237,453,205 $ 208,003,487
============= =============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 14
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998
---- ----
INTEREST INCOME
<S> <C> <C>
Loans $11,998,766 $11,019,814
Investment securities 2,059,379 2,273,839
Mortgage-backed and related securities 1,180,512 633,789
----------- -----------
Total interest income 15,238,657 13,927,442
INTEREST EXPENSE
Deposits 6,407,099 6,694,335
Borrowed funds 1,481,231 432,240
----------- -----------
Total interest expense 7,888,330 7,126,575
----------- -----------
Net interest income 7,350,327 6,800,867
PROVISION FOR LOAN LOSSES 105,000 300,000
----------- -----------
Net interest income after provision for loan losses 7,245,327 6,500,867
NONINTEREST INCOME
Service charges on deposit accounts 368,076 260,543
Gain on sale of securities 1,272,356 184,213
Gain on sale of other assets 116,706 88,006
Other income 616,371 423,035
----------- -----------
Total noninterest income 2,373,509 955,797
NONINTEREST EXPENSE
Salaries and benefits 4,011,564 2,476,633
Occupancy 457,878 500,232
Deposit insurance 90,720 109,360
Data processing 207,105 122,817
Advertising 230,988 255,223
Professional services 290,143 197,209
Other 970,646 905,406
----------- -----------
Total noninterest expense 6,259,044 4,566,880
----------- -----------
INCOME BEFORE INCOME TAXES 3,359,792 2,889,784
PROVISION FOR INCOME TAXES 1,198,430 1,004,000
----------- -----------
NET INCOME $ 2,161,362 $ 1,885,784
=========== ===========
EARNINGS PER SHARE
Basic earnings per share $ 0.50 NA
Diluted earnings per share $ 0.50 NA
</TABLE>
See notes to consolidated financial statements.
<PAGE> 15
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998
---- ----
<S> <C> <C>
Net income $ 2,161,362 $ 1,885,784
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during period, net of tax
effect of $308,003 in 1999 and $(313,334) in 1998 (547,560) 557,039
Reclassification adjustment for gains included in net income,
net of tax effect of $458,048 in 1999 and $66,317 in 1998 (814,308) (117,896)
----------- -----------
Other comprehensive income (1,361,868) 439,143
Comprehensive income $ 799,494 $ 2,324,927
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 16
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
Unallocated
Retained Common Accumulated
Additional Earnings Stock Unrealized
Preferred Common Paid-In Substantially Held By Gains (Losses)
Stock Stock Capital Restricted ESOP net of tax
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1997 $-- $ -- $ -- $ 19,769,045 $ -- $ 1,098,951
Comprehensive results:
Net income -- -- -- 1,885,784 -- --
Other comprehensive results,
net of tax -- -- -- -- -- 439,143
Issuance of 2,113,355 shares
of $1.00 par value common
stock in the initial public
offering at $10.00 per share -- 2,113,355 18,104,215 -- -- --
Issuance of 2,383,145 shares of
$1.00 par value common
stock to Gaston Federal
Holdings, MHC -- 2,383,145 (2,383,145) -- -- --
Loan to ESOP for purchase
of common stock -- -- -- -- (1,690,680) --
Allocation from shares
purchased with loan to ESOP -- -- -- -- 75,141 --
Cash dividends declared on
common stock -- -- -- (224,825) -- --
- - -----------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 -- 4,496,500 15,721,070 21,430,004 (1,615,539) 1,538,094
Comprehensive results:
Net income -- -- -- 2,161,362 -- --
Other comprehensive
results, net of tax -- -- -- (1,361,868)
Issuance of 84,534 shares of
$1.00 par value common
stock for employee
benefit plans -- 84,534 929,874 -- -- --
Allocation from shares
purchased with loan to ESOP -- -- -- -- 122,105 --
Cash dividends declared on
common stock -- -- -- (938,057) -- --
Repurchase of common stock -- -- -- -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 $ -- $ 4,581,034 $ 16,650,944 $ 22,653,309 $ (1,493,434) $176,226
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Treasury Total
Stock Equity
- - ------------------------------------------------------------------------------
<S> <C> <C>
BALANCE, SEPTEMBER 30, 1997 $ -- $ 20,867,996
Comprehensive results:
Net income -- 1,885,784
Other comprehensive results,
net of tax -- 439,143
Issuance of 2,113,355 shares
of $1.00 par value common
stock in the initial public
offering at $10.00 per share -- 20,217,570
Issuance of 2,383,145 shares of
$1.00 par value common
stock to Gaston Federal
Holdings, MHC -- --
Loan to ESOP for purchase
of common stock -- (1,690,680)
Allocation from shares
purchased with loan to ESOP -- 75,141
Cash dividends declared on
common stock -- (224,825)
- - ------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 -- 41,570,129
Comprehensive results:
Net income -- 2,161,362
Other comprehensive
results, net of tax -- (1,361,868
Issuance of 84,534 shares of
$1.00 par value common
stock for employee
benefit plans -- 1,014,408
Allocation from shares
purchased with loan to ESOP -- 122,105
Cash dividends declared on
common stock -- (938,057)
Repurchase of common stock (2,859,489) (2,859,489)
- - ---------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 $(2,859,489) $ 39,708,590
===========================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 17
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,161,362 $ 1,885,784
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses 105,000 300,000
Depreciation 334,533 401,789
Deferred income tax (benefit) (146,000) (213,000)
Gain on sale of investments available-for-sale (1,272,356) (184,213)
Gain on sale of loans (89,725) (80,148)
Gain on sale of premises and equipment (26,981) -
Deferred loan origination fees (115,690) (20,050)
Issuance of shares for the Recognition and Retention Plan 1,014,408 -
Allocation of shares to the ESOP 122,105 75,141
(Increase) in interest receivable (6,156) (281,033)
Increase (decrease) in interest payable (101,504) 16,634
(Increase) in other operating assets (186,048) (882,324)
------------ ------------
Net cash provided by operating activities 1,792,948 1,018,580
INVESTING ACTIVITIES
Net (increase) in loans made to customers (44,578,609) (11,809,490)
Proceeds from the sale of loans 13,135,511 9,600,226
Proceeds from the sale of premises and equipment 49,250 -
Proceeds from the sale of investments available-for-sale 5,881,780 2,628,000
Proceeds from the sale of mortgage-backed and related securities 492,304 -
Maturities and prepayments of investments available-for-sale 5,275,277 -
Maturities and prepayments of investments held-to-maturity 2,722,997 6,700,000
Maturities and prepayments of mortgage-backed and related securities 5,723,340 4,414,063
Purchases of investments available-for-sale (6,515,000) (14,420,877)
Purchases of investments held-to-maturity - (11,881,144)
Purchases of mortgage-backed and related securities (11,867,075) (9,012,318)
Purchases of FHLB stock (474,879) -
Purchases of premises and equipment (612,447) (509,729)
------------ ------------
Net cash used for investing activities (30,767,551) (24,291,269)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 15,524,006 (1,542,728)
Dividends to stockholders (938,057) (224,825)
Repurchase of common stock (2,859,489) -
Proceeds from common stock issuance - 18,526,890
Advances from FHLB 18,000,000 16,000,000
Repayments of advances from FHLB (2,000,000) -
Increase (decrease) in advances from borrowers for insurance and taxes 32,796 (314,299)
------------ ------------
Net cash provided by financing activities 27,759,256 32,445,038
Net increase (decrease) in cash and cash equivalents (1,215,347) 9,172,349
Cash and cash equivalents at the beginning of the year 13,797,964 4,625,615
------------ ------------
Cash and cash equivalents at the end of the year $ 12,582,617 $ 13,797,964
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 18
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Gaston Federal Bancorp, Inc. is a stock holding company whose activities are
primarily limited to holding the stock of Gaston Federal Bank. The Bank is a
community-oriented Federal stock savings bank engaged primarily in the business
of offering deposits to customers through its branch offices and investing those
deposits, together with funds generated from operations and borrowings, in
residential, commercial and consumer loans. The Bank's wholly-owned subsidiary,
Gaston Financial Services, Inc. (doing business as Gaston Federal Investment
Services) acts as an independent agent selling various financial products.
The accounting and reporting policies of Gaston Federal Bancorp, Inc. and its
subsidiaries 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 Bancorp, Inc., its wholly-owned subsidiary, Gaston
Federal Bank, and the Bank's wholly-owned subsidiary, Gaston Financial Services,
Inc. All significant intercompany accounts and transactions have been
eliminated.
Use of Estimates - The financial statements are prepared in accordance with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents - The Company 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 the
Company 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 strategies and to
manage liquidity. Adjustments for unrealized gains or losses, net of related
income tax effect, are recorded as an addition or deduction from equity in the
form of other comprehensive results.
The Company 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
and related 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 losses inherent 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
<PAGE> 19
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 - The Company makes loans to individuals and small
businesses primarily in Gaston County, North Carolina and surrounding counties.
The Company has a diversified loan portfolio, and the borrowers' ability to
repay their loans is not dependent upon any specific economic segment.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed over the estimated useful lives of the assets (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 to
conform to current year presentation; such reclassifications are immaterial to
the financial statements.
Comprehensive Income - During the year ended September 30, 1999, the Company
adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 established
standards for the reporting and display of comprehensive income and its
components in financial statements. SFAS No. 130 defines comprehensive income as
net income, as currently reported, as well as unrealized gains and losses on
assets available for sale and certain other items not currently included in the
income statement. The disclosure requirements of SFAS No. 130 have been included
in the Consolidated Statements of Comprehensive Income.
Operating Segments - The FASB issued in June 1997, SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, which established
standards for the way public business enterprises report information about
operating segments. This statement also established standards for related
disclosures about products, services, geographic areas and major customers. In
adopting SFAS No. 131, the Company has determined that, using the definitions
contained in the statement, all of its activities constitute only one reportable
operating segment.
Impact of Recently Issued Accounting Standards - SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, issued in June 1998, establishes
accounting and reporting requirements for derivative instruments, including
derivative instruments embedded in other contracts. The provisions of the
Statement
<PAGE> 20
are effective for fiscal years beginning after June 15, 2000. The Company
intends to adopt this statement effective October 1, 2000. The Company expects
that adopting the provisions of this statement will not have a material impact
on the consolidated financial statements of the Company.
NOTE 2 - CONVERSION TO STOCK FORM OF OWNERSHIP
On July 14, 1997, the Board of Directors of Gaston Federal Savings and Loan
Association (now known as "Gaston Federal Bank") adopted the Gaston Federal
Savings and Loan Association Plan of Reorganization from Mutual Savings
Association to Mutual Holding Company and Stock Issuance Plan (the "Plan of
Reorganization"). Pursuant to the Plan of Reorganization, on April 9, 1998, the
Bank converted from a federally chartered mutual savings and loan association to
a federally chartered stock savings bank and became the wholly-owned subsidiary
of Gaston Federal Bancorp, Inc., a Federal corporation (the "Reorganization").
The Company was incorporated on March 18, 1998, to serve as the Bank's holding
company, and prior to April 9, 1998, had no operations and insignificant assets
and liabilities. In addition, pursuant to the Plan of Reorganization, the
Company sold 2,113,355 shares of its common stock to the Bank's customers for
$10.00 per share (the "Offering"), and issued 2,383,145 shares of its common
stock to Gaston Federal Holdings, MHC (the "Mutual Holding Company"), a federal
mutual holding company formed as part of the Reorganization. At the conclusion
of the Offering, the Mutual Holding Company owned 53.0% of the Company's
outstanding shares of common stock and purchasers in the Offering owned 47.0%.
Gross proceeds of the Offering totaled $21,133,550, expenses totaled
approximately $916,000, and purchases by the Bank's employee stock ownership
plan formed in connection with the Offering, funded with a loan from the
Company, totaled $1,690,680 for net proceeds of approximately $18,527,000.
Subsequent to the Conversion, the Bank may not declare or pay cash dividends on
or repurchase any of its shares of common stock if the effect thereof would
cause stockholder's equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements. The Company, unlike the Bank, is not subject to
the same restrictions regarding the declaration or payment of dividends to its
shareholders, although the source of the Company's dividends may depend upon the
Bank's ability to pay dividends.
<PAGE> 21
NOTE 3 - 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, 1999
-------------------------------------------------------
Book Unrealized Unrealized Fair
Value Gains Losses Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-Sale
U.S. Treasury and other agencies $ 9,256,466 $ 5,545 $ (102,730) $ 9,159,281
Municipals 5,736,978 -- (372,773) 5,364,205
FHLMC stock 25,404 1,135,662 -- 1,161,066
Other equity securities 92,910 -- -- 92,910
----------- ----------- ------------ -----------
Total available-for-sale $15,111,758 $ 1,141,207 $ (475,503) $15,777,462
=========== =========== =========== ===========
Mortgage-backed and related securities Available-for-Sale
FNMA 2,485,393 -- (72,275) 2,413,118
GNMA 8,014,443 -- (232,728) 7,781,715
SBA's 6,043,041 -- (71,238) 5,971,803
----------- ----------- ------------ -----------
Total mortgage-backed and
related securities $16,542,877 $ -- $ (376,241) $16,166,636
=========== =========== =========== ===========
Held-to-Maturity
U.S. Treasury and other agencies $12,498,539 $ -- $ (497,298) $12,001,241
Municipals 366,637 81 -- 366,718
----------- ----------- ------------ -----------
Total held-to-maturity 12,865,176 81 (497,298) 12,367,959
=========== =========== =========== ===========
Mortgage-backed and related securities Held-to-Maturity
FHLMC $ 1,645,951 $ 7,171 $ (20,502) $ 1,632,620
FNMA 1,415,532 4,414 (18,743) 1,401,203
GNMA 763,609 11,850 (5,148) 770,311
----------- ----------- ------------ -----------
Total mortgage-backed and
related securities $ 3,825,092 $ 23,435 $ (44,393) $ 3,804,134
=========== =========== =========== ===========
</TABLE>
<PAGE> 22
<TABLE>
<CAPTION>
September 30, 1998
-------------------------------------------------------
Book Unrealized Unrealized Fair
Value Gains Losses Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-Sale
Federated U.S. Government Fund $ 1,162,998 $ 134,735 $ -- $ 1,297,733
Asset Management Fund 1,459,188 36,803 -- 1,495,991
FHLMC Stock 43,967 2,184,170 -- 2,228,137
U.S. Treasury and other agencies 15,046,698 156,003 -- 15,202,701
Municipals 680,000 14,471 -- 694,471
----------- ----------- ------------ -----------
Total available-for-sale $18,392,851 $ 2,526,182 $ -- $20,919,033
=========== =========== ============ ===========
Mortgage-backed and related securities Available-for-Sale
FNMA $ 1,482,570 $ -- $ (1,276) $ 1,481,294
GNMA 4,866,382 -- (12,078) 4,854,304
SBA's 2,009,810 4,771 -- 2,014,581
----------- ----------- ------------ -----------
Total mortgage-backed and
related securities $ 8,358,762 $ 4,771 $ (13,354) $ 8,350,179
=========== =========== ============ ===========
Held-to-Maturity
U.S. Treasury and other agencies $15,228,173 $ 371,223 $ -- $15,599,396
Municipals 360,000 8,281 -- 368,281
----------- ----------- ------------ -----------
Total held-to-maturity 15,588,173 379,504 -- 15,967,677
=========== =========== ============ ===========
Mortgage-backed and related securities Held-to-Maturity
FHLMC $ 3,038,585 $ 22,103 $ -- $ 3,060,688
FNMA 2,352,782 26,879 -- 2,379,661
GNMA 966,003 42,526 -- 1,008,529
----------- ----------- ------------ -----------
Total mortgage-backed and
related securities $ 6,357,370 $ 91,508 $ -- $ 6,448,878
=========== =========== ============ ===========
</TABLE>
<PAGE> 23
The book value and estimated fair value of debt securities at September 30,
1999, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
September 30, 1999
----------------------------
Book Fair
Value Value
----------------------------
<S> <C> <C>
Available-for-Sale
Due in one year or less $ 1,500,673 $ 1,504,814
Due after one year through five years 8,609,885 8,488,474
Due after five years through ten years 2,269,337 2,153,771
Due after ten years 2,613,549 2,376,427
Equities 118,314 1,253,976
----------- -----------
$15,111,758 $15,777,462
=========== ===========
Mortgage-backed and related securities $16,542,877 $16,166,636
=========== ===========
Held-to-maturity
Due in one year or less $ -- $ --
Due after one year through five years 866,637 868,030
Due after five years through ten years 11,998,539 11,499,929
Due after ten years -- --
----------- -----------
$12,865,176 $12,367,959
=========== ===========
Mortgage-backed and related securities $ 3,825,092 $ 3,804,134
=========== ===========
</TABLE>
Gross realized gains on the sale of securities available for sale were
$1,282,044 and $184,213 in 1999 and 1998, respectively. Gross realized losses on
the sale of securities available for sale were $9,688 and $0 in 1999 and 1998,
respectively. After-tax net gains on the sale of securities were $814,308 and
$117,896 in 1998 and 1998, respectively.
Investment securities having a carrying amount of approximately $1,000,000 have
been pledged as collateral to secure public deposits at September 30, 1999.
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
The following is a summary of loans outstanding by category at September 30:
<PAGE> 24
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Real estate:
One-to-four family residential $129,332,817 $105,526,044
Multi-family residential 2,413,821 3,771,000
Commercial mortgage 7,265,832 8,076,000
Construction 11,175,675 10,572,620
Commercial 14,355,922 6,629,452
Consumer 11,599,049 8,988,997
------------ ------------
Gross loans 176,143,116 143,564,113
Less:
Loans in process 6,204,788 5,151,824
Deferred loan fees, net 384,831 500,521
Allowance for loan losses 1,509,465 1,411,249
------------ ------------
Net loans $168,044,032 $136,500,519
============ ============
</TABLE>
The Company 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, 1999 and 1998 were immaterial.
<PAGE> 25
Changes in the allowance for loan losses for the two years ended September 30,
1999 were as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Balance at beginning of year $ 1,411,249 $ 1,110,000
Provision for loan losses 105,000 300,000
Recoveries on loans previously charged off 1,666 6,453
Loans charged off (8,450) (5,204)
----------- -----------
Balance at end of year $ 1,509,465 $ 1,411,249
=========== ===========
</TABLE>
Directors, executive officers, and associates of such persons were customers of
and had transactions with the Bank 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 $2,409,544 and $1,988,197 at
September 30, 1999 and 1998, respectively. During 1999, new loans of $1,022,119
were made and payments totaled $589,485. During 1998, new loans of $1,444,735
were made and payments totaled $216,666.
During 1999, the Bank sold groups of loans with a book value of $13,045,786 at a
net gain of $89,725. During 1998, the Bank sold groups of loans with a book
value of $9,588,145 at a gain of $80,148. The Bank held no loans for sale at
September 30, 1999 or 1998.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land $ 694,289 $ 604,704
Buildings 1,799,033 1,725,332
Land Improvements 101,720 103,071
Furniture and equipment 2,140,454 2,067,050
---------- ----------
4,735,496 4,500,157
Less: accumulated depreciation 2,232,414 2,252,720
---------- ----------
$2,503,082 $2,247,437
========== ==========
</TABLE>
<PAGE> 26
NOTE 6 - DEPOSITS
Deposit balances and interest expense and average rates paid for the years ended
September 30 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------- --------------------------------------
Actual Interest Average Actual Interest Average
Balance Expense Rate Balance Expense Rate
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing $ 6,481,000 $ -- -- $ 5,878,000 $ -- --
Interest bearing checking 11,916,000 195,000 1.6% 10,913,000 281,000 2.4%
Money market demand 13,709,000 396,000 2.1% 11,929,000 580,000 2.4%
Passbook savings 23,869,000 717,000 3.2% 20,557,000 664,000 3.4%
Savings certificates 103,450,000 5,100,000 5.2% 94,623,000 5,169,000 5.4%
------------ ------------ --- ------------ ------------ ---
$159,425,000 $ 6,408,000 4.1% $143,900,000 $ 6,694,000 4.3%
============ ============ === ============ ============ ===
</TABLE>
Contractual maturities of savings certificates as of September 30, 1999 are as
follows:
<TABLE>
<S> <C>
Under 1 year $ 85,165,011
1 to 2 years 13,015,613
2 to 3 years 5,269,028
------------
$103,449,652
============
</TABLE>
Certificates of deposit in excess of $100,000 totaled $17,727,853 and
$17,908,000 at September 30,1999 and 1998, respectively, and are not federally
insured. Interest paid on deposits and other borrowings was $7,786,826 and
$7,126,575 for the years ended September 30, 1999 and 1998, respectively.
Directors, executive officers, and associates of such persons were customers of
and had transactions with the Bank in the ordinary course of business. Included
in such transactions are deposit accounts, all of which were made under normal
terms. The aggregate amount of these deposit accounts was $2,512,000 and
$1,520,000 at September 30, 1999 and 1998, respectively.
The deposits of the Bank are insured by the Savings Association Insurance Fund
(SAIF), one of two funds administered by the FDIC. The Bank's annual SAIF
premium rates were $.0648 per $100 of deposits in 1999 and 1998.
NOTE 7 - 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 4.69% to 5.75% at September 30, 1999
and 4.97% to 5.75% at September 30, 1998. The unused portion of the line of
credit available to the Company at September 30, 1999 was $9,500,000.
<PAGE> 27
Maturities of advances at September 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Advances from FHLB due:
Less than 1 year $ -- $ --
1 to 2 years -- --
2 to 3 years -- --
3 to 4 years 1,500,000 2,000,000
4 to 5 years 7,000,000 1,500,000
5 to 10 years 27,000,000 16,000,000
After 10 years -- --
----------- -----------
$35,500,000 $19,500,000
=========== ===========
</TABLE>
Interest rates on certain advances may be reset at the option of the Federal
Home Loan Bank of Atlanta. At September 30, 1999, interest rates on $10 million
may be converted to a variable rate of interest on a quarterly basis starting in
December 1999, interest rates on $7 million may be reset in 2001, interest rates
on $8 million may be reset in 2003 and in 2004.
NOTE 8 - INCOME TAXES
The provision for income taxes is summarized below:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Currently payable
Federal $ 1,218,430 $ 1,123,000
State 126,000 94,000
----------- -----------
1,344,430 1,217,000
Deferred
Federal (105,000) (172,000)
State (41,000) (41,000)
----------- -----------
(146,000) (213,000)
----------- -----------
Total income taxes $ 1,198,430 $ 1,004,000
=========== ===========
</TABLE>
The reasons for the difference between consolidated income tax expense and the
amount computed by applying the statutory federal income tax rate of 34% to
income before income taxes were as follows:
<PAGE> 28
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Federal income taxes at statutory rate $ 1,142,000 $ 973,000
State income taxes, net of federal benefit 56,000 35,000
Other 430 (4,000)
----------- -----------
$ 1,198,430 $ 1,004,000
=========== ===========
Effective tax rate 35.7% 34.7%
=========== ===========
</TABLE>
Income taxes recoverable (payable) are included in other assets (liabilities)
and were $(78,000) and $65,000, at September 30, 1999 and 1998, respectively.
Income taxes paid for the years ended September 30, 1999 and 1998 were
$1,315,000 and $1,693,000, respectively.
<PAGE> 29
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at September 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets
Deferred compensation $ 278,824 $ 207,823
Deferred loan fees 150,546 195,804
Allowance for loan losses 314,623 184,242
Other 80,693 70,150
----------- -----------
Gross deferred tax assets 824,686 658,019
Deferred tax liabilities
Unrealized gain on securities
available-for-sale 114,891 985,990
Other -- 87,618
----------- -----------
Gross deferred tax liabilities 114,891 1,073,608
----------- -----------
Net deferred tax asset (liability) $ 709,795 $ (415,589)
=========== ===========
</TABLE>
The Company, in accordance with SFAS No. 109, did not record a deferred tax
liability of approximately $1,870,000 as of September 30, 1999 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 the Company will fully realize deferred tax assets
based on future taxable temporary differences, refundable income taxes from
carryback years, and current levels of operating income.
<PAGE> 30
NOTE 9 - COMMITMENTS TO EXTEND CREDIT
Commitments to extend credit are agreements to lend as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Commitments to extend credit as of September 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Loan commitments $ 703,700 $ 889,995
Unused lines of credit
Commercial 6,099,144 6,654,000
Consumer 13,192,106 8,389,000
</TABLE>
All loan commitments at September 30, 1999 are at fixed rates ranging from 7.4%
to 8.5%. Commitment periods are typically 60 days.
NOTE 10 - REGULATORY CAPITAL REQUIREMENTS
The Bank 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, the Bank 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 the Bank's financial statements.
The Bank is required to maintain: tangible capital of at least 1.5% of adjusted
total assets; core capital of at least 4.0% of adjusted total assets; and total
capital of at least 8.0% of risk weighted assets. At September 30, 1999, the
Bank's tangible capital and core capital were both $33,813,000 or 14.28% of
tangible assets, and total capital was $35,208,000 or 27.57% of risk-weighted
assets. The Company's primary regulator, the Office of Thrift Supervision,
informed the Bank that it was in the well-capitalized category as of the most
recent regulatory examination, and management is not aware of any events that
have occurred since that would have changed its classification.
<PAGE> 31
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands) (dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999
Total Risk-Based Capital
(to Risk-Weighted Assets) $35,208 27.57% $10,217 8.00% $12,772 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) 33,813 26.48% 5,109 4.00% 7,663 6.00%
Tier 1 Capital
(to Adjusted Total Assets) 33,813 14.28% 9,474 4.00% 11,842 5.00%
Tangible Capital
to Adjusted Total Assets) 33,813 14.28% 3,553 1.50% 7,105 3.00%
As of September 30, 1998
Total Risk-Based Capital
(to Risk-Weighted Assets) 34,142 31.53% 8,663 8.00% 10,829 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) 31,671 29.25% 4,332 4.00% 6,498 6.00%
Tier 1 Capital
(to Adjusted Total Assets) 31,671 15.44% 8,207 4.00% 10,256 5.00%
Tangible Capital
(to Adjusted Total Assets) 31,671 15.44% 3,078 1.50% 6,155 3.00%
</TABLE>
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Bank contributes to the Financial Institutions Retirement Fund, a
multiemployer, qualified, noncontributory defined benefit pension plan that
covers substantially all employees of the Bank 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 $3,810 in 1999 and $3,338
in 1998. Separate company information relating to the Bank is not available.
The Bank 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 the Bank providing matching contributions of 50% of employee
contributions up to 6% of compensation. The plan also provides for discretionary
employer contributions. Total expense relating to this plan was $47,765 in 1999
and $90,961 in 1998.
The Bank also maintains nonqualified deferred compensation and supplemental
retirement plans for its directors. Total expense for the plans was $141,845 in
1999 and $67,623 in 1998.
1999 Recognition and Retention Plan - On April 12, 1999, the Company's
shareholders, among other actions,
<PAGE> 32
approved the Gaston Federal Bank 1999 Recognition and Retention Plan.
Subsequently, 84,534 shares of common stock were awarded under the plan to
directors and management. All such awards vested during the year ended September
30, 1999. The Company recognized compensation expense of $1.0 million in
connection with these stock awards.
1999 Stock Option Plan - On April 12, 1999, the Company's shareholders also
approved the Gaston Federal Bank 1999 Stock Option Plan that provided the
issuance of 211,335 options for directors and officers to purchase the Company's
common stock. As of September 30, 1999, 200,069 shares had been awarded under
the plan at exercise prices ranging from $12.00 to $13.00 per share with a
weighted average exercise price of $12.05 and a weighted average contractual
life of 115 months. The exercise price of each option equals the fair market
value of the Company's common stock at the date of the grants. There were
109,628 options fully vested as of September 30, 1999. No options were
exercised, forfeited, or expired during the year ended September 30, 1999. The
Company applies the provisions of Accounting Principles Board Opinion No. 25 in
accounting for the plan and accordingly, no compensation expense has been
recognized in connection with the granting of the stock options. In accordance
with SFAS No. 123, Accounting for Stock-Based Compensation, the Company adopted
the disclosure - only option and elected to apply the provisions of APB No. 25
for financial statement purposes.
Had the compensation cost for the Company's stock option plan been determined in
accordance with the fair-value accounting provisions of SFAS No. 123, net
income, basic earnings per share, and diluted earnings per share for the year
ended September 30, 1999, would have been as follows:
<TABLE>
<CAPTION>
1999
-------------
<S> <C>
Net income:
As reported $ 2,161,362
Pro forma $ 1,749,131
Basic earnings per share:
As reported $ 0.50
Pro forma $ 0.41
Diluted earnings per share:
As reported $ 0.50
Pro forma $ 0.41
</TABLE>
The weighted average fair value of options granted during the year ended
September 30, 1999 was $4.27 per share. The fair value of the stock options was
determined by using the Black-Scholes option pricing model. This model requires
the use of assumptions, which can materially affect fair value estimates.
Therefore, this model does not necessarily provide a reliable single measure of
the fair value of the Company's stock options. The fair value of stock options
granted was estimated on the date of the grant using the following assumptions:
(1) expected dividend yield of 1.62%; (2) risk free interest rate of 5.20%; (3)
expected volatility of 30%; and (4) expected lives of options of seven years.
Employee Stock Ownership Plan - In connection with the Conversion, the Bank
established an ESOP. The ESOP is a tax-qualified retirement plan designed to
invest primarily in the Company's common stock. All full-time employees of the
Bank who have completed one year of service with the Bank will be eligible to
participate in the ESOP. The ESOP utilized funds borrowed from the Company
totaling $1,690,680, to purchase approximately 8%, or 169,068 shares of the
Company's common stock issued in the Conversion. The loan to the ESOP will be
primarily repaid with contributions from the Bank to the ESOP over a period not
to exceed 15 years. Under the terms of the ESOP, the Bank makes contributions to
the ESOP sufficient to cover all payments of principal and
<PAGE> 33
interest as they become due. At September 30, 1999, the loan had an outstanding
balance of $1,493,434 and an interest rate equal to the Bank's prime rate (8.25%
as of September 30, 1999).
Shares purchased with the loan proceeds are held in a suspense account by the
trustee of the plan for future allocation among participants as the loan is
repaid. Contributions to the ESOP and shares released from the suspense account
are allocated among participants on the basis of compensation as described in
the plan. The number of shares released to participants will be determined based
upon the percentage of principal and interest payments made during the year
divided by the total remaining principal and interest payments including the
current year's payment. Participants will vest in the shares allocated to their
respective accounts over a period not to exceed 5 years. Any forfeited shares
are allocated to the then remaining participants in the same proportion as
contributions. At September 30, 1999, 11,271 shares have been allocated to
participants and 157,797 shares remain unallocated. The fair value of the
unallocated shares was $1,972,463 at September 30, 1999. The Company recognizes
compensation expense attributable to the ESOP ratably over the fiscal year based
upon the estimated number of ESOP shares to be allocated each December 31st. The
Company recognized $128,000 and $75,000 as compensation expense in 1999 and
1998, respectively.
The trustee for the ESOP must vote all allocated shares held in the ESOP trust
in accordance with the instructions of the participants. Unallocated shares held
by the ESOP trust are voted by the trustee in a manner calculated to most
accurately reflect the results of the allocated ESOP shares voted, subject to
the requirements of the Employee Retirement Income Security Act of 1974, as
amended (ERISA).
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments. In cases where quoted market
prices are not available, fair values are based on estimates using 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 value for investment securities and mortgage-backed and related 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 value for the advances from the Federal Home Loan Bank Board is based on
discounted cash flows using current interest rates.
At September 30, 1999 and 1998, The Company 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
<PAGE> 34
for similar instruments. At September 30, 1999 and 1998, the carrying amounts
and fair values of these off-balance sheet financial instruments were
immaterial.
The Company 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 the Company. The estimated fair values of financial
instruments as of September 30 were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------ -------------------------------
Carrying Estimated Fair Carrying Estimated Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 4,206,884 $ 4,206,884 $ 2,697,028 $ 2,697,028
Interest-earning bank balances 8,375,733 8,375,733 11,100,936 11,100,936
Investment and mortgage-
backed securities 48,634,366 48,116,191 51,214,755 51,685,767
Loans 168,044,032 164,032,000 136,500,519 138,444,000
Financial liabilities
Deposits 159,424,778 154,810,000 143,900,772 144,324,000
Advances from FHLB 35,500,000 34,014,000 19,500,000 19,677,000
</TABLE>
NOTE 13 - EARNINGS PER SHARE
Earnings per share has been determined under the provisions of SFAS No. 128,
Earnings Per Share. Basic earnings per share is computed by dividing net income
applicable to common stock by the weighted average number of common shares
outstanding during the period, without considering any dilutive items. Diluted
earnings per share is computed by dividing net income applicable to common stock
by the weighted average number of common shares and common stock equivalents for
items that are dilutive, net of shares assumed to be repurchased using the
treasury stock method. Common stock equivalents arise from the assumed
conversion of outstanding stock options. Earnings per share data for the year
ended September 30, 1998 is not presented because such data would not be
meaningful given the short period during which common stock was outstanding
during that period.
The only potential stock of the Company as defined in SFAS No. 128, is stock
options granted to various directors and officers of the Bank. The following is
a summary of the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Year Ended
September 30, 1999
------------------
<S> <C>
Net income $2,161,362
Weighted average outstanding shares 4,293,516
Basic earnings per share $ 0.50
</TABLE>
<PAGE> 35
<TABLE>
<S> <C>
Weighted average outstanding shares 4,293,516
Dilutive effect of stock options 13,773
----------
Weighted average diluted shares 4,307,289
Diluted earnings per share $ 0.50
</TABLE>
Options to purchase 10,000 shares of common stock at $13 per share were
outstanding since May 1999 but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares. These options, which will expire May
2009, were outstanding at September 30, 1999.
On October 9, 1998, the Company's Board of Directors announced the authorization
to repurchase up to 105,668 shares of outstanding common stock under the 1998
Stock Repurchase Plan. On April 19, 1999, the Company's Board of Directors
announced the authorization to repurchase 295,869 shares of outstanding common
stock for the 1999 Stock Option Plan and the 1999 Recognition and Retention
Plan.
As of September 30, 1999, 211,400 shares have been repurchased under these plans
at an average price of $13.53 per share.
NOTE 14 - PARENT-ONLY FINANCIAL INFORMATION
The earnings of the Bank are recognized by Gaston Federal Bancorp, Inc. using
the equity method of accounting. Accordingly, undistributed earnings of the Bank
are recorded as increases in the Company's investment in the Bank. The following
are the condensed financial statements of the Company as of and for the year
ended September 30, 1999.
Condensed Statements of Financial Condition
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash and cash equivalents $ 5,199,471 $ 6,874,046
Investment in securities available-for-sale 495,648 1,514,219
Investment in subsidiary 33,992,158 33,200,213
Other assets 21,313 33,300
----------- -----------
Total assets $39,708,590 $41,621,778
=========== ===========
Liabilities and Stockholders' Equity
Liabilities $ -- $ 51,649
Stockholders' Equity 39,708,590 41,570,129
----------- -----------
Total liabilities and stockholders' equity $39,708,590 $41,621,778
=========== ===========
</TABLE>
<PAGE> 36
Condensed Statements of Operations
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998
----------- -----------
<S> <C> <C>
Interest income $ 226,347 $ 467,092
Interest expense -- (227,282)
Other operating expenses (136,687) (108,126)
----------- -----------
Income before income taxes and undistributed
earnings from subsidiaries 89,660 131,684
Income taxes (70,148) (51,397)
----------- -----------
Income before undistributed earnings
from subsidiaries 19,512 80,287
Equity in undistributed earnings of subsidiaries 2,141,850 1,805,497
----------- -----------
Net income $ 2,161,362 $ 1,885,784
=========== ===========
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998
------------ ------------
<S> <C> <C>
Operating activities
Net income $ 2,161,362 $ 1,885,784
Adjustments to reconcile net income to net
Cash provided by operating activities
Equity in undistributed earnings of subsidiaries (2,141,850) (1,805,497)
Issuance of stock for Recognition and Retention Plan 1,014,408 --
Allocation of shares to ESOP 122,105 --
Decrease (increase) in other operating assets 11,987 (33,300)
(Decrease) increase in other operating liabilities (45,041) 46,562
------------ ------------
Net cash (used in) provided by operating activities 1,122,971 93,549
Investing activities
Purchase of investments available-for-sale -- (1,500,000)
Maturities and prepayments of investment securities 1,000,000 --
Investment in subsidiary -- (10,096,709)
------------ ------------
Net cash provided by (paid in)investing activities 1,000,000 (11,596,709)
Financing activities
Repurchase of common stock (2,859,489) --
Proceeds from common stock issuance -- 18,602,031
Dividends to stockholders (938,057) (224,825)
------------ ------------
Net cash (paid in) provided by financing activities (3,797,546) 18,377,206
Net (decrease) increase in cash and cash equivalents (1,674,575) 6,874,046
Cash and cash equivalents, beginning of period 6,874,046 --
------------ ------------
Cash and cash equivalents, end of period $ 5,199,471 $ 6,874,046
============ ============
</TABLE>
<PAGE> 37
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Gaston Federal Bancorp, Inc.
We have audited the accompanying consolidated statements of condition of
Gaston Federal Bancorp, Inc. and subsidiaries as of September 30, 1999 and 1998
and the related consolidated statements of operations, comprehensive income,
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 Bancorp, Inc. and subsidiaries as of September 30, 1999 and 1998 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 26, 1999
<PAGE> 38
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected financial data for the years ended September 30,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
(In Thousands Except Per Share Data) QUARTER QUARTER QUARTER QUARTER
- - ------------------------------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
FISCAL 1999:
Interest income .................... $3,708 $3,770 $3,886 $3,875
Net interest income ................ 1,821 1,859 1,886 1,784
Provision for losses ............... 15 50 25 15
Income before provision for
income taxes ..................... 826 838 954 742
Net income ......................... 526 537 616 482
Earnings per common share .......... $ 0.12 $ 0.12 $ 0.14 $ 0.12
Fiscal 1998:
Interest income .................... $3,277 $3,410 $3,655 $3,585
Net interest income ................ 1,540 1,573 1,937 1,751
Provision for losses ............... 75 75 90 60
Income before provision
for income taxes ................. 597 660 921 712
Net income ......................... 378 428 609 471
Earnings per common share .......... n/a n/a $ 0.14 $ 0.10
</TABLE>
COMMON STOCK AND RELATED MATTERS
The Company's common stock is listed on the Nasdaq National Market
under the symbol "GBNK." As of November 30, 1999, the Company had six registered
market makers, 1,041 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and
4,328,634 shares outstanding. As of such date, Gaston Federal Holdings, MHC (the
"Mutual Company"), the Company's mutual holding company, held 2,383,145 shares
of common stock and stockholders other than the Mutual Company held 1,945,489
shares.
The following table sets forth market price and dividend information
for the Common Stock since the completion of the Bank's reorganization into the
two-tier mutual holding company structure, which was completed on April 9, 1998.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED CASH DIVIDENDS
SEPTEMBER 30, 1999 HIGH LOW DECLARED
<S> <C> <C> <C>
First quarter $14 7/8 $10 1/8 $0.050/share
Second quarter $13 1/2 $11 1/2 0.055/share
Third quarter $13 7/8 $11 1/2 0.055/share
Fourth quarter $14 1/4 $12 7/16 0.055/share
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended Cash Dividends
September 30, 1998 High Low Declared
<S> <C> <C> <C>
Third quarter $20 $10 $0.050/share
Fourth quarter $15 1/2 $10 5/8 0.050/share
</TABLE>
Payment of dividends on the Company's common stock is subject to
determination and declaration by the Board of Directors and depends upon a
number of factors, including capital requirements, regulatory
<PAGE> 39
limitations on the payment of dividends, the Company's results of operations and
financial condition, tax considerations and general economic conditions. No
assurance can be given that dividends will be declared or, if declared, what the
amount of dividends will be, or whether such dividends, once declared, will
continue.
OTS regulations impose limitations upon all "capital distributions" by
savings institutions, including cash dividends, payments by a savings
institution to repurchase or otherwise acquire its stock, payments to
stockholders of another savings institution in a cash-out merger, and other
distributions charged against capital. The regulations establish a three-tiered
system of regulation, with the greatest flexibility being afforded to
well-capitalized or Tier 1 savings associations. As of the date hereof, the Bank
was a Tier 1 institution. Accordingly, under the OTS capital distribution
regulations, the Bank would be permitted to pay dividends during any calendar
year up to 100 percent of its net income during that calendar year, plus the
amount that would reduce by one-half its surplus capital ratio at the beginning
of the calendar year.
In addition to the foregoing, earnings of the Bank appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then-current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions. The Bank intends to make full
use of this favorable tax treatment and does not contemplate any distribution by
the Bank in a manner that would limit the Bank's bad debt deduction or create
federal tax liability.
The Mutual Company has accepted all dividends paid by the Company. OTS
regulations require the Mutual Company to notify the OTS of any proposed waiver
of the right to receive dividends. It is the OTS' recent practice to review
dividend waiver notices on a case-by case-basis, and, in general, not object to
any such waiver if: (i) the mutual holding company's board of directors
determines that such a waiver is consistent with such directors' fiduciary
duties to the mutual holding company's members; (ii) for as long as the savings
association subsidiary is controlled by the mutual holding company, the dollar
amount of dividends waived by the mutual holding company are considered as a
restriction on the retained earnings of the savings association as a note to the
financial statements; (iii) the amount of any dividend waived by the mutual
holding company is available for declaration as a dividend solely to the mutual
holding company, and, in accordance with SFAS 5, where the savings association
determines that the payment of such dividend to the mutual holding company is
probable, an appropriate dollar amount is recorded as a liability; (iv) the
amount of any waived dividend is considered as having been paid by the savings
association (and the savings association's capital ratios adjusted accordingly)
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.
<PAGE> 40
STOCKHOLDER INFORMATION
DIRECTORS
Senator David W. Hoyle, Chairman of the Board
Ben R. Rudisill, II, Vice Chairman of the Board
Kim S. Price, President, CEO, and Director
Martha Barnett Beal, Director
James J. Fuller, Director
William H. Keith, Director
Charles D. Massey, Director
Eugene R. Matthews, II, Director
Robert W. Williams, Sr., Director
DIRECTORS EMERITI
Henry L. Fowler, Sr.
Thomas M. Holland
B. Frank Matthews, II
EXECUTIVE OFFICERS
Kim S. Price, President and Chief Executive Officer
Paul L. Teem, Jr., Executive Vice President, Secretary, and Chief Operations
Officer
Gary F. Hoskins, Senior Vice President, Treasurer, and Chief Financial Officer
Michael R. Maguire, Senior Vice President and Chief Credit Officer
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 10:30 A.M. on Thursday,
February 17, 2000, at the Gaston County Public Library at 1555 East Garrison
Boulevard, Gastonia, North Carolina, 28054-5175.
STOCK LISTING
The Company's Common Stock trades over-the-counter on the Nasdaq National Market
under the symbol "GBNK."
COUNSEL
Stott, Hollowell, Palmer, and Windham, L.L.P.
110 West Main Avenue, Third Floor
Post Office Box 995
Gastonia, NC 28053-0995
SPECIAL COUNSEL
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W., Suite 400
Washington, D.C. 20015
INDEPENDENT AUDITORs
Cherry, Bekaert & Holland, L.L.P.
2020 Remount Road
Post Office Box 1064
Gastonia, North Carolina 28053-1064
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road, Overpeck Centre
Ridgefield Park, New Jersey 07660
Phone (800) 370-1163
<PAGE> 41
ANNUAL REPORT ON FORM 10-KSB
A copy of the Company's Form 10-KSB for the fiscal year ended September 30,
1999, will be furnished without charge to stockholders as of December 27, 1999,
upon written request to the Secretary, Gaston Federal Bancorp, Inc., 245 West
Main Avenue, P.O. Box 2249, Gastonia, North Carolina 28053-2249.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Company Percent Owned
- - ------- -------------
Gaston Federal Bank 100% owned by the Company.
Gaston Financial Services, Inc. 100% owned by the Bank.
(dba Gaston Federal Investment Services)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Gaston Federal Bancorp, Inc.
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-77657) of Gaston Federal Bancorp, Inc. of our report dated
October 26, 1999 relating to the consolidated statements of condition,
operations, comprehensive income, changes in equity and cash flows as of and for
the years ended September 30, 1999 and 1998, which report is incorporated by
reference in the September 30, 1999 annual report on Form 10-KSB of Gaston
Federal Bancorp, Inc.
/s/ Cherry, Bekaert & Holland, L.L.P.
Gastonia, North Carolina
December 27, 1999
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