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, 2000
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)
Federal 56-2063438
---------------------------- ---------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation or Organization)
245 West Main Avenue, Gastonia, North Carolina 28053
---------------------------------------------- -----
(Address of Principal Executive Office) (Zip Code)
(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, 2000 were
$18.5 million.
As of December 7, 2000, there were issued and outstanding 4,218,934
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 December 7, 2000 ($11.00) was $19.7 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
September 30, 2000 (Parts II and IV).
2. Sections of the Proxy Statement for the 2001 Annual Meeting of
Stockholders (Part III).
<PAGE>
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 $3.1 million. At September 30, 2000,
1,821,289 shares of the Company's common stock, par value $1.00 per share, were
held by the public, and 2,397,645 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, which was chartered in 1904, 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 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'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
The Bank's main office and two branches are located in Gastonia, North
Carolina, one branch is located in Mount Holly, North Carolina, and one branch
is located in Dallas, North Carolina. All of these offices are located in Gaston
County which 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. The Bank also operates a mortgage loan production
office in Shelby, North Carolina. This office is located approximately 30 miles
from the Bank's main office in Gastonia.
Gaston County has a population of approximately 200,000, and has an economy
based on manufacturing, textiles, apparel, fabricated metals, machinery,
chemicals, and automotive transportation equipment, and has developed a strong
base in service industries, especially construction and retail trade. 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, 2000, the Bank's net loans receivable totaled
$177.0 million, or 72.3% of total assets at that date. In the past, the Bank
concentrated its lending activities on conventional first mortgage loans secured
by one- to four-family properties. Currently, the Bank concentrates its lending
activities on construction loans, commercial real estate 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>
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,
---------------------------------------------------------------------------------------
2000 1999 1998 1997
-------------------- -------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent
--------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family............. $ 125,269 68.32% $ 129,332 73.42% $ 105,526 73.50% $ 106,422 76.50%
Construction.................. 5,416 2.95 8,513 4.83 10,573 7.36 5,869 4.22
Commercial.................... 5,289 2.88 7,266 4.13 8,076 5.63 7,318 5.26
Multifamily residential....... 2,046 1.12 2,414 1.37 3,771 2.63 6,514 4.68
--------- --------- --------- --------- --------- --------- --------- ---------
Total real estate loans...... 138,020 75.27 147,525 83.75 127,946 89.12 126,123 90.66
Commercial business loans....... 28,181 15.37 17,019 9.67 6,629 4.62 5,558 4.00
Consumer loans:
Home equity lines of credit... 14,197 7.74 8,867 5.03 6,764 4.71 5,651 4.06
Loans on deposits............. 668 0.36 995 0.56 1,052 0.73 688 0.49
Other......................... 2,303 1.26 1,737 0.99 1,173 0.82 1,091 0.78
--------- --------- --------- --------- --------- --------- --------- ---------
Total consumer loans........ 17,168 9.36 11,599 6.58 8,989 6.26 7,430 5.34
--------- --------- --------- --------- --------- --------- --------- ---------
Total loans..................... 183,369 100.00% 176,143 100.00% 143,564 100.00% 139,111 100.00%
========= ========= ========= =========
Less:
Loans in process.............. 4,544 6,205 5,152 2,990
Deferred loan origination fees 325 385 501 520
Allowance for loan losses..... 1,537 1,509 1,411 1,110
--------- --------- --------- ---------
Total loans, net................ $ 176,963 $ 168,044 $ 136,500 $ 134,491
========= ========= ========= =========
At September 30,
--------------------
1996
--------------------
Amount Percent
--------- ---------
Real estate loans:
One- to four-family........... $ 104,363 76.72%
Construction.................. 6,827 5.02
Commercial.................... 6,458 4.75
Multifamily residential....... 6,843 5.03
--------- ---------
Total real estate loans...... 124,491 91.52
Commercial business loans....... 5,160 3.79
Consumer loans:
Home equity lines of credit... 4,747 3.49
Loans on deposits............. 709 0.52
Other......................... 923 0.68
--------- ---------
Total consumer loans........ 6,379 4.69
--------- ---------
Total loans..................... 136,030 100.00%
=========
Less:
Loans in process.............. 3,812
Deferred loan origination fees 526
Allowance for loan losses..... 830
---------
Total loans, net................ $ 130,862
=========
</TABLE>
<PAGE>
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, 2000, $125.3 million, or 68.3% of the Bank's total
loan portfolio, consisted of one- to four-family residential real estate loans.
The Bank originated $5.0 million, $17.4 million and $21.3 million of one- to
four-family residential mortgage loans during the fiscal years ended September
30, 2000, 1999 and 1998, 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. These loans are typically originated
under terms, conditions and documentation that 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, which enabled the Bank to purchase one- to four-family
residential mortgage loans from private mortgage bankers. The Bank confined this
practice to select mortgage banking companies located only in the State of North
Carolina. The purpose of this program was to provide an additional medium by
which the Bank could invest its new capital in conservative assets such as
residential loan products with three, five, seven and ten year rate adjustments
or shorter-term 15-year fixed rate loans. The objectives of the program were met
in 1999 and the program was subsequently discontinued.
The Bank offers adjustable-rate mortgage ("ARM") loans at competitive
rates and terms. At September 30, 2000, $38.0 million, or 30.4% of the Bank's
total one- to four-family residential loan portfolio, was in ARM loans which are
subject to periodic interest rate adjustments. Substantially all of the Bank's
ARM loan originations meet the underwriting standards of Freddie Mac. 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 retention of ARM
loans in the Bank's loan portfolio helped 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 fixed and
adjustable rate 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 Bank's sale of mortgage loans at origination 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.
Occasionally, the Bank will originate a mortgage loan that is held in the Bank's
own portfolio. However, these loans are typically three or five year ARMs.
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.
<PAGE>
Construction Lending. The Bank originates residential construction
loans to individuals who have a contract with a builder for the construction of
their residence. These loans are generally secured by property located in the
Bank's primary market area. At September 30, 2000, construction loans amounted
to $5.4 million, or 3.0% of the Bank's total loan portfolio. The Bank also
originates construction loans to local builders through the Bank's commercial
loan department.
The Bank's construction loans are typically made in connection with the
granting of the permanent financing on the property. Construction loans convert
to a fully amortizing three or five year 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. These loans are generally originated
pursuant to the same policies regarding loan to value ratios and credit quality
as are used in connection with loans secured by existing one- to four-family
residential real estate. 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 during the construction period.
Construction lending affords the Bank the opportunity to charge higher
interest rates relative to permanent residential lending. However, construction
lending is generally considered to involve a higher degree of risk than
permanent residential lending because of the inherent difficulty in estimating a
property's value at the completion of the construction. 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 collateralize the loan.
Projects may also be jeopardized by disagreements between borrowers and builders
and by the failure of builders to pay subcontractors. 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,
requiring lien waivers from contractors prior to making disbursements, and
holding back a portion of the loan proceeds until construction is complete.
Commercial Real Estate Lending. The Bank originates mortgage loans for
the acquisition and refinancing of commercial real estate properties. At
September 30, 2000, $5.3 million, or 2.9% 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 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
<PAGE>
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, 2000, $2.0 million, or 1.1% 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 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.
Commercial Business Loans. The Bank originates commercial business
loans to customers who are generally well known to the Bank and are located in
the Bank's primary market area. At September 30, 2000, the Bank had $28.2
million of commercial business loans that represented 15.4% of the total loan
portfolio. 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
interest rates for the Bank's commercial business loans generally adjust based
on the Bank's prime rate, or are fixed at the time of closing at the Bank's
prime rate plus a margin of zero to three percent for a term of generally five
to seven years. 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. Unsecured commercial business loans totaled $2.3 million as of September
30, 2000.
The Bank grants construction loans to local builders on either a
pre-sold or speculative (unsold) basis. 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, 2000, speculative
construction loans amounted to $1.7 million, net of $2.0 million in undisbursed
loans in process.
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. Commercial
business loans are often unsecured or secured by real estate, equipment or other
business assets. The liquidation of collateral in
<PAGE>
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.
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
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,
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, 2000, consumer loans
amounted to $17.2 million, or 9.4% of the total loan portfolio.
At September 30, 2000, the largest component of the consumer loan
portfolio consisted of home equity lines of credit, which totaled $14.2 million,
or 7.7% of the total loan portfolio. Unused commitments to extend credit under
these home equity lines of credit totaled $18.1 million.
Most 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. 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.
<PAGE>
Maturity of Loan Portfolio. The following table sets forth certain
information at September 30, 2000 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
loan 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.................. $ 235 $ 753 $ 10 $ 0 $ 13,162 $ 14,160
Over 1 to 2 years.............. 119 0 159 12 1,929 2,219
Over 2 to 3 years.............. 332 0 18 0 2,580 2,930
Over 3 to 5 years.............. 1,405 0 160 375 6,390 8,330
Over 5 to 10 years............. 15,556 0 673 121 4,976 21,326
Over 10 to 20 years............ 59,872 1,395 4,269 1,538 16,240 83,314
Over 20 years.................. 47,750 3,268 0 0 72 51,090
-------- --------- --------- --------- --------- ---------
Total amount due............... $125,269 $ 5,416 $ 5,289 $ 2,046 $ 45,349 $ 183,369
======== ========= ========= ========= ========= =========
</TABLE>
The following table sets forth the dollar amount of all loans for which
final payment is not due until after September 30, 2001. 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. $ 86,986 $ 38,048 $ 125,034
Construction.................... 4,663 0 4,663
Commercial real estate.......... 98 5,181 5,279
Multifamily residential......... 0 2,046 2,046
------------- ------------- -------------
Total real estate loans............ 91,747 45,275 137,022
Commercial and consumer............ 7,787 24,400 32,187
------------- ------------- -------------
Total loans..................... $ 99,534 $ 69,675 $ 169,209
============= ============= =============
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of mortgage loans tends to increase, however, when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are substantially
higher than current mortgage loan market rates. Furthermore, management believes
that a significant number of the Bank's residential mortgage loans are
outstanding for a period less than their contractual terms because of the
transitory nature of many of the borrowers who reside in its primary market
area.
Loan Solicitation and Processing. The Bank's lending activities are
subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by management and approved by the Bank's
Board of Directors. 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. Loan officers also call on
local businesses soliciting commercial products. The Bank advertises its loan
products in various print media including the local newspaper. In its marketing,
the Bank emphasizes its community ties, customized personal service and an
efficient underwriting and approval process. The Bank uses professional fee
appraisers for most residential real estate loans and construction loans and all
commercial real estate and land loans. The Bank requires hazard, title and, to
the extent applicable, flood insurance on all security property.
<PAGE>
All loans (i) of $1.0 million or more, or (ii) in any amount to
borrowers with existing exposure to the Bank of $1.0 million 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 $1.0 million or more, must be approved by the
Board of Directors of the Bank. In addition, all unsecured loans of $400,000 or
more, must be approved by the Board of Directors of the Bank. Loans of less than
$1.0 million, or customers with exposure (including the proposed loan) of less
than $1.0 million, or unsecured loans of less than $400,000, as applicable, may
be approved individually or jointly by the Bank's lending officers within loan
approval limits delegated by the Board of Directors. In addition, the Board of
Directors has delegated "incremental" loan approval limits to certain lending
officers which allows them to approve a new loan to an existing customer in an
amount equal to, or less than, their incremental loan limit that would otherwise
require approval by the Board of Directors or the additional approval of another
lending officer. Any loan approved by a lending officer using their incremental
loan limit must be ratified by the Board of Directors or approved by another
lending officer, as applicable, after the loan has been made.
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,
----------------------------------
2000 1999 1998
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Total loans receivable at beginning of period.. $176,143 $143,564 $139,111
Total loan originations:
One- to four-family residential............. 4,951 17,427 21,282
Construction................................ 2,716 8,552 10,701
Commercial real estate...................... 0 0 1,265
Multifamily................................. 0 150 0
Commercial business and consumer............ 44,351 27,234 19,456
-------- -------- --------
Total loans originated......................... 52,018 53,363 52,704
Loans purchased................................ 20 38,262 8,835
Loans sold..................................... (215) (13,136) (9,600)
Principal repayments........................... (44,597) (45,910) (47,486)
--------- -------- --------
Net loan activity.............................. 7,226 32,579 4,453
--------- -------- --------
Total loans receivable at end of period........ $183,369 $176,143 $143,564
======== ======== ========
</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, 2000, the Bank
had loan commitments (excluding undisbursed portions of interim construction
loans of $4.5 million) of $2.8 million and unused lines of credit of $24.5
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 generally 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 $108,000, $232,000 and $231,000 of deferred
loan fees during the fiscal years ended September 30, 2000, 1999, and 1998,
respectively, in connection with loan refinancings, payoffs, sales and ongoing
amortization of outstanding loans.
<PAGE>
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 collecting 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 total number
and amount of loans which are more than 30 days delinquent. Loans that are more
than 90 days delinquent or in foreclosure are reviewed by the Board on an
individual basis each month.
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,
--------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate loans:
One- to four-family residential.................... $ 211 $ 94 $ 970 $ 876 $ 1,053
Multifamily residential............................ 0 0 177 183 141
Commercial real estate............................. 0 0 91 0 0
Commercial business and consumer....................... 46 0 0 0 0
Total nonaccrual loans................................. 257 94 1,238 1,059 1,194
Accruing loans which were contractually past due 90
days or more....................................... 0 0 0 0 0
------- ------- ------- -------- -------
Total nonperforming loans.............................. 257 94 1,238 1,059 1,194
Real estate owned...................................... 0 259 247 247 258
------- ------- ------- -------- -------
Total nonperforming assets............................. $ 257 $ 353 $ 1,485 $ 1,306 1,452
======= ======= ======= ======== =======
Nonaccrual loans and loans 90 days past due as a
percentage of net loans............................ 0.15% 0.06% 0.91% 0.79% 0.91%
Nonaccrual loans and loans 90 days past due as a
percentage of total assets......................... 0.11% 0.04% 0.60% 0.61% 0.69%
Total nonperforming assets as a percentage of
total assets....................................... 0.11% 0.15% 0.71% 0.75% 0.84%
</TABLE>
Interest income that would have been recorded for the fiscal years
ended September 30, 2000, 1999, and 1998 had nonaccruing loans been current in
accordance with their original terms amounted to $13,000, $10,000 and $77,000,
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, 2000, the Bank had no 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
<PAGE>
restructurings, however, and troubled debt restructurings do not necessarily
result in nonaccrual loans. The Bank had no restructured loans as of September
30, 2000.
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. As of September 30,
2000, the aggregate amount of the Bank's assets classified as substandard was
$919,000, and no assets were classified as doubtful or loss. The aggregate
amount designated special mention was $1.2 million. As of September 30, 1999,
the aggregate amount of the Bank's assets classified as substandard was
$599,000, and no assets were classified as doubtful or loss. As of the same
date, the aggregate amount designated special mention was $1.3 million.
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, 2000, the Bank had an allowance for loan losses of
$1.5 million. Management believes that this amount 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 modify 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>
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,
-------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding.......................... $ 183,369 $ 176,143 $ 143,564 $ 139,111 $136,030
========= ========= ========= ========= ========
Average loans outstanding........................ $ 174,176 $ 158,534 $ 141,322 $ 137,149 $131,671
========= ========= ========= ========= ========
Allowance at beginning of period................. $ 1,509 $ 1,411 $ 1,110 $ 830 $ 786
Provision........................................ 30 105 300 293 47
Recoveries....................................... 1 1 0 0 0
Charge-offs:
Consumer loans................................. 3 8 5 13 3
--------- --------- --------- --------- --------
Allowance at end of period....................... $ 1,537 $ 1,509 $ 1,411 $ 1,110 $ 830
========= ========= ========= ========= ========
Allowance for loan losses as a percentage
of total loans outstanding..................... 0.84% 0.86% 0.98% 0.80% 0.61%
========= ========= ========= ========= ========
Net loans charged off as a percentage of total
loans outstanding.............................. --% --% -- % 0.01% --%
========= ========= ========= ========= ========
Ratio of allowance to nonperforming loans........ 598.05% 1,605.32% 113.97% 104.82% 69.51%
========= ========= ========= ========= ========
</TABLE>
<PAGE>
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,
-----------------------------------------------------------------------------
2000 1999 1998
----------------------- ------------------------ ------------------------
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......... $ 400 68.32% $ 700 73.42% $ 699 73.50%
Construction............................ 50 2.95 100 6.34 125 7.36
Commercial.............................. 50 2.88 225 4.13 200 5.63
Multifamily residential................. 50 1.12 75 1.37 75 2.63
Commercial and consumer................... 987 24.73 407 14.74 312 10.88
------ ------ ------ ------- ------- --------
Total allowance for loan losses........... $1,537 100.00% $1,509 100.00% $ 1,411 100.00%
====== ====== ====== ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------
1997 1996
------------------------ ------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential......... $ 643 76.50% $ 450 76.72%
Construction............................ 55 4.22 50 5.02
Commercial.............................. 105 5.26 88 4.75
Multifamily residential................. 100 4.68 75 5.03
Commercial and consumer................... 207 9.34 167 8.48
------- -------- ------ --------
Total allowance for loan losses........... $ 1,110 100.00% $ 830 100.00%
======= ====== ===== ======
</TABLE>
<PAGE>
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>
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,
---------------------------------------------------------------
2000 1999
------------------------------ -------------------------------
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 $ 12,499 $ (577) $ 11,922 $ 12,498 $ (497) $ 12,001
U.S. Government and agency securities available
for sale 13,274 (113) 13,161 9,256 (97) 9,159
Municipal bonds - held to maturity.................. 365 (2) 363 367 0 367
Municipal bonds - available for sale................ 5,854 (300) 5,554 5,737 (373) 5,364
-------- --------- -------- --------- ---------- ---------
Total investment securities............................ $ 31,992 $ (992) $ 31,000 $ 27,858 $ (967) $ 26,891
======== ======== ======== ========= ========= =========
Mortgage-backed securities:
FHLMC held to maturity.............................. $ 1,146 $ (18) $ 1,128 $ 1,646 $ (13) $ 1,633
FNMA held to maturity............................... 971 (11) 960 1,416 (15) 1,401
GNMA held to maturity............................... 640 6 646 764 6 770
FNMA available for sale............................. 6,278 (159) 6,119 2,485 (72) 2,413
GNMA available for sale............................. 7,114 (237) 6,877 8,015 (233) 7,782
SBA available for sale.............................. 4,119 (101) 4,018 6,043 (71) 5,972
-------- --------- -------- --------- ---------- ---------
Total mortgage-backed securities....................... $ 20,268 $ (520) 19,748 $ 20,369 $ (398) $ 19,971
======== ======== ======== ========= ========= =========
Other Investments available for sale:
US League Asset Management Fund..................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Federated Government Trust.......................... 0 0 0 0 0 0
FHLMC common stock.................................. 19 1,019 1,038 25 1,136 1,161
Other equity securities............................. 243 69 312 93 0 93
-------- -------- -------- --------- --------- ---------
Total other investments................................ $ 262 $ 1,088 $ 1,350 $ 118 $ 1,136 $ 1,254
======== ======== ======== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
At September 30,
-------------------------------
1998
-------------------------------
Net
Amortized Unrealized Fair
Cost Gain(Loss) Value
--------- --------- ---------
<S> <C> <C> <C>
Investment Securities:
U.S. Government and agency securities held
to maturity $ 15,228 $ 371 $ 15,599
U.S. Government and agency securities available
for sale 15,047 156 15,203
Municipal bonds - held to maturity.................. 360 8 368
Municipal bonds - available for sale................ 680 15 695
--------- --------- ---------
Total investment securities............................ $ 31,315 $ 550 $ 31,865
========= ========= =========
Mortgage-backed securities:
FHLMC held to maturity.............................. $ 3,039 $ 72 $ 3,111
FNMA held to maturity............................... 2,353 27 2,380
GNMA held to maturity............................... 966 43 1,009
FNMA available for sale............................. 1,457 24 1,481
GNMA available for sale............................. 4,809 45 4,854
SBA available for sale.............................. 1,825 190 2,015
--------- --------- ---------
Total mortgage-backed securities....................... $ 14,449 $ 401 $ 14,850
========= ========= =========
Other Investments available for sale:
US League Asset Management Fund..................... $ 1,459 $ 37 $ 1,496
Federated Government Trust.......................... 1,163 135 1,298
FHLMC common stock.................................. 44 2,184 2,228
Other equity securities............................. 0 0 0
--------- --------- ---------
Total other investments................................ $ 2,666 $ 2,356 $ 5,022
========= ========= =========
</TABLE>
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for our investment securities portfolio at September 30, 2000 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, 2000
------------------------------------------------------------------------------------
Less than 1 year 1 to 5 years Over 5 to 10 years Over 10 years
-------------------- ------------------- ------------------- -------------------
Weighed Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield(1) Value Yield(1) Value Yield(1) Value Yield(1)
-------- ------- -------- --------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government securities..... $ 0 0.00% $ 0 0.00% $ 0 0.00% $ 0 0.00%
U.S. Agency securities......... 1,998 6.25 9,467 6.38 14,308 6.52 0 0.00
Municipal securities........... 0 0.00 1,730 5.65 1,582 6.03 2,907 6.53
------- ---- ------- ---- ------- ---- ------- ----
Total.......................... $ 1,998 6.25% $11,197 6.26% $15,890 6.47% $ 2,907 6.53%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
<TABLE>
<CAPTION>
At September 30, 2000
---------------------------
Total Securities
---------------------------
Weighted
Carrying Average Market
Value Yield(1) Value
-------- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C>
U.S. Government securities..... $ 0 0.00% $ 0
U.S. Agency securities......... 25,773 6.43 25,083
Municipal securities........... 6,219 6.17 5,917
-------- ---- -------
Total.......................... $ 31,992 6.38% $31,000
======== ==== ========
--------------------
(1) Yields on tax exempt obligations have been computed on a tax equivalent basis.
</TABLE>
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for the Bank's
lending and other investment activities. In addition, the Bank also generates
funds internally from loan principal repayments and prepayments and maturing
investment securities. Scheduled loan repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and money market conditions. Borrowings
from the FHLB-Atlanta may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources.
Deposit Accounts. The Bank's deposit products include a broad selection
of deposit instruments, including checking accounts, money market accounts,
savings accounts, individual retirement accounts, and term certificate accounts.
The Bank offers these products to both retail and commercial customers. 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 alternative lending programs, and the deposit
growth rate the Bank is seeking to achieve.
The following table sets forth information concerning the Bank's time
deposits and other interest-bearing deposits at September 30, 2000.
<TABLE>
<CAPTION>
At September 30, 2000 At September 30, 1999 At September 30, 1998
--------------------- --------------------- ---------------------
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 $ 5,272 0.0% $ 6,481 0.0% $ 5,878 0.0%
Interest bearing demand 14,009 1.1 11,916 1.6 10,913 2.4
Money market demand 14,909 3.2 13,709 2.1 11,929 2.4
Savings accounts 19,189 3.1 23,869 3.2 20,558 3.4
Certificates of deposit 107,973 5.4 103,450 5.2 94,623 5.4
--------- ------ --------- ------ --------- -----
Total Deposits $ 161,352 4.3% $ 159,425 4.1% $ 143,901 4.3%
========= ====== ========= ====== ========= =====
</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, 2000.
Maturity Period Certificates of Deposit
--------------- -----------------------
(In Thousands)
Within three months........................... $ 8,998
Three to six months........................... 3,213
Six through twelve months..................... 7,624
Over twelve months............................ 3,389
--------
Total jumbo certificates of deposit........ $ 23,224
========
Time Deposits by Rates. The following table sets forth the amount of
time deposits in the Bank categorized by rates at the dates indicated.
As of September 30,
-----------------------------------
2000 1999 1998
--------- --------- --------
(In Thousands)
Interest Rate
2.00-4.00%........................... $ 767 $ 759 $ 399
4.01-6.00%........................... 63,941 102,279 91,641
6.01-8.00%........................... 43,265 412 2,583
--------- --------- --------
$ 107,973 $ 103,450 $ 94,623
========= ========= ========
<PAGE>
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, 2000.
<TABLE>
<CAPTION>
After
Interest Rate September 30, 2001 September 30, 2002 September 30, 2003 September 30, 2004 Total
------------- ------------------ ------------------ ------------------ ------------------ ---------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
2.01-4.0%........ $ 767 $ 0 $ 0 $ 0 $ 767
4.01-6.0%........ 52,026 10,321 1,590 4 63,941
6.01-8.0%........ 36,755 5,872 638 0 43,265
--------- --------- --------- -------- ---------
Total............ $ 89,548 $ 16,193 $ 2,228 $ 4 $ 107,973
========= ========= ========= ======== =========
</TABLE>
Deposit Activity. The following table set forth the deposit activity of
the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance......................................... $ 159,425 $ 143,901 $145,444 $145,975 $141,432
Net increase (decrease) before interest credited.......... (4,748) 9,102 (8,215) (7,386) (2,751)
Interest credited......................................... 6,675 6,422 6,672 6,855 7,294
--------- --------- -------- -------- --------
Net increase (decrease) in savings deposits............... 1,927 15,524 (1,543) (531) 4,543
--------- --------- -------- --------- --------
Ending balance............................................ $ 161,352 $ 159,425 $143,901 $145,444 $145,975
========= ========= ======== ======== ========
</TABLE>
Borrowings. Savings deposits are the primary source of funds for the
Bank's lending and investment activities and for its general business purposes.
The Bank has the ability to use advances from the Federal Home Loan Bank of
Atlanta ("FHLB") to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB functions as a central reserve bank providing
credit for member financial institutions. As a member of the FHLB, the Bank is
required to own capital stock in the FHLB 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, 2000, 1999, and 1998 were $43.5
million, $35.5 million and $19.5 million, respectively, the average balances
outstanding were $39.4 million, $28.7 million and $7.9 million, respectively.
The weighted average interest rates were 5.87%, 5.20% and 5.50%, respectively.
The Bank's outstanding balances of FHLB advances as of September 30, 2000, 1999,
and 1998, were $40.0 million, $35.5 million and $19.5 million, respectively.
<PAGE>
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, 2000, 1999, and 1998. 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,
-------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
(Dollars in Thousands) Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $174,176 $ 12,985 7.46% $158,534 $ 11,999 7.48 $ 141,322 $ 11,020 7.80%
Investment securities (2) 34,817 2,127 6.11 35,458 2,059 5.81 37,434 2,273
6.07
Mortgage-backed securities 20,546 1,302 6.34 20,750 1,181 5.69 9,692 634 6.54
-------- -------- ---- -------- -------- ---- ------- ----- ----
Total interest-earning assets $229,539 $ 16,414 7.15 $216,651 $ 15,239 7.04 $ 188,448 13,927 7.39
Noninterest-earning assets 13,408 8,269 3,777
-------- -------- ---------
Total assets $242,947 $224,920 $ 192,225
======== ======== =========
Interest-bearing liabilities,:
Demand deposit accounts $ 19,571 $ 226 1.15% $ 17,413 $ 194 1.11% 16,214 281 1.73%
Money market demand accounts 13,841 452 3.27 13,152 397 3.02 20,974 580 2.77
Savings accounts 22,636 693 3.06 22,624 717 3.17 19,607 663 3.38
Certificates of deposit 103,964 5,597 5.38 98,030 5,099 5.20 96,400 5,170 5.36
Borrowed funds 39,639 2,251 5.68 28,658 1,481 5.17 7,852 432 5.50
-------- -------- ---- -------- -------- ---- ------- ----- ----
Total interest-bearing liabilities $199,651 $ 9,219 4.62 $179,877 $ 7,888 4.39% 161,047 7,126 4.42%
Noninterest-bearing liabilities 3,798 -------- -------- -----
-------- -------- ---------
Total liabilities 203,449 183,297 163,079
Total equity 39,498 41,623 29,146
-------- -------- -------
Total liabilities and
retained earnings $242,947 $224,920 $ 192,225
======== ======== =========
Net interest income $ 7,195 $ 7,351 $ 6,801
======== ======== =========
Interest rate spread (3) 2.53% 2.65% 2.97%
====== ====== ======
Net yield on interest-earning
assets (4) 3.13% 3.39% 3.61%
====== ====== ======
Ratio of average interest-earning
assets to interest-bearing
liabilities 114.97% 120.44% 117.01%
====== ====== ======
----------------------------
(1) Average balances include nonaccrual loans.
(2) Investment securities includes interest-earning bank balances.
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
</TABLE>
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).
<PAGE>
<TABLE>
<CAPTION>
For The Year Ended For the Year Ended
September 30, 2000 vs September 30, 1999 September 30, 1999 vs September 30, 1998
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------------- ----------------------------------------
Rate/ Rate/
(In Thousands) Volume Rate Volume Total Volume Rate Volume Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Securities and other interest-earning assets $ 1,027 $ (38) $ (3) $ 986 $ 1,491 $ (451) $ (61) $ 979
Mortgage-backed and related securities (37) 107 (2) 68 (120) (99) 5 (214)
Loan portfolio (12) 134 (1) 121 723 (82) (94) 547
------- ------- ------- ------- ------- ------- ------- -------
Total interest income 978 203 (6) 1,175 2,094 (632) (150) 1,312
------- ------- ------- ------- ------- ------- ------- -------
Interest expense:
Deposits 354 195 13 562 (6) (245) (36) (287)
Borrowed funds 567 146 56 769 1,145 (26) (70) 1,049
------- ------- ------- ------- ------- ------- ------- -------
Total interest expense 921 341 69 1,331 1,139 (271) (106) 762
------- ------- ------- ------- ------- ------- ------- -------
Net interest income $ 57 $ (138) $ (75) $ (156) $ 955 $ (361) $ (44) $ 550
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
Management of Market Risk
Generally. The Bank's most significant form of market risk is interest
rate risk, as the majority of the Bank's assets and liabilities are sensitive to
changes in interest rates. The principal objective of the Bank's interest rate
risk management is to evaluate the interest rate risk inherent in the Bank's
assets and liabilities, determine the level of risk appropriate given the Bank's
business strategy, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with the guidelines
approved by the Board of Directors. Through such management, the Bank seeks to
reduce the vulnerability of its operations to changes in interest rates. The
Bank's Asset/Liability Committee ("ALCO") is comprised of various members of the
Bank's senior management team and various outside Directors. The ALCO is
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.
Management recognizes that the long-term effect of interest rate
changes on the Bank's income can be substantial. Accordingly, during the past
year, management utilized the following strategies to manage interest rate risk:
(1) emphasizing the origination and retention of shorter-term commercial
business loans, (2) emphasizing the origination of adjustable-rate home equity
lines of credit, (3) emphasizing the origination and retention of one- to
four-family residential ARM loans, and (4) investing in shorter term investment
securities.
Net Portfolio Value. The Office of Thrift Supervision ("OTS"), Bank's
primary regulator, 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.
The following table presents the Bank's NPV at September 30, 2000, as
calculated by Risk Analytics, an independent third party, based upon information
provided by the Bank.
Percentage Change in Net Portfolio Value
----------------------------------------
Changes Board
in Market Projected Policy
Interest Rates Change (1) Limit
-------------- ---------- -----
(basis points)
+300 -30.00% -45.00%
+200 -19.78% -30.00%
+100 -9.74% -15.00%
0 0.00% 0.00%
-100 7.76% -15.00%
-200 10.47% -30.00%
-300 7.63% -45.00%
-------------------------
(1) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
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.
<PAGE>
Employees
As of September 30, 2000, the Bank had 62 full-time and 8 part-time
employees, none of whom is represented by a collective bargaining unit. The Bank
believes its relationship with its employees is good.
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 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 Financial Institutions
Business Activities. The activities of financial institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which savings association
may engage. The description of statutory provisions and regulations applicable
to savings associations set forth herein does not purport to be a complete
description of such statutes and regulations and their effect on the Bank.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to a single or related
group of borrowers. Generally, this limit is 15% of the Bank's unimpaired
capital and surplus, and an additional 10% of unimpaired capital and surplus if
such loan is secured by readily-marketable collateral, which is defined to
include certain financial instruments and bullion. The OTS by regulation has
amended the loans to one borrower rule to permit savings associations meeting
certain requirements to extend loans to one 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, 2000.
<PAGE>
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, 2000, 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 associations
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.
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.
<PAGE>
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 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, 2000, the Bank met each of its
capital requirements, in each case on a fully phased-in basis.
<PAGE>
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.
<PAGE>
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, 2000, 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, 2000, the Bank
was in compliance with these reserve requirements. The balances maintained to
meet the reserve requirements imposed by the FRB may be used to satisfy
liquidity requirements imposed by the OTS.
Holding Company Regulation
Generally. The Mutual Company and the 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
<PAGE>
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 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
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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, 2000, was approximately
$470,000.
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, 2000, the Bank's total federal pre-1988 reserve was
approximately $4.8 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no federal income tax provision has
been made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At September 30, 2000, 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.
<PAGE>
State Taxation
State of North Carolina. Under North Carolina law, the corporate income
tax is 7.0% 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, 2000, all of which are owned by the Bank.
Approximate
-----------
Location Year Opened Square Feet Deposits
-------- ----------- ----------- --------
245 West Main Avenue 1971 12,400 $41,552,283
Gastonia, North Carolina 28052-4140
1535 Burtonwood Drive 1976 2,372 49,764,461
Gastonia, North Carolina 28054-4011
233 South Main Street 1990 4,739 42,783,227
Mount Holly, North Carolina 28120-1620
1670 Neal Hawkins Road 1987 5,322 21,079,926
Gastonia, North Carolina 28056-6429
3135 Dallas High Shoals Road 2000 3,226 6,171,617
Dallas, North Carolina 28034-1307
------------
Total Deposits $161,351,514
At September 30, 2000, the net book value of the Bank's office
properties and the Bank's fixtures, furniture, and equipment was $3.8 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.
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.
<PAGE>
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.
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
<PAGE>
(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, 2000.
(c) Exhibits
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 2000 Annual Report to Stockholders
21 Subsidiaries of the Company
23.1 Consent of Cherry Bekaert & Holland, L.L.P.
27 EDGAR Financial Data Schedule
<PAGE>
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 29, 2000 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.
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<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 29, 2000 Date: December 29, 2000
-------------------------------------------- ------------------------------------------
By: /s/ David W. Hoyle By: /s/ Ben R. Rudisill, II
-------------------------------------------- --------------------------------------------
David W. Hoyle Ben R. Rudisill, II
Chairman Vice Chairman
Date: December 29, 2000 Date: December 29, 2000
-------------------- ------------------------------------------
By: /s/ Martha B. Beal By: /s/ Charles D. Massey
-------------------------------------------- --------------------------------------------
Martha B. Beal Charles D. Massey
Director Director
Date: December 29, 2000 Date: December 29, 2000
-------------------- ------------------------------------------
By: /s/ James J. Fuller By: /s/ Eugene R. Matthews, II
-------------------------------------------- --------------------------------------------
James J. Fuller Eugene R. Matthews, II
Director Director
Date: December 29, 2000 Date: December 29, 2000
-------------------------------------------- --------------------------------------
By: /s/ William H. Kieth
--------------------------------------------
William H. Keith
Director
Date: December 29, 2000
--------------------------------------------
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