UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------------------
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File Number 0-23971
GASTON FEDERAL BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
United States 56-2063438
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
245 West Main Avenue, Gastonia, North Carolina 28052-4140
---------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (704)-868-5200
--------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check |X| whether the Registrant (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 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 4,297,434 shares
of the Registrant's common stock outstanding as of February 4, 2000.
<PAGE>
GASTON FEDERAL BANCORP, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements............................... 2
Consolidated Statements of Financial Condition as of
December 31, 1999 and September 30, 1999 ........................ 2
Consolidated Statements of Operations for the three
months ended December 31, 1999 and 1998.......................... 3
Consolidated Statements of Comprehensive Income for the
three months ended December 31, 1999 and 1998.................... 4
Consolidated Statements of Cash Flows for the three months ended
December 31, 1999 and 1998....................................... 5
Notes to Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 8
PART II. OTHER INFORMATION.................................................. 11
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Gaston Federal Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition (unaudited)
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
----------- ------------
<S> <C> <C>
Assets
- ------
Cash and cash equivalents ............................................ 7,197 12,583
Investment securities available-for-sale, at fair value .............. 18,469 15,777
Investment securities held-to-maturity, at amortized cost ............ 12,865 12,865
Mortgage-backed securities available-for-sale, at fair value ......... 15,401 16,167
Mortgage-backed securities held-to-maturity, at amortized cost ....... 3,465 3,825
Loans, net ........................................................... 169,931 168,044
Premises and equipment, net .......................................... 2,921 2,503
Accrued interest receivable .......................................... 1,024 1,244
Federal Home Loan Bank stock ......................................... 1,775 1,775
Other assets ......................................................... 2,694 2,670
--------- --------
Total assets ....................................................... $ 235,742 $237,453
========= ========
Liabilities and Equity
- ----------------------
Deposits ............................................................. $ 158,603 $159,425
Advances from borrowers for taxes and insurance ...................... 412 761
Advances from Federal Home Loan Bank ................................. 35,500 35,500
Other liabilities .................................................... 2,326 2,059
--------- --------
Total liabilities .................................................. 196,841 197,745
Retained earnings, substantially restricted .......................... 22,912 22,653
Common stock and additional paid in capital, net of ESOP loan ........ 16,015 16,879
Unrealized gain/(loss) on securities available-for-sale, net of tax .. (26) 176
--------- --------
Total equity ....................................................... 38,901 39,708
--------- --------
Total liabilities and equity ......................................... $ 235,742 $237,453
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Gaston Federal Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended December 31,
------------------
1999 1998
---- ----
<S> <C> <C>
Interest income
- ---------------
Loans ................................................... $ 3,102 $ 2,850
Investment securities ................................... 550 600
Mortgage-backed and related securities .................. 299 258
---------- ---------
Total interest income ................................. 3,951 3,708
Interest Expense
- ----------------
Deposits ................................................ 1,669 1,580
Borrowed funds .......................................... 463 307
---------- ---------
Total interest expense ................................ 2,132 1,887
---------- ---------
Net interest income ..................................... 1,819 1,821
Provision for loan losses ............................... 8 15
---------- ---------
Net interest income after provision for loan losses ... 1,811 1,806
Noninterest Income
- ------------------
Service charges on deposit accounts ..................... 129 75
Gain on sale of securities .............................. 0 6
Gain on sale of other assets ............................ 0 0
Other income ............................................ 191 142
---------- ---------
Total noninterest income .............................. 320 223
Noninterest Expense
- -------------------
Compensation and benefits ............................... 805 676
Occupancy and equipment expense ......................... 154 86
Other expenses .......................................... 425 441
---------- ---------
Total noninterest expense ............................. 1,384 1,203
Income before income taxes .............................. 747 826
Provision for income taxes .............................. 247 300
---------- ---------
Net income .............................................. $ 500 $ 526
========== =========
Basic earnings per share ................................ $ 0.12 $ 0.12
Diluted earnings per share .............................. $ 0.12 $ 0.12
Basic weighted average outstanding shares ............... 4,339,601 4,484,600
Diluted weighted average outstanding shares ............. 4,344,026 4,484,600
Dividends paid per share ................................ $ 0.055 $ 0.050
</TABLE>
3
<PAGE>
Gaston Federal Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended December 31,
------------------
1999 1998
---- ----
<S> <C> <C>
Net income ................................................................. $ 500 $ 526
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains/(losses) arising during period .............. (202) 278
Reclassification adjustment for (gains)/losses included in net income . 0 (4)
------- -------
Other comprehensive income ............................................... (202) 274
------- -------
Comprehensive income ....................................................... $ 298 $ 800
------- -------
</TABLE>
4
<PAGE>
Gaston Federal Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended December 31,
----------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................................... $ 500 $ 526
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ..................................................... 8 15
Depreciation .................................................................. 95 138
(Gain) on sale of investment securities ....................................... 0 (6)
(Gain) on sale of other assets ................................................ 0 0
Decrease in other assets ...................................................... 196 149
Increase in other liabilities ................................................. 267 59
-------- --------
Net cash provided by (used for) operating activities ......................... 1,066 881
-------- --------
Cash flows from investing activities:
Net (increase) in loans receivable ............................................... (1,855) (19,657)
Sale of investment securities .................................................... 0 2,000
Maturities and prepayments of investment securities .............................. 1,856 975
Maturities and prepayments of mortgage-backed securities ......................... 1,127 1,235
Purchases of investments ......................................................... (4,750) (5,483)
Purchases of mortgage-backed securities .......................................... 0 (1,485)
Net cash flows from other investing activities ................................... (513) (286)
-------- --------
Net cash provided by (used for) investment activities ........................ (4,135) (22,701)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits .............................................. (822) 5,091
Dividends to stockholders ........................................................ (241) (225)
Repurchase of common stock ....................................................... (904) (519)
Net increase in borrowed money ................................................... 0 8,000
(Decrease) in advances from borrowers for insurance and taxes .................... (349) (340)
-------- --------
Net cash provided by (used for) financing activities ......................... (2,316) 12,007
-------- --------
Net (decrease) in cash and cash equivalents ........................................ (5,385) (9,813)
Cash and cash equivalents at beginning of period ................................... 12,582 13,798
-------- --------
Cash and cash equivalents at end of period ......................................... $ 7,197 $ 3,985
======== ========
</TABLE>
5
<PAGE>
GASTON FEDERAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Presentation
In management's opinion, the financial information, which is unaudited,
reflects all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of the financial information as of and for the
three month periods ended December 31, 1999 and 1998, in conformity with
generally accepted accounting principles. The financial statements include the
accounts of Gaston Federal Bancorp, Inc. (the "Company") and its wholly-owned
subsidiary, Gaston Federal Bank (the "Bank"). Operating results for the three
month period ended December 31, 1999, are not necessarily indicative of the
results that may be expected for future periods.
The organization and business of the Company, accounting policies
followed, and other information are contained in the notes to the consolidated
financial statements of the Company as of and for the years ended September 30,
1999 and 1998, filed as part of the Company's annual report on Form 10-KSB.
These consolidated financial statements should be read in conjunction with the
annual consolidated financial statements.
Note B - Earnings per Share
Earnings per share has been determined under the provisions of the
Statement of Financial Accounting Standards No. 128, Earnings Per Share. For the
quarters ended December 31, 1999 and 1998, basic earnings per share has been
computed based upon the weighted average common shares outstanding of 4,339,601
and 4,484,600, respectively.
The only potential stock of the Company as defined in the Statement of
Financial Accounting Standards No. 128, Earnings Per Share, is stock options
granted to various directors and officers of the Bank. The following is a
summary of the diluted earnings per share calculation for the three months ended
December 31, 1999, and 1998: (in thousands, except per share data)
Three Months
Ended December 31,
------------------
1999 1998
---- ----
Net income............................. $ 500 $ 526
Weighted average outstanding shares.... 4,339,601 4,484,600
Dilutive effect of stock options....... 4,425 0
---------- ----------
Weighted average diluted shares........ 4,344,026 4,484,600
Diluted earnings per share............ $ 0.12 $ 0.12
Options for 10,000 shares granted with an exercise price of $13.00 per
share were excluded from the calculation of diluted earnings per share because
the exercise price exceeded the average market price of $12.286.
6
<PAGE>
Note C - Stock Compensation Plans
On April 12, 1999, the Company's shareholders, among other actions,
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 quarter ended June
30, 1999. In addition, the Company's shareholders approved the Gaston Federal
Bank 1999 Stock Option Plan that provided for the issuance of 211,335 options
for directors and officers to purchase the Company's common stock. As of
December 31, 1999, 200,069 options had been awarded under the plan at a weighted
average exercise price of $12.05 and a weighted average contractual life of 115
months. There were 82,819 options fully vested as of December 31, 1999. The
Company applies the provisions of Accounting Principles Board Opinion No. 25 in
accounting for the Stock Option Plan described above and, accordingly, no
compensation expense has been recognized in connection with the granting of the
stock options.
7
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements provided that the Company notes that a variety of
factors could cause the Company's actual results to differ materially from the
anticipated results expressed in the Company's forward-looking statements. The
risks and uncertainties that may affect the operations, performance, and results
of the Company's business include, but are not limited to, changes in economic
conditions, changes in interest rates, and changes in laws and regulations.
Accordingly, past results and trends should not be used by investors to
anticipate future results or trends. Statements included in this report should
be read in conjunction with the Company's Annual Report on Form 10-KSB and are
incorporated into this discussion by this reference.
Comparison of Financial Condition
Assets. Total assets of the Company decreased by $1.7 million, or 0.7%,
from $237.4 million as of September 30, 1999, to $235.7 million as of December
31, 1999. The primary reason for the decrease was the use of cash and cash
equivalents to fund $904,000 in common stock repurchases, $822,000 in deposit
withdrawals, and $241,000 in cash dividends. During the quarter ended December
31, 1999, mortgage loans decreased by $1.5 million, or 1.0%, to $141.0 million,
while nonmortgage loans increased by $3.3 million, or 13.1%, to $28.9 million.
This shift in the loan portfolio composition reflects management's efforts to
make the Company's balance sheet more reflective of a community bank. Management
plans to continue to grow the loan portfolio in a safe and sound manner with an
emphasis on short-term, high-yielding nonmortgage loans. Also during the
quarter, investment securities increased by $2.7 million to $31.4 million, while
mortgage-backed securities decreased by $1.1 million to $18.9 million.
Liabilities. Total liabilities decreased by $904,000, or 0.5%, from $197.7
million as of September 30, 1999, to $196.8 million as of December 31, 1999. The
primary reason for the change was a $822,000, or 0.5%, decrease in total
deposits from $159.4 million to $158.6 million. This decrease in deposits was
due, in part, to public concerns regarding possible Year 2000 complications in
the financial services industry. Despite these concerns, the Company
successfully moved into the Year 2000 without any disruptions of the Company's
computer or electronic systems. Management plans to continue in its efforts to
gain deposit market share through new product development and aggressive
marketing. Borrowed money remained at $35.5 million and is comprised of various
callable and fixed-term Federal Home Loan Bank advances at fixed interest rates
ranging from 4.69% to 6.06%, with a weighted average interest rate of 5.51%.
Equity. Total equity decreased by $807,000, or 2.1%, from $39.7 million as
of September 30, 1999, to $38.9 million as of December 31, 1999. This decrease
was primarily due to the repurchase of 72,200 shares of common stock for
$904,000 at a weighted average price of $12.52 per share, the payment of
$241,000 in dividends, or $0.055 per share, and a $202,000 reduction in
unrealized gains on available for sale securities. This decrease in equity was
partly offset by $500,000 in earnings for the quarter. Management plans to
continue repurchasing its common stock in the open market when such actions are
considered to be financially prudent. The Company has been authorized to
repurchase a total of 295,869 shares of common stock, or 110,437 additional
shares.
8
<PAGE>
Comparison of Results of Operations for the Three Months Ended December 31, 1999
and 1998
General. Net income for the Company for the three months ended December
31, 1999, amounted to $500,000, or $0.12 per share, as compared to $526,000, or
$0.12 per share, for the three months ended December 31, 1998.
Net interest income. Net interest income remained flat at $1.8 million for
both the three months ended December 31, 1999, and for the three months ended
December 31, 1998, despite the increases in interest rates during the past year.
Interest income increased by $243,000, primarily due to a $13.7 million increase
in total loans, coupled with an increase in interest rates. In addition,
interest expense increased by $244,000, primarily due to a $9.6 million increase
in total deposits and a $8.0 million increase in borrowed money, coupled with an
increase in interest rates.
Provision for loan losses. The provision for loan losses amounted to
$7,500 for the three months ended December 31, 1999, as compared to $15,000 for
the three months ended December 31, 1998. This represents a decrease of $7,500.
The amount of the provision for loan losses was reduced, in part, due to an
overall reduction in the percentage of nonperforming assets to 0.16% of total
assets as of December 31, 1999, from 0.21% of total assets as of December 31,
1998. The ratio of loan loss reserves to gross loans was 0.88% as of December
31, 1999, and 0.91% as of December 31, 1998.
Noninterest income. Total noninterest income amounted to $320,000 for the
three months ended December 31, 1999, as compared to $223,000 for the three
months ended December 31, 1998. This increase of $97,000 was primarily due to
additional fee income derived from loan and deposit products and commissions on
the sale of financial products through the Bank's wholly-owned subsidiary. Also,
noninterest income for the quarter ended December 31, 1998, included $6,000 in
nonrecurring income derived from the sale of securities.
Noninterest expense. Total noninterest expense amounted to $1.4 million
for the three months ended December 31, 1999, as compared to $1.2 million for
the three months ended December 31, 1998. This increase of $181,000 was
primarily due to the nonrecurring expenses associated with implementing the
final phase of the Company's Year 2000 Plan and additional expenses associated
with the preparation of the opening of the Bank's fifth full-service financial
center. This office will be located in Dallas, North Carolina and is scheduled
to open in February 2000. In addition, the Bank opened a loan production office
in Shelby, North Carolina in October 1999.
Income taxes. Income taxes amounted to $247,000, or 33.1% of taxable
income, for the three month period ended December 31, 1999, as compared to
$300,000, or 36.3% of taxable income, for the three month period ended December
31, 1998. This represents a decrease of $53,000, or 17.6%. This difference was
primarily due to a $78,000 decrease in net income before taxes for the three
months ended December 31, 1999, and an increase in interest income from
tax-exempt securities.
9
<PAGE>
Liquidity and Capital Resources
The objective of the Bank's liquidity management 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
Bank's ability to meet deposit withdrawals on demand or at contractual maturity,
to repay borrowings as they mature, and to fund new loans and investments as
opportunities arise.
The Bank's primary sources of internally generated funds are principal and
interest payments on loans receivable and cash flows generated from operations.
External sources of funds include increases in deposits and advances from the
Federal Home Loan Bank of Atlanta.
The Bank is required under applicable federal regulations to maintain
specified levels of liquid investments in qualifying types of investments having
maturities of five years or less. Current OTS regulations require that a savings
bank maintain liquid assets of not less that 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 December 31, 1999, the Bank's liquidity, as measured for
regulatory purposes, was 17.5%, or $23.4 million in excess of the minimum OTS
requirement.
The Bank is subject to various regulatory capital requirements
administered by the banking regulatory agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly discretionary actions
by the regulators that, if undertaken, could have a direct material effect on
the Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are subject
to qualitative judgments by the regulators about components, risk-weightings,
and other factors. As of December 31, 1999, Gaston Federal Bank's level of
capital substantially exceeded all applicable regulatory requirements.
Year 2000
As of February 4, 2000, the Company has experienced no disruptions or
problems with its computer or electronic systems as a result of the Year 2000
(Y2K) changeover. As part of the Company's Y2K Plan, management tested and
sampled internal systems and third party applications to ensure a smooth
transition into the new millennium. These tests were conducted both prior to Y2K
in order to identify and correct any potential problems prior to the changeover
and on January 1, 2000, to ensure that the Company's systems operated properly.
All sampling and testing conducted on January 1, 2000, indicated all systems
were operating as normal. In addition, there have been no loan or deposit
customers of the Company that have indicated that they were having any Y2K
related issues that would present any financial exposure to the Company. Based
upon the successful transition through the January 1, 2000, rollover period and
the previously conducted testing, the Company does not anticipate any
significant problems to arise.
10
<PAGE>
PART II. OTHER INFORMATION
Legal Proceedings
There are various claims and lawsuits in which the Bank is periodically
involved incidental to the Bank's business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.
Changes in Securities
Not applicable.
Defaults Upon Senior Securities
Not applicable.
Submission of Matters to a Vote of Security Holders
There were no meetings of the Company's shareholders during the quarter
ended December 31, 1999.
Exhibits and Report on Form 8-K.
No Form 8-K reports were filed during the quarter.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
GASTON FEDERAL BANCORP, INC.
Date: February 14, 2000 By: /s/ Kim S. Price
-------------------------------------
Kim S. Price
President and Chief Executive Officer
Date: February 14, 2000 By: /s/ Gary F. Hoskins
-------------------------------------
Gary F. Hoskins
Senior Vice President, Chief
Financial Officer and Treasurer
1
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,197
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,470
<INVESTMENTS-CARRYING> 12,865
<INVESTMENTS-MARKET> 12,180
<LOANS> 169,931
<ALLOWANCE> 1,517
<TOTAL-ASSETS> 235,742
<DEPOSITS> 158,603
<SHORT-TERM> 10,000
<LIABILITIES-OTHER> 2,737
<LONG-TERM> 25,500
0
0
<COMMON> 16,014
<OTHER-SE> 22,887
<TOTAL-LIABILITIES-AND-EQUITY> 235,742
<INTEREST-LOAN> 3,102
<INTEREST-INVEST> 629
<INTEREST-OTHER> 220
<INTEREST-TOTAL> 3,951
<INTEREST-DEPOSIT> 1,669
<INTEREST-EXPENSE> 2,132
<INTEREST-INCOME-NET> 1,819
<LOAN-LOSSES> 8
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,384
<INCOME-PRETAX> 747
<INCOME-PRE-EXTRAORDINARY> 747
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 500
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.12
<YIELD-ACTUAL> 2.4
<LOANS-NON> 125
<LOANS-PAST> 0
<LOANS-TROUBLED> 258
<LOANS-PROBLEM> 1,751
<ALLOWANCE-OPEN> 1,510
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,517
<ALLOWANCE-DOMESTIC> 1,517
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
