-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JAH1pjBl+bzqZ83F35+9r4wQbg3pYtq2a5bOlB0xoVMRt+hygbTVgj2o3OSZ4hmp DNoUz/bbCPcvYHw97doUCA== 0000950168-00-002682.txt : 20010101 0000950168-00-002682.hdr.sgml : 20010101 ACCESSION NUMBER: 0000950168-00-002682 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GASTON FEDERAL BANCORP INC CENTRAL INDEX KEY: 0001051871 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 562063438 STATE OF INCORPORATION: SC FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-23971 FILM NUMBER: 798187 BUSINESS ADDRESS: STREET 1: 245 WEST MAIN STREET CITY: GASTONIA STATE: NC ZIP: 28053 MAIL ADDRESS: STREET 1: 245 WEST MAIN STREET CITY: GASTONIA STATE: NC ZIP: 28053 10KSB 1 0001.txt GASTON FEDERAL BANCORP, INC. 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). 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. 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.
At September 30, --------------------------------------------------------------------------------------- 2000 1999 1998 1997 -------------------- -------------------- -------------------- -------------------- Amount Percent Amount Percent Amount Percent Amount Percent --------- --------- --------- --------- --------- --------- --------- --------- (Dollars in Thousands) 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 =========
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. 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 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 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. 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.
Real Estate Loans ---------------------------------------------------- One- to Four- Multi- Commercial Family Family Business and Residential Construction Commercial Residential Consumer Total ------------ ------------ ---------- ----------- ----------- --------- (In Thousands) 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 ======== ========= ========= ========= ========= =========
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.
Fixed Rates Adjustable Rates Total ------------- ---------------- ------------- (In Thousands) 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 ============= ============= =============
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. 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.
For the Years Ended September 30, ---------------------------------- 2000 1999 1998 -------- -------- -------- (In Thousands) 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 ======== ======== ========
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. 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.
At September 30, -------------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- -------- ------- (Dollars in Thousands) 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%
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 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. The following table sets forth an analysis of the Bank's allowance for loan losses.
At and For the Fiscal Years Ended September 30, ------------------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- --------- --------- ------- (Dollars in Thousands) 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% ========= ========= ========= ========= ========
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.
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) 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% ====== ====== ====== ====== ======= ======
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 -------- ------------- -------- ------------- 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% ======= ====== ===== ======
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. The following table sets forth the amortized cost and fair value of our investment and mortgage-backed securities, at the dates indicated.
At September 30, --------------------------------------------------------------- 2000 1999 ------------------------------ ------------------------------- Net Net Amortized Unrealized Fair Amortized Unrealized Fair Cost Gain(Loss) Value Cost Gain(Loss) Value -------- --------- -------- --------- ---------- --------- (Dollars in Thousands) 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 ======== ======== ======== ========= ========= =========
At September 30, ------------------------------- 1998 ------------------------------- Net Amortized Unrealized Fair Cost Gain(Loss) Value --------- --------- --------- 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 ========= ========= =========
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.
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) 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% ======= ==== ======= ==== ======= ==== ======= ====
At September 30, 2000 --------------------------- Total Securities --------------------------- Weighted Carrying Average Market Value Yield(1) Value -------- --------- ------ (Dollars in Thousands) 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.
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.
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) 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% ========= ====== ========= ====== ========= =====
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 ========= ========= ======== 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.
After Interest Rate September 30, 2001 September 30, 2002 September 30, 2003 September 30, 2004 Total - ------------- ------------------ ------------------ ------------------ ------------------ --------------- (In Thousands) 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 ========= ========= ========= ======== =========
Deposit Activity. The following table set forth the deposit activity of the Bank for the periods indicated.
Year Ended September 30, ---------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- -------- -------- -------- (In Thousands) 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 ========= ========= ======== ======== ========
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. 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.
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 - ---------------------------------------------------------------------------------------------------------------------------------- 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.
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).
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 - ------------------------------------------------------------------------------------------------------------------------------------ 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 ======= ======= ======= ======= ======= ======= ======= =======
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. 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. 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. 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. Prompt Corrective Regulatory Action Under the OTS Prompt Corrective Action regulations, the OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of capitalization. Generally, a savings institution that has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0% is considered to be undercapitalized. A savings institution that has total risk-based capital of less than 6.0%, a Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be "significantly undercapitalized," and a savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be "critically undercapitalized." Subject to a narrow exception, the banking regulator is required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date an institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." In addition, numerous mandatory supervisory actions become immediately applicable to the institution, including, but not limited to, restrictions on growth, investment activities, capital distributions, and affiliate transactions. The OTS may also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Insurance of Deposit Accounts The FDIC has adopted a risk-based insurance assessment system. The FDIC assigns an institution to one of three capital categories based on the institution's financial information, as of the reporting period ending seven months before the assessment period, consisting of (1) well capitalized, (2) adequately capitalized or (3) undercapitalized, and one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information which the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. The FDIC is authorized to raise the assessment rates in certain circumstances. The FDIC has exercised this authority several times in the past and may raise insurance premiums in the future. If such action is taken by the FDIC, it could have an adverse effect on the earnings of the Bank. Federal Home Loan Bank System The Bank is a member of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB, is required to acquire and hold shares of capital stock in that FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. As of September 30, 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 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 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. 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. 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 (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 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.
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 --------------------------------------------
EX-13 2 0002.txt ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13 [GRAPHIC] FINANCIAL HIGHLIGHTS The following table sets forth certain information concerning the financial position of the Company and its subsidiaries as of and for the dates indicated. The consolidated data is derived from, and should be read in conjunction with the Consolidated Financial Statements of the Company and its subsidiaries and related notes presented herein.
At and for the years ended September 30, --------------------------- 2000 1999 ------------- ------------- (Dollars in thousands, except per share data) Income Statement Data: Interest income .................................................. $ 16,414 $ 15,238 Interest expense ................................................. 9,219 7,888 --------- --------- Net interest income .............................................. 7,195 7,350 Provision for loan losses ........................................ 30 105 --------- --------- Net interest income after provision for loan losses .............. 7,165 7,245 Noninterest income ............................................... 2,068 2,373 Noninterest expense .............................................. 5,961 6,259 --------- --------- Income before income taxes ....................................... 3,272 3,359 Income tax expense ............................................... 1,087 1,198 --------- --------- Net income ....................................................... $ 2,185 $ 2,161 ========= ========= Per Share Data (1): Basic net income ................................................. $ 0.53 $ 0.50 Diluted net income ............................................... 0.53 0.50 Cash dividends declared .......................................... 0.235 0.215 Period-end book value ............................................ 9.31 9.09 Balance Sheet Data: Total assets ..................................................... $ 244,651 $ 237,453 Loans receivable, net ............................................ 176,963 168,044 Mortgage-backed and related securities ........................... 19,772 19,992 Investment securities, available for sale ........................ 20,066 15,777 Investment securities, held to maturity .......................... 12,864 12,865 Deposits ......................................................... 161,352 159,425 Borrowings ....................................................... 40,606 35,500 Stockholders' equity ............................................. 39,287 39,709 Performance Ratios: Return on average assets (net income divided by average assets) .......................... 0.90% 0.96% Return on average equity (net income divided by average equity) .......................... 5.53 5.19 Net interest rate spread ......................................... 2.53 2.65 Net interest margin .............................................. 2.96 3.27 Average interest-earning assets to average interest-bearing liabilities ..................................................... 114.97 120.44 Noninterest expense to total assets .............................. 2.44 2.64 Noninterest expense to average total assets ...................... 2.45 2.78 Asset Quality Ratios: Allowance for loan losses to total loans at the end of period 0.84% 0.86% Nonperforming assets to total assets ............................. 0.11 0.15 Nonperforming loans to total loans ............................... 0.15 0.06 Nonperforming loans to total assets .............................. 0.11 0.04 Capital Ratios: Average equity to average total assets ........................... 16.26% 18.51% Equity to assets at period end ................................... 16.06 16.72 Dividend payout ratio (1) ........................................ 39.44 43.40 Other Data: Number of real estate loans outstanding .......................... 1,686 1,858 Number of deposit accounts ....................................... 16,218 14,419 Number of full service offices ................................... 5 4 At and for the years ended September 30, ------------------------------------------- 1998 1997 1996 ------------- -------------- -------------- (Dollars in thousands, except per share data) Income Statement Data: Interest income .................................................. $ 13,927 $ 12,936 $ 12,518 Interest expense ................................................. 7,126 6,952 7,381 --------- ---------- ---------- Net interest income .............................................. 6,801 5,984 5,137 Provision for loan losses ........................................ 300 293 47 --------- ---------- ---------- Net interest income after provision for loan losses .............. 6,501 5,691 5,090 Noninterest income ............................................... 956 516 417 Noninterest expense .............................................. 4,567 3,956 4,646 --------- ---------- ---------- Income before income taxes ....................................... 2,890 2,251 861 Income tax expense ............................................... 1,004 819 351 --------- ---------- ---------- Net income ....................................................... $ 1,886 $ 1,432 $ 510 ========= ========== ========== Per Share Data (1): Basic net income ................................................. -- -- -- Diluted net income ............................................... -- -- -- Cash dividends declared .......................................... 0.100 -- -- Period-end book value ............................................ 9.24 -- -- Balance Sheet Data: Total assets ..................................................... $ 208,003 $ 173,470 $ 171,953 Loans receivable, net ............................................ 136,501 134,491 130,862 Mortgage-backed and related securities ........................... 14,707 10,087 12,918 Investment securities, available for sale ........................ 20,919 8,248 5,515 Investment securities, held to maturity .......................... 15,588 10,407 14,751 Deposits ......................................................... 143,900 145,444 145,975 Borrowings ....................................................... 19,500 3,500 3,750 Stockholders' equity ............................................. 41,570 20,868 19,084 Performance Ratios: Return on average assets (net income divided by average assets) .......................... 0.98% 0.84% 0.30% Return on average equity (net income divided by average equity) .......................... 6.47 7.38 2.76 Net interest rate spread ......................................... 2.97 3.24 2.82 Net interest margin .............................................. 3.54 3.50 3.03 Average interest-earning assets to average interest-bearing liabilities ..................................................... 117.01 109.92 108.29 Noninterest expense to total assets .............................. 2.20 2.28 2.70 Noninterest expense to average total assets ...................... 2.38 2.31 2.74 Asset Quality Ratios: Allowance for loan losses to total loans at the end of period 0.98% 0.80% 0.61% Nonperforming assets to total assets ............................. 0.71 0.75 0.84 Nonperforming loans to total loans ............................... 0.91 0.79 0.91 Nonperforming loans to total assets .............................. 0.60 0.61 0.69 Capital Ratios: Average equity to average total assets ........................... 15.16% 11.34% 10.92% Equity to assets at period end ................................... 19.99 12.03 11.10 Dividend payout ratio (1) ........................................ 23.90 -- -- Other Data: Number of real estate loans outstanding .......................... 1,841 1,999 2,038 Number of deposit accounts ....................................... 13,432 13,760 13,795 Number of full service offices ................................... 4 4 4
(1) Per share data and dividend payout ratios are not relevant for periods prior to the Reorganization in April 1998. Also, the dividends from the Company payable to Gaston Federal Holdings, MHC, the Mutual Holding Company, were waived by the Mutual Holding Company, for the third and fourth quarters of the 2000 fiscal year. [GRAPHIC] FELLOW SHAREHOLDERS It is a pleasure to report to you that Gaston Federal Bancorp, Inc. enjoyed record earnings for the fiscal year ended September 30, 2000. This record is particularly pleasing given the challenge of a dramatic rise in interest rates during the year. Net income for the 2000 fiscal year totaled $2,184,868, or $0.53 per share, as compared to $2,161,362, or $0.50 per share, for the fiscal year ended September 30, 1999. This represents a 6% increase in earnings per share. The execution of our strategic business plan, which, in part, involves changing our balance sheet mix of assets and liabilities, continues to drive our earnings improvement. Growth in our higher-yielding commercial loan and home equity loan portfolios of $11.2 million, or 65.6%, and $5.3 million, or 48.0%, respectively, enabled our asset yields to partially absorb the negative effects of dramatic increases in deposit and borrowing costs, resulting from repeated increases in interest rates by the Federal Reserve Board. We have accomplished this growth without compromising credit quality, as non-performing loans amounted to 0.15% of total loans, well below industry standards. Additionally, growth in operating noninterest income of $826,000, or 83.9%, during the year allowed us to offset the effect of a narrowing net interest margin. This noninterest income growth was derived primarily from fees associated with our growing base of business and personal demand deposit accounts and our success with our financial services subsidiary, which markets uninsured investment products, such as mutual funds and annuities. The banking industry as a whole is dealing with slowing deposit growth as more and more money flows into the stock market and other uninsured investment vehicles from more traditional savings accounts and certificates of deposit. Gaston Federal Bank's deposit base grew marginally in Fiscal 2000 to $161 million from $159 million the previous year. We exercised discipline in our deposit pricing in the rising interest rate environment as our local market bids aggressively to attract sufficient deposits to fund loan demand. This discipline is partially responsible for containment of shrinkage in our net interest margin. Our Dallas, North Carolina, branch, which opened on February 22, 2000, and has already exceeded $7 million in deposits, gives us positive encouragement that our deposit gathering efforts will continue to improve as we plan the opening in Stanley, North Carolina, of our sixth full service branch in February 2001. Quality customer service delivered with a hometown community banking style continues to be the framework of our business strategy. Our continuous improvement plan includes upgrades in our technology, expansion of our training programs, and additions to our staff who bring with them a commitment to our business philosophy. During the year we did an exhaustive study of our core processing technology which resulted in an upgrade to new core processing software. This software has been installed and is already producing significant improvements in convenience for our customers and efficiencies for our staff. In addition, we selected a software provider for our Internet banking initiative, which will be rolled out in 2001. On the staffing side, we instituted a mystery shopping program to test ourselves on our level of customer service and to identify areas and methods of improvement. We then developed and held training sessions to improve customer service in the appropriate areas. These mystery shops and training sessions are ongoing and results are reviewed quarterly. [GRAPHIC] As we approach 2001, we see both threats and opportunities on the horizon. We are positioning ourselves to deal with what we believe will be a slowing economy in the first half of next year. This slowdown could bring with it not only a reduction in interest rates, which would be favorable to our current balance sheet structure, but also the possibility of weaker loan demand and increased default risk. We have and will continue to utilize strict discipline in our credit underwriting. We believe that we are well prepared to manage these risks as they present themselves. In closing, we would like to acknowledge the valuable contributions of two individuals who have been guiding influences in your company. William H. Keith will be retiring from the Board of Directors when his term expires in February. His nine years of service on the Board have provided an immeasurable contribution of knowledge, leadership, and good judgment. We are fortunate that Mr. Keith has agreed to continue to work with us in a consulting role when called upon. On June 30, 2000, we lost former Director and former Chief Executive Officer Robert W. Williams to cancer. Mr. Williams served Gaston Federal Bank and its predecessor company for 25 years. The tenacity and determination he demonstrated in his seven-year battle with cancer are the same characteristics he demonstrated in establishing a solid foundation for this company. We will miss his fighting spirit. We dedicate this Annual Report to his memory and extend our heartfelt sympathy to his friends and family. Please let us know your thoughts and suggestions and know that we appreciate your continued support. Sincerely, [GRAPHIC] [GRAPHIC] Senator David W. Hoyle Kim S. Price Chairman of the Board President and Chief Executive Officer [GRAPHIC] CONSOLIDATED STATEMENTS OF CONDITION
September 30, --------------------------------- 2000 1999 ----------------- --------------- ASSETS Cash and due from banks ............................................................... $ 2,671,124 $ 4,206,884 Interest-earning bank balances ........................................................ 883,692 8,375,733 ------------- ------------ Cash and cash equivalents ............................................................ 3,554,816 12,582,617 Investment securities Available-for-sale ................................................................... 20,065,914 15,777,462 Held-to-maturity (fair value of $12,284,794 in 2000 and $12,367,959 in 1999) ......... 12,863,584 12,865,176 Mortgage-backed and related securities Available-for-sale ................................................................... 17,014,165 16,166,636 Held-to-maturity (fair value of $2,733,867 in 2000 and $3,04,134 in 1999)............. 2,757,915 3,825,092 Loans, net ............................................................................ 176,963,216 168,044,032 Premises and equipment ................................................................ 3,823,074 2,503,082 Accrued interest receivable ........................................................... 1,381,605 1,244,381 Federal Home Loan Bank stock .......................................................... 2,177,300 1,775,000 Deferred income taxes ................................................................. 871,758 709,795 Other assets .......................................................................... 3,177,848 1,959,932 ------------- ------------ Total assets ...................................................................... $ 244,651,195 $237,453,205 ============= ============ LIABILITIES Deposits .............................................................................. $ 161,351,514 $159,424,778 Advances from borrowers for taxes and insurance ....................................... 1,070,955 760,857 Accrued interest payable .............................................................. 846,893 549,783 Advances from Federal Home Loan Bank .................................................. 40,000,000 35,500,000 Repurchase agreements ................................................................. 605,500 -- Other liabilities ..................................................................... 1,489,558 1,509,197 ------------- ------------ Total liabilities ................................................................. 205,364,420 197,744,615 Commitments and contingencies STOCKHOLDERS' EQUITY Preferred stock, 10,000,000 shares authorized, none issued ............................ -- -- Common stock, $1.00 par value, 20,000,000 shares authorized, issued and outstanding 4,581,034 in 2000 and in 1999 ........................................................ 4,581,034 4,581,034 Additional paid-in-capital ............................................................ 16,662,215 16,650,944 Unallocated common stock held by Employee Stock Ownership Plan ........................ (1,380,721) (1,493,434) Retained earnings, substantially restricted ........................................... 23,976,368 22,653,309 Accumulated unrealized gain on securities available-for-sale, net of tax .............. 108,396 176,226 Treasury stock of 362,100 and 211,400 shares at cost in 2000 and 1999 ................. (4,660,517) (2,859,489) ------------- ------------ Total stockholders' equity ........................................................ 39,286,775 39,708,590 ------------- ------------ Total liabilities and stockholders' equity ........................................ $ 244,651,195 $237,453,205 ============= ============
See notes to consolidated financial statements. [GRAPHIC] CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30, --------------------------------- 2000 1999 ---------------- ---------------- Interest income Loans ................................................ $ 12,985,629 $ 11,998,766 Investment securities ................................ 2,126,673 2,059,379 Mortgage-backed and related securities ............... 1,302,079 1,180,512 ------------ ------------ Total interest income ............................. 16,414,381 15,238,657 Interest expense Deposits ............................................. 6,968,270 6,407,099 Borrowed funds ....................................... 2,250,728 1,481,231 ------------ ------------ Total interest expense ............................ 9,218,998 7,888,330 ============ ============ Net interest income ............................... 7,195,383 7,350,327 Provision for loan losses ............................. 30,000 105,000 ------------ ------------ Net interest income after provision for loan losses ... 7,165,383 7,245,327 Noninterest income Service charges on deposit accounts .................. 588,562 368,076 Gain on sale of securities ........................... 224,884 1,272,356 Gain on sale of other assets ......................... 31,925 116,706 Commissions on sales of financial products ........... 602,877 299,740 Dividends on FHLB stock .............................. 156,288 112,554 Other income ......................................... 463,267 204,077 ------------ ------------ Total noninterest income .......................... 2,067,803 2,373,509 Noninterest expense Salaries and benefits ................................ 3,642,979 4,011,564 Occupancy ............................................ 623,893 457,878 Deposit insurance .................................... 49,453 90,720 Data processing ...................................... 215,845 207,105 Advertising .......................................... 197,012 230,988 Professional services ................................ 220,664 290,143 Other ................................................ 1,011,042 970,646 ------------ ------------ Total noninterest expense ......................... 5,960,888 6,259,044 ============ ============ Income before income taxes ............................ 3,272,298 3,359,792 Provision for income taxes ............................ 1,087,430 1,198,430 ------------ ------------ Net income ............................................ $ 2,184,868 $ 2,161,362 ============ ============ Earnings per share Basic earnings per share ............................. $ 0.53 $ 0.50 Diluted earnings per share ........................... $ 0.53 $ 0.50
See notes to consolidated financial statements. [GRAPHIC] CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended September 30, ------------------------------ 2000 1999 -------------- --------------- Net income ............................................................................... $ 2,184,868 $ 2,161,362 Other comprehensive income, net of tax: Unrealized gains (losses) on securities Unrealized holding gains (losses) arising during period, net of tax effect of $(50,223) in 2000 and $308,003 in 1999.......................................................... 76,096 (547,560) Reclassification adjustment for gains included in net income, net of tax effect of $80,958 in 2000 and $458,048 in 1999 ................................................. (143,926) (814,308) ----------- ------------ Other comprehensive income ............................................................ (67,830) (1,361,868) Comprehensive income ..................................................................... $ 2,117,038 $ 799,494 =========== ============
[GRAPHIC] CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Retained Additional Earnings Preferred Common Capital Substantially Stock Stock Paid-in Restricted ---------- ------------- ------------ ------------- Balance, September 30, 1998 ......... $-- $4,496,500 $ 15,721,070 $21,430,004 Comprehensive results: Net Income ......................... -- -- -- 2,161,362 Other comprehensive results, net of tax ............................ -- -- -- -- Issuance of 84,534 shares of $1.00 par value common stock for employee benefit plans ............. -- 84,534 929,874 -- Allocation from shares purchased with loan to ESOP .................. -- -- -- -- Cash dividends declared on common stock .............................. -- -- -- (938,057) Repurchase of common stock .......... -- -- -- -- --- ---------- ------------ ----------- Balance, September 30, 1999 ......... -- 4,581,034 16,650,944 22,653,309 Comprehensive results: Net Income ......................... -- -- -- 2,184,868 Other comprehensive results, net of tax ............................ -- -- -- -- Allocation from shares purchased with loan to ESOP .................. -- -- 11,271 -- Cash dividends declared on common stock .............................. -- -- -- (861,809) Repurchase of common stock .......... -- -- -- -- --- ---------- ------------ ----------- Balance, September 30, 2000 ......... $-- $4,581,034 $ 16,662,215 $23,976,368 === ========== ============ =========== Accumulated Unallocated Unrealized Total Common Stock Gains (Losses), Treasury Stockholders' Held by ESOP net of tax Stock Equity ---------------- ---------------- --------------- ---------------- Balance, September 30, 1998 ......... $(1,615,539) $ 1,538,094 $ -- $ 41,570,129 Comprehensive results: Net Income ......................... -- -- -- 2,161,362 Other comprehensive results, net of tax ............................ -- (1,361,868) -- (1,361,868) Issuance of 84,534 shares of $1.00 par value common stock for employee benefit plans ............. -- -- -- 1,014,408 Allocation from shares purchased with loan to ESOP .................. 122,105 -- -- 122,105 Cash dividends declared on common stock .............................. -- -- -- (938,057) Repurchase of common stock .......... -- -- (2,859,489) (2,859,489) ----------- ------------- ----------- ------------ Balance, September 30, 1999 ......... (1,493,434) 176,226 (2,859,489) 39,708,590 Comprehensive results: Net Income ......................... -- -- -- 2,184,868 Other comprehensive results, net of tax ............................ -- (67,830) -- (67,830) Allocation from shares purchased with loan to ESOP .................. 112,713 -- -- 123,984 Cash dividends declared on common stock .............................. -- -- -- (861,809) Repurchase of common stock .......... -- -- (1,801,028) (1,801,028) ----------- ------------- ----------- ------------ Balance, September 30, 2000 ......... $(1,380,721) $ 108,396 $(4,660,517) $39,286,775 =========== ============= =========== ============
See notes to consolidated financial statements. [GRAPHIC] CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30, ------------------------------- 2000 1999 --------------- --------------- Operating Activities Net Income ......................................................................... $ 2,184,868 $ 2,161,362 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses ........................................................ 30,000 105,000 Depreciation ..................................................................... 400,037 334,533 Deferred income tax (benefit) .................................................... (117,000) (146,000) Gain on sale of investments available-for-sale ................................... (224,884) (1,272,356) Gain on sale of other assets ..................................................... (31,925) (116,706) Deferred loan origination fees ................................................... (60,258) (115,690) Issuance of shares for the Recognition and Retention Plan ........................ -- 1,014,408 Allocation of shares to the ESOP ................................................. 123,984 122,105 (Increase) in interest receivable ................................................ (137,224) (6,156) (Increase) in other operating assets ............................................. (346,935) (287,552) ------------- ------------- Net cash provided by operating activities ....................................... 1,820,663 1,792,948 Investing Activities Net (increase) in loans made to customers ........................................... (8,898,383) (44,578,609) Proceeds from the sale of loans ..................................................... 10,000 13,135,511 Proceeds from the sale of premises and equipment .................................... -- 49,250 Proceeds from the sale of investments available-for-sale ............................ 2,231,088 5,881,780 Proceeds from the sale of mortgage-backed and related securities .................... 594,581 492,304 Maturities and prepayments of investment securities ................................. 2,994,563 7,998,274 Maturities and prepayments of mortgage-backed and related securities ................ 3,767,223 5,723,340 Purchases of investment securities .................................................. (9,350,000) (6,515,000) Purchases of mortgage-backed and related securities ................................. (4,149,205) (11,867,075) Purchases of FHLB stock ............................................................. (402,300) (474,879) Purchases of premises and equipment ................................................. (1,720,029) (612,447) ------------- ------------- Net cash used for investing activities .......................................... (14,922,462) (30,767,551) Financing Activities Net increase in deposits ............................................................ 1,926,736 15,524,006 Dividends to stockholders ........................................................... (861,808) (938,057) Repurchase of common stock .......................................................... (1,801,028) (2,859,489) Advances from FHLB .................................................................. 15,000,000 18,000,000 Repayments of advances from FHLB .................................................... (10,500,000) (2,000,000) Increase in advances from borrowers for insurance and taxes ......................... 310,098 32,796 ------------- ------------- Net cash provided by financing activities ....................................... 4,073,998 27,759,256 Net (decrease) in cash and cash equivalents ......................................... (9,027,801) (1,215,347) Cash and cash equivalents at the beginning of the year .............................. 12,582,617 13,797,964 ------------- ------------- Cash and cash equivalents at the end of the year .................................... $ 3,554,816 $ 12,582,617 ============= =============
See notes to consolidated financial statements. [GRAPHIC] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Gaston Federal Bancorp, Inc. (the Company) is a stock holding company whose activities are primarily limited to holding the stock of Gaston Federal Bank (the Bank). The Bank is a community-oriented Federal stock savings bank engaged primarily in the business of offering deposits to customers through its branch offices and investing those deposits, together with funds generated from operations and borrowings, in residential, commercial and consumer loans. The Bank's wholly-owned subsidiary, Gaston Financial Services, Inc. (doing business as Gaston Federal Investment Services) acts as an independent agent selling various financial products. The accounting and reporting policies of Gaston Federal Bancorp, Inc. and its subsidiaries follow generally accepted accounting principles and policies within the financial services industry. The following is a summary of the more significant policies. Principles of Consolidation The consolidated financial statements include the accounts of Gaston Federal Bancorp, Inc. (the Company), its wholly-owned subsidiary, Gaston Federal Bank (the Bank), and the Bank's wholly-owned subsidiary, Gaston Financial Services, Inc. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The financial statements are prepared in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers cash on hand, cash due from banks, which are maintained in financial institutions, and interest-earning deposits, which are maintained with the Federal Home Loan Bank, as cash and cash equivalents. Securities Management determines the appropriate classification of securities at the time of purchase. Securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Securities classified as available-for-sale are carried at fair value. Such securities are used to execute asset/liability management strategies and to manage liquidity. Adjustments for unrealized gains or losses, net of related income tax effect, are recorded as an addition or deduction from equity in the form of other comprehensive results. The Company has no trading portfolio. Amortization of premiums and accretion of discounts are included in interest income over the life of the related security, or in the case of mortgage-backed and related securities, the estimated life of the security. Gains or losses on the sale of securities are recognized on a specific identification, trade date basis. Loans and Allowance for Loan Losses Loans are carried at their principal amount outstanding. Income on loans is accrued based upon the outstanding principal balance. Generally, loans are classified as nonaccrual, and the accrual of interest is discontinued, when the contractual payment of principal and interest has become 90 days past due or when, in management's judgment, principal or interest is not collectible in accordance with the terms of the obligation. Cash receipts on nonaccrual loans are applied to principal. The accrual of interest resumes when the loan returns to performing status. The allowance for loan losses is maintained at a level believed by management to be adequate to absorb losses inherent in the portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current economic conditions, volume, growth, and composition of the loan portfolio, and other risks inherent in the portfolio. Loans are charged to the allowance at the time they are determined to be losses. Subsequent recoveries are credited to the allowance. [GRAPHIC] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Concentrations of Credit Risk The Company makes loans to individuals and small businesses primarily in Gaston County, North Carolina, and surrounding counties. The Company has a diversified loan portfolio, and the borrowers' ability to repay their loans is not dependent upon any specific economic segment. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed over the estimated useful lives of the assets (from 3 to 30 years) primarily by the straight-line method. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life of the improvement or the lease term. Other Real Estate Owned Other real estate owned, included in other assets, is comprised of real estate properties acquired in partial or total satisfaction of problem loans. The properties are recorded at the lower of cost or fair value less estimated costs to sell at the date acquired. Losses arising at the time of acquisition of such properties are charged against the allowance for loan losses. Subsequent write-downs that may be required to the carrying value of these properties are charged to noninterest expenses. Gains and losses realized from the sale of other real estate owned are included in noninterest income. Loan Origination Fees Origination fees received and direct costs incurred are amortized to interest income over the contractual lives of the loans, using the level yield method. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Amounts provided for deferred income taxes relate primarily to differences between tax and financial reporting for unrealized gains and losses on securities available-for-sale, allowances for loan losses, depreciation, and deferred compensation. Advertising Advertising costs are expensed as incurred. Reclassifications Certain of the prior year amounts have been reclassified to conform to current year presentation; such reclassifications are immaterial to the financial statements. Comprehensive Income During the year ended September 30, 1999, the Company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 established standards for the reporting and display of comprehensive income and its components in financial statements. SFAS No. 130 defines comprehensive income as net income, as currently reported, as well as unrealized gains and losses on assets available for sale and certain other items not currently included in the income statement. The disclosure requirements of SFAS No. 130 have been included in the Consolidated Statements of Comprehensive Income. Operating Segments The FASB issued in June 1997, SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which established standards for the way public business enterprises report information about operating segments. This statement also established standards for related disclosures about products, services, geographic areas and major customers. In adopting SFAS No. 131, the Company has determined that, using the definitions contained in the statement, all of its activities constitute only one reportable operating segment. [GRAPHIC] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Impact of Recently Issued Accounting Standards SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, issued in June 1998, as amended by SFAS No. 137 and SFAS No. 138, establishes accounting and reporting requirements for derivative instruments, including derivative instruments embedded in other contracts. The provisions of the Statement are effective for fiscal years beginning after June 15, 2000. The Company intends to adopt this statement effective October 1, 2000. In connection with the adoption of the provisions of SFAS No. 133, the Company intends to reclassify as available-for-sale the investments classified as held-to-maturity at September 30, 2000. The transfer will be accounted for at the fair values of the securities at the date of transfer. The effect of the reclassification will be to decrease carrying values of these securities by approximately $603,000, increase deferred tax assets by approximately $236,000, and record in accumulated other comprehensive income a loss, net of tax, of approximately $367,000. SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in September 2000 and supersedes SFAS No. 125. SFAS No. 140 establishes accounting and reporting requirements for the transfers and servicing of financial assets and the extinquishments of liabilities. The provisions of SFAS No. 140 are effective for transfers of financial assets occurring after March 31, 2001, applied prospectively. The Company expects that adopting the provisions of this statement will not have a material impact on the consolidated financial statements of the Company. NOTE 2 - INVESTMENT SECURITIES The aggregate book and fair values, as well as gross unrealized gains and losses, of investment securities as of September 30 were as follows:
September 30, 2000 ------------------------------------------------------- Book Unrealized Unrealized Fair Value Gains Losses Value --------------- ----------- ------------- ------------- Available-for-Sale U.S. Treasury and other agencies ........................... $ 13,274,273 -- (113,026) 13,161,247 Municipals ................................................. 5,854,040 -- (299,739) 5,554,301 FHLMC stock ................................................ 19,200 1,018,810 -- 1,038,010 Other equity securities .................................... 242,917 69,439 -- 312,356 ------------ --------- -------- ---------- Total available-for-sale ............................... $ 19,390,430 1,088,249 (412,765) 20,065,914 ============ ========= ======== ========== Mortgage-backed and related securities Available-for-Sale FNMA ....................................................... 6,278,145 -- (159,597) 6,118,548 GNMA ....................................................... 7,114,357 -- (237,221) 6,877,136 SBA's ...................................................... 4,119,099 -- (100,618) 4,018,481 ------------ --------- -------- ---------- Total mortgage-backed and related securities ........... $ 17,511,601 -- (497,436) 17,014,165 ============ ========= ======== ========== Held-to-Maturity U.S. Treasury and other agencies ........................... $ 12,498,662 -- (577,176) 11,921,486 Municipals ................................................. 364,922 -- (1,614) 363,308 ------------ --------- -------- ---------- Total held-to-maturity ................................. 12,863,584 -- (578,790) 12,284,794 ============ ========= ======== ========== Mortgage-backed and related securities Held-to-Maturity FHLMC ...................................................... $ 1,145,846 -- (18,238) 1,127,608 FNMA ....................................................... 971,988 -- (11,897) 960,091 GNMA ....................................................... 640,081 6,087 -- 646,168 ------------ --------- -------- ---------- Total mortgage-backed and related securities ........... $ 2,757,915 6,087 (30,135) 2,733,867 ============ ========= ======== ==========
[GRAPHIC] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
September 30, 1999 ------------------------------------------------------------ Book Unrealized Unrealized Fair Value Gains Losses Value -------------- -------------- --------------- -------------- Available-for-Sale U.S. Treasury and other agencies ............................ $ 9,256,466 $ 5,545 $ (102,730) $ 9,159,281 Municipals .................................................. 5,736,978 -- (372,773) 5,364,205 FHLMC stock ................................................. 25,404 1,135,662 -- 1,161,066 Other equity securities ..................................... 92,910 -- -- 92,910 ------------ ----------- ----------- ------------ Total available-for-sale ................................ $ 15,111,758 $ 1,141,207 $ (475,503) $ 15,777,462 ============ =========== =========== ============ Mortgage-backed and related securities Available-for-Sale FNMA ........................................................ 2,485,393 -- (72,275) 2,413,118 GNMA ........................................................ 8,014,443 -- (232,728) 7,781,715 SBA's ....................................................... 6,043,041 -- (71,238) 5,971,803 ------------ ----------- ----------- ------------ Total mortgage-backed and related securities ............ $ 16,542,877 $ -- $ (376,241) $ 16,166,636 ============ =========== =========== ============ Held-to-Maturity U.S. Treasury and other agencies ............................ $ 12,498,539 $ -- $ (497,298) $ 12,001,241 Municipals .................................................. 366,637 81 -- 366,718 ------------ ----------- ----------- ------------ Total held-to-maturity .................................. 12,865,176 81 (497,298) 12,367,959 ============ =========== =========== ============ Mortgage-backed and related securities Held-to-Maturity FHLMC ....................................................... $ 1,645,951 $ 7,171 $ (20,502) $ 1,632,620 FNMA ........................................................ 1,415,532 4,414 (18,743) 1,401,203 GNMA ........................................................ 763,609 11,850 (5,148) 770,311 ------------ ----------- ----------- ------------ Total mortgage-backed and related securities ............ $ 3,825,092 $ 23,435 $ (44,393) $ 3,804,134 ============ =========== =========== ============
The book value and estimated fair value of debt securities at September 30, 2000, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
September 30, 2000 ----------------------------- Book Fair Value Value -------------- -------------- Available-for-Sale Due in one year or less ........... $ 1,997,526 $ 1,991,529 Due after one year through five years 8,832,037 8,693,863 Due after five years through ten years 5,392,047 5,336,875 Due after ten years ............... 2,906,703 2,693,281 Equities .......................... 262,117 1,350,366 ------------ ------------ $ 19,390,430 $ 20,065,914 ============ ============ Mortgage-backed and related securities $ 17,461,666 $ 17,014,165 ============ ============ Held-to-maturity Due in one year or less ........... $ -- $ -- Due after one year through five years 2,364,922 2,336,622 Due after five years through ten years 10,498,662 9,948,172 Due after ten years ............... -- -- ------------ ------------ $ 12,863,584 $ 12,284,794 ============ ============ Mortgage-backed and related securities $ 2,757,915 $ 2,733,867 ============ ============
Gross realized gains on the sale of securities available for sale were $256,331 and $1,282,044 in 2000 and 1999, respectively. Gross realized losses on the sale of securities available for sale were $31,447 and $9,688 in 2000 and 1999, respectively. After-tax net gains on the sale of securities were $143,926 and $814,308 in 2000 and 1999, respectively. [GRAPHIC] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Investment securities having a carrying amount of approximately $5,000,000 have been pledged as collateral to secure public deposits at September 30, 2000. Investment securities having a carrying amount of $750,000 have been pledged as collateral for repurchase agreements at September 30, 2000. NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES The following is a summary of loans outstanding by category at September 30:
2000 1999 ---------------- ---------------- Real estate: One-to-four family residential ..... $ 125,268,896 $ 129,332,817 Multi-family residential ........... 2,045,712 2,413,821 Commercial mortgage ................ 5,289,205 7,265,832 Construction ....................... 5,415,900 8,513,600 Commercial ................... 28,181,192 17,017,997 Consumer ..................... 17,167,809 11,599,049 ------------- ------------- Gross loans .................. 183,368,714 176,143,116 Less: Loans in process ................... 4,544,420 6,204,788 Deferred loan fees, net ............ 324,573 384,831 Allowance for loan losses .......... 1,536,505 1,509,465 ------------- ------------- Net loans .................... $ 176,963,216 $ 168,044,032 ============= =============
The Company evaluates impairment of its residential mortgage and consumer loans on a collective basis. Commercial loans individually evaluated and considered impaired under SFAS No. 114 at September 30, 2000 and 1999 were immaterial. Changes in the allowance for loan losses for the two years ended September 30, 2000 were as follows:
2000 1999 -------------- -------------- Balance at beginning of year ............ $ 1,509,465 $ 1,411,249 Provision for loan losses ............... 30,000 105,000 Recoveries on loans previously charged off 394 1,666 Loans charged off ....................... (3,354) (8,450) ----------- ----------- Balance at end of year .................. $ 1,536,505 $ 1,509,465 =========== ===========
Directors, executive officers, and associates of such persons were customers of and had transactions with the Bank in the ordinary course of business. Included in such transactions are outstanding loans and commitments, all of which were made under normal credit terms and did not involve more than normal risk of collection. The aggregate amount of these loans was $2,517,362 and $2,409,544 at September 30, 2000 and 1999, respectively. During 2000, new loans of $853,313 were made and payments totaled $409,041. During 1999, new loans of $1,022,119 were made and payments totaled $589,485. During 2000, the Bank sold one loan with a book value of $9,457 at a gain of $543. During 1999, the Bank sold groups of loans with a book value of $13,045,786 at a net gain of $89,725. The Bank held no loans for sale at September 30, 2000 or 1999. As part of the Bank's interest rate risk management, in November 2000, the Bank entered into a commitment to sell 159 fixed-rate mortgage loans totaling $18.8 million with servicing released. These fixed-rate mortgage loans have a weighted average coupon of 6.3% and a weighted average maturity of 153 months. Proceeds from the sale are expected to be invested in higher-yielding, shorter-term consumer and commercial loans over the next six to twelve months. The sale is expected to close in December 2000, with a pretax loss of approximately $900,000. [GRAPHIC] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 4 - PREMISES AND EQUIPMENT Premises and equipment at September 30 are summarized as follows:
2000 1999 -------------- -------------- Land ............................... $ 1,154,353 $ 694,289 Buildings .......................... 2,719,747 1,799,033 Land Improvements .................. 119,570 101,720 Furniture and equipment ............ 2,445,451 2,140,454 ----------- ----------- 6,439,121 4,735,496 Less: accumulated depreciation ..... 2,616,047 2,232,414 ----------- ----------- $ 3,823,074 $ 2,503,082 =========== ===========
NOTE 5 - DEPOSITS Deposit balances and interest expense and average rates paid for the years ended September 30 are summarized as follows:
2000 1999 ---------------------------------------- ---------------------------------------- Actual Interest Average Actual Interest Average Balance Expense Rate Balance Expense Rate ---------------- -------------- -------- ---------------- -------------- -------- Noninterest bearing ........... $ 5,272,347 $ -- -- $ 6,481,000 $ -- -- Interest bearing checking ..... 14,008,668 225,549 1.1% 11,916,000 195,000 1.6% Money market demand ........... 14,908,946 452,410 3.2% 13,709,000 396,000 2.1% Passbook savings .............. 19,188,828 692,521 3.1% 23,869,000 717,000 3.2% Savings certificates .......... 107,972,725 5,597,790 5.4% 103,450,000 5,100,000 5.2% ------------- ----------- --- ------------- ----------- --- $ 161,351,514 $ 6,968,270 4.3% $ 159,425,000 $ 6,408,000 4.1% ============= =========== === ============= =========== ===
Contractual maturities of savings certificates as of September 30, 2000 are as follows: Under 1 year ......... $ 89,547,232 1 to 2 years ......... 16,193,543 2 to 3 years ......... 2,231,950 ------------ $107,972,725 ============
Certificates of deposit in excess of $100,000 totaled $23,224,000 and $17,728,000 at September 30, 2000 and 1999, respectively, and are not federally insured. Interest paid on deposits and other borrowings was $8,921,888 and $7,786,826 for the years ended September 30, 2000 and 1999, respectively. Directors, executive officers, and associates of such persons were customers of and had transactions with the Bank in the ordinary course of business. Included in such transactions are deposit accounts, all of which were made under normal terms. The aggregate amount of these deposit accounts was $2,353,399 and $2,512,000 at September 30, 2000 and 1999, respectively. The deposits of the Bank are insured by the Savings Association Insurance Fund (SAIF), one of two funds administered by the FDIC. The Bank's annual SAIF premium rates were $.0204 and $.0648 per $100 of deposits in 2000 and 1999, respectively. NOTE 6 - ADVANCES FROM THE FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank of Atlanta are pursuant to lines of credit and are collateralized by a lien on qualifying first mortgage loans in an amount necessary to satisfy outstanding indebtedness plus accrued interest. Advances had interest rates ranging from 4.69% to 6.76% at September 30, 2000 and 4.69% to 5.75% at September 30, 1999. The total amount available on the line of credit is 20% of total assets of the Bank. The unused portion of the line of credit available to the Company at September 30, 2000 was approximately $8,800,000. [GRAPHIC] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Maturities of advances at September 30 are as follows:
2000 1999 -------------- --------------- Advances from FHLB due: Less than 1 year ......... $ 2,500,000 $ -- 1 to 2 years ............. -- -- 2 to 3 years ............. 6,500,000 -- 3 to 4 years ............. 7,000,000 1,500,000 4 to 5 years ............. 7,000,000 7,000,000 5 to 10 years ............ 17,000,000 27,000,000 After 10 years ........... -- -- ------------ ------------ $ 40,000,000 $ 35,500,000 ============ ============
Interest rates on certain advances may be reset at the option of the Federal Home Loan Bank of Atlanta. At September 30, 2000, interest rates on $5 million may be converted to a variable rate of interest on a quarterly basis starting in January 2002, interest rates on $7 million may be reset in 2001, interest rates on $2 million may be reset in 2002, and interest rates on $8 million may be reset in 2003 and in 2004. NOTE 7 - INCOME TAXES The provision for income taxes is summarized below:
2000 1999 -------------- -------------- Currently payable Federal .................... $ 1,100,430 $ 1,218,430 State ...................... 104,000 126,000 ----------- ----------- 1,204,430 1,344,430 Deferred Federal .................... (76,000) (105,000) State ...................... (41,000) (41,000) ----------- ----------- (117,000) (146,000) ----------- ----------- Total income taxes ......... $ 1,087,430 $ 1,198,430 =========== ===========
The reasons for the difference between consolidated income tax expense and the amount computed by applying the statutory federal income tax rate of 34% to income before income taxes were as follows:
2000 1999 --------------- -------------- Federal income taxes at statutory rate $ 1,113,000 $ 1,142,000 State income taxes, net of federal benefit ............................ 42,000 56,000 Effect of federal tax exempt interest (92,000) (50,000) Other .............................. 24,430 50,430 ----------- ----------- $ 1,087,430 $ 1,198,430 =========== =========== Effective tax rate ................. 33.2% 35.7% =========== ===========
Income taxes payable are included in other liabilities and were $9,000 and $78,000 at September 30, 2000 and 1999, respectively. Income taxes paid for the years ended September 30, 2000 and 1999 were $1,176,000 and $1,315,000, respectively. [GRAPHIC] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at September 30 are as follows:
2000 1999 ------------ ------------ Deferred tax assets Deferred compensation ...................... $ 280,369 $ 278,824 Deferred loan fees ......................... 126,973 150,546 Allowance for loan losses .................. 417,161 314,623 Other ...................................... 116,908 80,693 --------- --------- Gross deferred tax assets .................... 941,411 824,686 Deferred tax liabilities Unrealized gain on securities available- for-sale ................................... 69,653 114,891 --------- --------- Gross deferred tax liabilities ............... 69,653 114,891 --------- --------- Net deferred tax asset ....................... $ 871,758 $ 709,795 ========= =========
The Company, in accordance with SFAS No. 109, did not record a deferred tax liability of approximately $1,870,000 as of September 30, 2000 related to the cumulative special bad debt deduction for savings and loan associations recognized for income tax reporting prior to September 30, 1988, Gaston Federal's base year. Management believes that the Company will fully realize deferred tax assets based on future taxable temporary differences, refundable income taxes from carryback years, and current levels of operating income. NOTE 8 - COMMITMENTS TO EXTEND CREDIT Commitments to extend credit are agreements to lend as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments to extend credit as of September 30 are as follows:
2000 1999 -------------- ------------- Mortgage loan commitments ......... $ 1,064,645 $ 703,700 Commercial loan commitments ....... 1,717,000 -- Unused lines of credit Commercial ........................ 5,458,543 6,099,144 Consumer .......................... 18,968,035 13,192,106
Mortgage loan commitments at September 30, 2000 are at fixed rates ranging from 7.75% to 8.00%. Commercial loan commitments either have fixed rates ranging from 9.00% to 10.5% or variable rates ranging from the Bank's prime rate (9.50% at September 30, 2000) plus 0.25% to 1.00%. Commitment periods are typically 60 days. NOTE 9 - REGULATORY CAPITAL REQUIREMENTS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain commitments as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. The Bank is required to maintain: tangible capital of at least 1.5% of adjusted total assets; core capital of at least 4.0% of adjusted total assets; and total capital of at least 8.0% of risk weighted assets. At September 30, 2000, the Bank's tangible capital and core capital were both $35,967,000 or 14.75% of tangible assets, and total capital was $37,963,000 or [GRAPHIC] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 25.84% of risk-weighted assets. The Company's primary regulator, the Office of Thrift Supervision, informed the Bank that it was in the well-capitalized category as of the most recent regulatory examination, and management is not aware of any events that have occurred since that would have changed its classification.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ----------------------- ---------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ----------- ----------- ----------- ---------- ----------- ----------- (dollars in thousands) (dollars in thousands) (dollars in thousands) As of September 30, 2000 Total Risk-Based Capital (to Risk-Weighted Assets) ... $ 37,963 25.84% $ 11,755 8.00% $ 14,693 10.00% Tier 1 Capital (to Risk-Weighted Assets) ... 35,967 24.48% 5,877 4.00% 8,816 6.00% Tier 1 Capital (to Adjusted Total Assets) .. 35,967 14.75% 9,757 4.00% 9,757 5.00% Tangible Capital (to Adjusted Total Assets) .. 35,967 14.75% 3,659 1.50% 7,318 3.00% As of September 30, 1999 Total Risk-Based Capital (to Risk-Weighted Assets) ... $ 35,208 27.57% $ 10,217 8.00% $ 12,772 10.00% Tier 1 Capital (to Risk-Weighted Assets) ... 33,813 26.48% 5,109 4.00% 7,663 6.00% Tier 1 Capital (to Adjusted Total Assets) .. 33,813 14.28% 9,474 4.00% 11,842 5.00% Tangible Capital (to Adjusted Total Assets) .. 33,813 14.28% 3,553 1.50% 7,105 3.00%
NOTE 10 - EMPLOYEE BENEFIT PLANS On July 1, 2000, the Company terminated its participation in the Financial Institutions Retirement Fund, a multiemployer, qualified, noncontributory defined benefit pension plan that covered substantially all employees of the Bank meeting certain age and service requirements. As a result of the termination, plan participants who had accumulated a balance in the plan of less than $3,500 or who were 55 years of age or greater on the termination date received a lump sum payment equal to their balance accumulated in the plan. The balances of those plan participants who had accumulated an amount of $3,500 or greater in the plan and who were less than 55 years of age on the termination date remain in the plan until those participants reach the age of 55 years. The plan requires employers to fund amounts necessary to meet ERISA minimum funding requirements. Total expense relating to this plan was $85,419 in 2000 recognized prior to the termination of the plan on July 1, 2000 and $3,810 in 1999. Separate company information relating to the Bank is not available. The Bank also provides supplemental benefits to substantially all employees through a 401(k) savings plan. Eligible participants may contribute up to 15% of base salary, with the Bank providing matching contributions of 50% of employee contributions up to 6% of compensation. The plan also provides for discretionary employer contributions. Total expense relating to this plan was $58,678 in 2000 and $47,765 in 1999. The Bank also maintains nonqualified deferred compensation and/or supplemental retirement plans for certain of its directors. Total expense for the plans was $175,288 in 2000 and $141,845 in 1999. 1999 Recognition and Retention Plan -- On April 12, 1999, the Company's shareholders, among other actions, approved the Gaston Federal Bank 1999 Recognition and Retention Plan. Subsequently, 84,534 shares of common stock were awarded under the plan to directors and management. All such awards vested during the year ended September 30, 1999. The Company recognized compensation expense of $1.0 million in connection with these stock awards in 1999. [GRAPHIC] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 1999 Stock Option Plan -- On April 12, 1999, the Company's shareholders also approved the Gaston Federal Bank 1999 Stock Option Plan that provided the issuance of 211,335 options for directors and officers to purchase the Company's common stock. As of September 30, 2000, 199,175 options were outstanding under the plan at exercise prices ranging from $12.00 to $13.00 per share with a weighted average exercise price of $12.05 and a weighted average contractual life of 103 months. As of September 30, 1999, 200,069 options were outstanding under the plan at exercise prices ranging from $12.00 to $13.00 per share with a weighted average exercise price of $12.05 and a weighted average contractual life of 115 months. The exercise price of each option equals the fair market value of the Company's common stock at the date of the grants. There were 110,270 and 109,628 options fully vested as of September 30, 2000 and 1999, respectively. There were 3,394 shares forfeited during the year ended September 30, 2000 and no shares forfeited during the year ended September 30, 1999. No options were exercised or expired during the years ended September 30, 2000 and 1999. The Company applies the provisions of Accounting Principles Board Opinion No. 25 in accounting for the plan and accordingly, no compensation expense has been recognized in connection with the granting of the stock options. In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the Company adopted the disclosure-only option and elected to apply the provisions of APB No. 25 for financial statement purposes. Had the compensation cost for the Company's stock option plan been determined in accordance with the fair-value accounting provisions of SFAS No. 123, net income, basic earnings per share, and diluted earnings per share were as follows:
Year Ended September 30, --------------------------------- 2000 1999 ---------------- ---------------- Net income: As reported ............... $ 2,184,868 $ 2,161,362 Pro forma ................. $ 1,934,841 $ 1,749,131 Basic earnings per share: As reported ............... $ 0.53 $ 0.50 Pro forma ................. $ 0.47 $ 0.41 Diluted earnings per share: As reported ............... $ 0.53 $ 0.50 Pro forma ................. $ 0.47 $ 0.41
The weighted average fair value of options granted were $2.57 and $4.27 per share during the years ended September 30, 2000 and 1999, respectively. The fair value of the stock options was determined by using the Black-Scholes option pricing model. This model requires the use of assumptions, which can materially affect fair value estimates. Therefore, this model does not necessarily provide a reliable single measure of the fair value of the Company's stock options. The fair value of stock options granted was estimated on the date of the grant using the following assumptions in 2000: (1) expected dividend yield of 2.08%; (2) risk free interest rate of 6.00%; (3) expected volatility of 22%; and (4) expected lives of options of seven years. The fair value of stock options granted was estimated on the date of the grant using the following assumptions in 1999: (1) expected dividend yield of 1.62%; (2) risk free interest rate of 5.20%; (3) expected volatility of 30%; and (4) expected lives of options of seven years. Employee Stock Ownership Plan -- The Bank established an Employee Stock Ownership Plan (ESOP). The ESOP is a tax-qualified retirement plan designed to invest primarily in the Company's common stock. All full-time employees of the Bank who have completed one year of service with the Bank are eligible to participate in the ESOP. The ESOP utilized funds borrowed from the Company totaling $1,690,680, to purchase approximately 8%, or 169,068 shares of the Company's common stock issued in the Conversion. The loan to the ESOP will be primarily repaid with contributions from the Bank to the ESOP over a period not to exceed 15 years. Under the terms of the ESOP, the Bank makes contributions to the ESOP sufficient to cover all payments of principal and interest as they become due. The loan had an outstanding balance of $1,380,721 with an interest rate of 9.5% and $1,493,434 with an interest rate of 8.25% at September 30, 2000 and 1999, respectively. The interest rate on the loan is based on the Bank's prime rate. [GRAPHIC] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Shares purchased with the loan proceeds are held in a suspense account by the trustee of the plan for future allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants on the basis of compensation as described in the plan. The number of shares released to participants will be determined based upon the percentage of principal and interest payments made during the year divided by the total remaining principal and interest payments including the current year's payment. Participants will vest in the shares allocated to their respective accounts over a period not to exceed 5 years. Any forfeited shares are allocated to the then remaining participants in the same proportion as contributions. As of September 30, 2000, 22,542 shares have been allocated to participants and 146,526 shares remain unallocated. The fair value of the unallocated shares was $1,570,612 at September 30, 2000. The Company recognizes compensation expense attributable to the ESOP ratably over the fiscal year based upon the estimated number of ESOP shares to be allocated each December 31st. The Company recognized $124,000 and $128,000 as compensation expense in 2000 and 1999, respectively. The trustee for the ESOP must vote all allocated shares held in the ESOP trust in accordance with the instructions of the participants. Unallocated shares held by the ESOP trust are voted by the trustee in a manner calculated to most accurately reflect the results of the allocated ESOP shares voted, subject to the requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA). NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. The estimates are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. These estimates may differ substantially from amounts that could be realized in an immediate sale or settlement of the instrument. Fair value approximates book value for the following financial instruments due to their short-term nature: cash and due from banks, interest-earning bank balances, and advances from customers for taxes and insurance. Fair value for investment securities and mortgage-backed and related securities are based on quoted market prices. If a quoted market price is not available, fair value is estimated using market prices for similar securities. Fair value for variable rate loans that reprice frequently is based on the carrying value reduced by an estimate of credit losses inherent in the portfolio. Fair value for all other loans is estimated by discounting their future cash flows using interest rates currently being offered for loans of comparable terms and credit quality. Fair value for demand deposit accounts and interest-bearing accounts with no fixed maturity is equal to the carrying value. Certificate of deposit fair values are estimated by discounting cash flows from expected maturities using interest rates currently being offered for similar instruments. The carrying amount of repurchase agreements approximates fair value due to the short-term nature of the agreements. Fair value for the advances from the Federal Home Loan Bank Board is based on discounted cash flows using current interest rates. At September 30, 2000 and 1999, the Company had outstanding unfunded commitments to extend credit offered in the normal course of business. Fair values of these commitments are based on fees currently charged for similar instruments. At September 30, 2000 and 1999, the carrying amounts and fair values of these off-balance sheet financial instruments were immaterial. [GRAPHIC] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The Company has used management's best estimates of fair values of financial instruments based on the above assumptions. This presentation does not include certain financial instruments, nonfinancial instruments or certain intangible assets such as customer relationships, deposit base intangibles, or goodwill. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The estimated fair values of financial instruments as of September 30 were as follows:
2000 1999 ----------------------------- ----------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------------- -------------- -------------- -------------- Financial assets Cash and due from banks ............ $ 2,671,124 $ 2,671,124 $ 4,206,884 $ 4,206,884 Interest-earning bank balances ..... 883,692 883,692 8,375,733 8,375,733 Investment and mortgage-backed securities ........................ 52,701,578 52,098,740 48,634,366 48,116,191 Loans .............................. 176,963,216 172,295,703 168,044,032 164,032,000 Financial liabilities Deposits ........................... 161,351,514 153,435,501 159,424,778 154,810,000 Repurchase agreements .............. 605,500 605,500 -- -- Advances from FHLB ................. 40,000,000 38,908,929 35,500,000 34,014,000
NOTE 12 - EARNINGS PER SHARE Earnings per share has been determined under the provisions of SFAS No. 128, Earnings Per Share. Basic earnings per share is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Diluted earnings per share is computed by dividing net income applicable to common stock by the weighted average number of common shares and common stock equivalents for items that are dilutive, net of shares assumed to be repurchased using the treasury stock method. Common stock equivalents arise from the assumed conversion of outstanding stock options. The only potential stock of the Company as defined in SFAS No. 128, is stock options granted to various directors and officers of the Bank. The following is a summary of the computation of basic and diluted earnings per share:
Year Ended Year Ended September 30, 2000 September 30, 1999 -------------------- ------------------- Net income .............................. $ 2,184,868 $ 2,161,362 Weighted average outstanding shares ..... 4,117,934 4,293,516 Basic earnings per share ................ $ 0.53 $ 0.50 Weighted average outstanding shares ..... 4,117,934 4,293,516 Dilutive effect of stock options ........ 1,106 13,773 ------------ ------------ Weighted average diluted shares ......... 4,119,040 4,307,289 Diluted earnings per share .............. $ 0.53 $ 0.50
Options to purchase 10,000 shares of common stock at $13 per share were outstanding since May 1999 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. These options, which will expire May 2009, were outstanding at September 30, 2000 and 1999. On October 9, 1998, the Company's Board of Directors announced the authorization to repurchase up to 105,668 shares of outstanding common stock under the 1998 Stock Repurchase Plan. On April 19, 1999, the Company's Board of Directors announced the authorization to repurchase 295,869 shares of outstanding common stock for the 1999 Stock Option Plan and the 1999 Recognition and Retention Plan. On May 23, 2000, the Company's Board of Directors announced the authorization to repurchase up to 92,539 shares of outstanding common stock. As of September 30, 2000, 362,100 shares have been repurchased under these plans at an average price of $12.82 per share. [GRAPHIC] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 13 - PARENT-ONLY FINANCIAL INFORMATION The earnings of the Bank are recognized by Gaston Federal Bancorp, Inc. using the equity method of accounting. Accordingly, undistributed earnings of the Bank are recorded as increases in the Company's investment in the Bank. The following are the condensed financial statements of the Company as of and for the year ended September 30, 2000 and 1999. Condensed Statements of Financial Condition
2000 1999 -------------- -------------- Assets Cash and cash equivalents .................. $ 2,344,410 $ 5,199,471 Investment in securities available-for-sale 805,864 495,648 Investment in subsidiary ................... 35,966,739 33,992,158 Other assets ............................... 209,924 44,011 ------------ ------------ Total assets ............................... $ 39,326,937 $ 39,731,288 ============ ============ Liabilities and Stockholders' Equity Liabilities ................................ $ 40,162 $ 22,698 Stockholders' Equity ....................... 39,286,775 39,708,590 ------------ ------------ Total liabilities and stockholders' equity . $ 39,326,937 $ 39,731,288 ============ ============
Condensed Statements of Operations
Year Ended September 30, -------------------------------- 2000 1999 --------------- --------------- Interest income ........................................................ $ 125,441 $ 226,347 Interest expense ....................................................... -- -- Other operating expenses ............................................... (74,952) (136,687) ----------- ----------- Income before income taxes and undistributed earnings from subsidiaries 50,489 89,660 Income taxes ........................................................... (19,000) (70,148) ----------- ----------- Income before undistributed earnings from subsidiaries ................. 31,489 19,512 Equity in undistributed earnings of subsidiaries ....................... 2,153,379 2,141,850 ----------- ----------- Net income ............................................................. $ 2,184,868 $ 2,161,362 =========== ===========
[GRAPHIC] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Condensed Statements of Cash Flows
Year Ended September 30, ----------------------------- 2000 1999 -------------- -------------- Operating activities Net income .......................................................... $ 2,184,868 $ 2,161,362 Adjustments to reconcile net income to net Cash provided by operating activities Equity in undistributed earnings of subsidiaries .................... (2,153,379) (2,141,850) Issuance of stock for Recognition and Retention Plan ................ -- 1,014,408 Allocation of shares to ESOP ........................................ 123,984 122,105 Decrease (increase) in other operating assets ....................... (215,154) 11,987 (Decrease) increase in other operating liabilities .................. 17,464 (45,041) ------------ ------------ Net cash (used in) provided by operating activities ............... (42,217) 1,122,971 Investing activities Purchase of investments available-for-sale .......................... (150,007) -- Maturities and prepayments of investment securities ................. -- 1,000,000 ------------ ------------ Net cash provided by (paid in) investing activities ............... (150,007) 1,000,000 Financing activities Repurchase of common stock .......................................... (1,801,028) (2,859,489) Dividends to stockholders ........................................... (861,809) (938,057) ------------ ------------ Net cash (paid in) provided by financing activities ............... (2,662,837) (3,797,546) Net (decrease) increase in cash and cash equivalents ................. (2,855,061) (1,674,575) Cash and cash equivalents, beginning of period ....................... 5,199,471 6,874,046 ------------ ------------ Cash and cash equivalents, end of period ............................. $ 2,344,410 $ 5,199,471 ============ ============
[GRAPHIC] MANAGEMENT'S DISCUSSION AND ANALYSIS Description of Business 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, deposits held at the Bank, and investment securities. As of September 30, 2000, there were 1,821,289 shares of the Company's common stock held by the public and 2,397,645 shares held by Gaston Federal Holdings, MHC (the "Mutual Company"), the Company's parent mutual holding company. The publicly held common stock of the Company currently trades on the Nasdaq National Market System under the symbol GBNK. The Company's principal business is overseeing and directing the business of the Bank and investing the net stock offering proceeds retained by the Company. 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 residential, commercial, and consumer loans, and investment and mortgage-backed securities. The Company's results of operations are dependent primarily on net interest income, which is the difference between the income earned on its loan and securities portfolios and its cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the Company's provision for loan losses, sales of assets, service charges on its deposit accounts, and commissions on the sale of investment products. The Company's noninterest expense primarily consists of salaries and employee benefits, occupancy expense, professional services, advertising, and other noninterest expenses. Results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates and actions of regulatory and governmental authorities 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 approximately 20 miles west of the regional banking center of Charlotte, North Carolina. Gaston County is bounded by the North Carolina Counties of Mecklenburg, Lincoln, and Cleveland, and the South Carolina County of York. The Bank considers Gaston and these contiguous counties to be its primary market area. The Bank also operates a mortgage loan production office in Shelby, North Carolina. This office is located in Cleveland County and is approximately 30 miles from the main office in Gastonia. Forward Looking Statements This report may contain certain "forward-looking statements" that represent the Company's expectations or beliefs concerning future events as of the date of this report. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Factors that could cause such a difference include, but are not limited to, the timing and amount of revenues that may be recognized by the Company, continuation of current revenue and expense trends, unforeseen changes in the Company's markets, legal and regulatory changes, and general changes in the economy. Because of the risks and uncertainties inherent in forward-looking statements, readers should not place undue reliance on these statements. The Company has no obligation to update or revise these forward-looking statements to reflect events or circumstances that occur after the date of this report. Readers should carefully review the risk factors described in other documents the Company files from time to time with the SEC, including quarterly reports on Form 10-QSB and current reports filed on Form 8-K. [GRAPHIC] MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED Comparison of Financial Condition Years Ended September 30, 2000 and 1999 General The Company reported record earnings of $2,185,000, or $0.53 per share, for the fiscal year ended September 30, 2000, as compared to $2,161,000, or $0.50 per share, for the fiscal year ended September 30, 1999. Net interest income decreased slightly by $155,000, or 2.1%, due to significant increases in interest rates. However, this was offset, in part, by a $826,000, or 83.9%, increase in operating noninterest income and a $298,000, or 4.8%, decrease in noninterest expense. The provision for loan losses decreased from $105,000 in fiscal 1999 to $30,000 in fiscal 2000. Gains on sales of assets decreased from $1.4 million in fiscal 1999 to $257,000 in fiscal 2000. Total assets for the fiscal year ended September 30, 2000, increased by $7.2 million, or 3.0% from $237.5 million to $244.7 million. The change in assets was primarily due to a $8.9 million, or 5.3%, increase in net loans outstanding to $177.0 million. Commercial business loans increased by $11.2 million, or 65.6%, to $28.2 million, consumer loans increased by $5.6 million, or 48.0%, to $17.2 million, while mortgage loans decreased by $9.5 million, or 6.9%, to $147.5 million. Cash and cash equivalents, decreased by $9.0 million, or 71.7%, primarily due to the investment of excess funds held at the end of 1999 for possible Year 2000 cash needs. These funds were primarily used to fund increased demand for commercial business loans and home equity lines of credit. Also, investment securities and mortgage-backed and related securities increased by $4.1 million, or 8.4%, due to leverage strategies using funds from advances from the Federal Home Loan Bank. Management plans to continue to grow its asset base with a continued emphasis on higher-yielding commercial business loans and adjustable-rate home equity lines of credit. Total liabilities for the fiscal year ended September 30, 2000, increased by $7.7 million, or 3.9%, from $197.7 million to $205.4 million. The change in liabilities was primarily due to a $5.1 million increase in borrowed money and a $1.9 million increase in total deposits. Borrowed money increased from $35.5 million to $40.6 million, or 14.4%, while total deposits increased from $159.4 million to $161.4 million, or 1.2%. Funds generated from borrowed money and deposits were used to fund loan originations and to engage in various wholesale leverage strategies. Management plans to continue to aggressively market its retail deposit products to the local community and to increase the Bank's deposit market share through an expanding branch network. Management also plans to continue pursuing attractive opportunities to leverage the Company's capital. Total equity for the fiscal year ended September 30, 2000, decreased from $39.7 million to $39.3 million, or 1.1%. This decrease was due to a $1.8 million repurchase of common stock, the payment of $862,000 in cash dividends, and a $68,000 reduction of accumulated unrealized gains on available for sale securities. These reductions in capital were offset by $2.2 million in net income for the year. Management plans to continue to repurchase its publicly traded common stock at prices that are considered by management to be attractive. Results of Operations Comparison of Years Ended September 30, 2000 and 1999 General Net income for the fiscal year ended September 30, 2000, increased by $24,000, or 1.1%, to $2.2 million. This change was primarily due to a $155,000 decrease in net interest income, a $75,000 reduction in the provision for loan losses, a $1.1 million decrease in the gain on sale of assets, a $826,000 increase in operating noninterest income, a $298,000 decrease in noninterest expenses, and a $111,000 reduction in the income tax provision. Interest Income Interest income for the fiscal year ended September 30, 2000, increased by $1.2 million, or 7.7%, to $16.4 million. This change was primarily due to a $987,000 increase in interest earned on loans. This additional interest income was due to a $15.6 million, or 9.9%, increase in average outstanding loans to $174.2 million. The yield on loans remained flat at 7.5% primarily due to deferred fees recognized as a result of the sale of $13.1 million in mortgage loans in fiscal 1999. Interest earned on investment securities increased by $67,000, or 3.3%, while interest earned on mortgage-backed securities increased $122,000, [GRAPHIC] MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED or 10.3%. The average balance of investment securities decreased by $641,000, the effects of which were offset by an increase in yield from 5.8% to 6.1% due to higher market rates. Average outstanding mortgage-backed securities decreased by $204,000, while the yield increased from 5.7% to 6.3% due to higher market rates. Interest Expense Interest expense for the fiscal year ended September 30, 2000, increased $1.3 million, or 16.9%, to $9.2 million. This increase was due to a $561,000, or 8.8%, increase in interest paid on deposits and a $769,000, or 52.0% increase in interest paid on borrowings. Average deposits increased $8.8 million, or 5.8%, to $160.0 million. The average interest rate paid on deposits increased from 4.2% to 4.4% from fiscal 1999 to fiscal 2000. Average borrowings increased by $11.0 million, or 38.3%, to $39.6 million. The rate paid on borrowings has increased from 5.2% to 5.7% due to higher interest rates on additional advances taken in fiscal 2000. Net Interest Income Net interest income decreased by $155,000, or 2.1%, from $7.4 million for fiscal 1999 to $7.2 million for fiscal 2000. Net interest margin decreased slightly from 3.3% for fiscal 1999 to 3.0% for fiscal 2000. Average interest-earning assets increased $12.9 million while average interest-bearing liabilities increased $19.8 million. The primary reasons for this change were the purchase of $2.0 million in bank-owned life insurance, the $1.8 million repurchase of common stock, and the addition of the bank's fifth full service branch office. Provision for Loan Losses The Company provided $30,000 and $105,000 in loan loss provisions for the fiscal years ended September 30, 2000 and 1999, respectively. The Company's allowance for loan losses was $1.5 million, or 0.84% of total loans, for the fiscal year ended September 30, 2000, compared to $1.5 million, or 0.86% of total loans, for the fiscal year ended September 30, 1999. The ratio of nonperforming loans to total loans amounted to 0.15% and 0.06% for the fiscal years ended September 30, 2000, and 1999, respectively. Management will make future loan loss provisions based on available information including changes in economic conditions, changes in the loan portfolio mix and performance, and regulatory requirements. Noninterest Income Operating noninterest income is composed of service charges on deposit accounts, commissions on the sale on investment products, FHLB dividends, and other income. For the fiscal year ended September 30, 2000, operating noninterest income increased by $826,000, or 83.9%, from $985,000 to $1.8 million. The primary reasons for the change were a $221,000 increase in service charges on deposit accounts, a $303,000 increase in commissions on the sale of investment products, a $44,000 increase in FHLB dividends, and a $259,000 increase in other income. The increase in service charges on deposit accounts resulted from an aggressive marketing program to increase fee generating demand deposit accounts and a competitive fee structure on deposit products. Other income increased due to fees generated as a result of strong loan demand and increased commissions generated on the sale of uninsured investment products by the Bank's wholly-owned subsidiary. Noninterest income also includes gains on the sale of assets, which is considered to be a nonrecurring source of noninterest income. During the fiscal year ended September 30, 2000, the Company sold $2.2 million in investment securities and $595,000 in mortgage-backed securities at a gain of $225,000, and $17.2 million in loan servicing and $10,000 in loans at a gain of $32,000. During the fiscal year ended September 30, 1999, the Company sold $5.9 million in investment securities and $492,000 in mortgage-backed securities at a gain of $1.3 million, and $13.1 million in loans and $49,000 in premises and equipment at a gain of $117,000. This resulted in a decrease in the gain on the sale of assets of $1.1 million from 1999 to 2000. [GRAPHIC] MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED Noninterest Expenses Noninterest expense is composed of salaries and benefits, office occupancy, deposit insurance, data processing, advertising, professional services, and other expenses. For the fiscal year ended September 30, 2000, noninterest expense decreased $298,000, or 4.8%, from $6.3 million to $6.0 million. The primary reason for the change was a $369,000 decrease in salary and benefits and modest decreases in professional services, deposit insurance, and advertising. A $166,000 increase in occupancy expense and modest increases in data processing and other noninterest expenses offset these benefits. The decrease in salary and benefits was primarily due to a $1.0 million nonrecurring expense incurred during the fiscal year ended September 30, 1999, associated with the award of common stock in accordance with the Gaston Federal Bank 1999 Recognition and Retention Plan approved by the shareholders in April 1999. Occupancy expense increased as a result of the opening of a new full service branch in Dallas, North Carolina, in February 2000 and a loan production office in Shelby, North Carolina, in October 1999. Provision for Income Taxes The Company's provision for income taxes was $1.1 million and $1.2 million for the fiscal years ended September 30, 2000, and 1999, respectively. The change was primarily due to an increase in tax-advantaged assets such as municipal securities, U.S. Government Agency securities, and bank-owned life insurance that generate tax-exempt income. The purchase of these tax-advantaged assets resulted in a decrease in the effective tax rate from 35.7% to 33.2%. Comparison of Financial Condition Years Ended September 30, 1999 and 1998 General The Company reported earnings of $2,161,000, or $0.50 per share, for the fiscal year ended September 30, 1999, as compared to $1,886,000, for the fiscal year ended September 30, 1998. Net interest income increased by $549,000, or 8.1%, due to the investment of the $18.5 million in net proceeds received in the stock conversion. Operating noninterest income increased by $301,000, or 44.0%, while noninterest expense increased $1.7 million, or 37.1%, from fiscal 1998 to fiscal 1999. The provision for loan losses decreased from $300,000 in fiscal 1998 to $105,000 in fiscal 1999. Gains on sales of assets increased from $272,000 in fiscal 1998 to $1.4 million in fiscal 1999. Total assets for the fiscal year ended September 30, 1999, increased by $29.5 million, or 14.2%, from $208.0 million to $237.5 million. The change in assets was primarily due to a $31.5 million, or 23.1%, increase in net loans outstanding to $168.0 million. Mortgage loans secured by one-to-four family dwellings increased by $23.8 million, or 22.6%, to $129.3 million, while nonmortgage loans increased by $10.3 million, or 66.2%, to $26.0 million. Cash and cash equivalents, investment securities, and mortgage-backed and related securities decreased by $3.8 million, or 6.2%, due to the increased loan demand, normal maturities and principal payments, calls, and prepayments. Total liabilities for the fiscal year ended September 30, 1999, increased by $31.3 million, or 18.8%, from $166.4 million to $197.7 million. The change in liabilities was primarily due to a $16.0 million increase in borrowed money and a $15.5 million increase in total deposits. Borrowed money increased from $19.5 million to $35.5 million, or 82.1%, while deposits increased from $143.9 million to $159.4 million, or 10.8%. Funds generated from borrowed money and deposits were used to fund the purchase and origination of loans and to engage in various wholesale leverage strategies. Total equity for the fiscal year ended September 30, 1999, decreased from $41.6 million to $39.7 million, or 4.6%. This decrease was due, in part, to a $2.9 million repurchase of common stock, the payment of $938,000 in cash dividends, and a $1.4 million reduction of accumulated unrealized gains on available for sale securities. These reductions in capital were offset by $2.2 million in net income for the year. [GRAPHIC] MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED Results of Operations Comparison of Years Ended September 30, 1999 and 1998 General Net income for the fiscal year ended September 30, 1999, increased by $275,000, or 14.6%, to $2.2 million. This change was primarily due to a $549,000 increase in net interest income, a $195,000 reduction in the provision for loan losses, a $1.1 million increase in the gain on sale of assets, a $301,000 increase in operating noninterest income, a $1.7 million increase in noninterest expenses, and a $191,000 increase in the income tax provision. Interest Income Interest income for the fiscal year ended September 30, 1999, increased by $1.3 million, or 9.4%, to $15.2 million. This change was primarily due to a $979,000, or 8.9%, increase in interest earned on loans outstanding. This increase was primarily attributable to a $17.2 million, or 12.2%, increase in average loans outstanding from $141.3 million to $158.5 million, the effects of which were offset by a reduction in the yield from 7.8% to 7.5%. The decrease in yield was primarily due to the lower interest rate environment that resulted in the refinancing of many existing higher-yielding loans and the origination of new loans at lower interest rates. Interest earned on mortgage-backed and related securities increased by $547,000, or 86.3%, due to an $11.1 million, or 114.1%, increase in the average outstanding balance from $9.7 million to $20.8 million, the effects of which were offset by a decrease in yield from 6.5% to 5.7%. Mortgage-backed securities increased during the year primarily due to the execution of leverage strategies, which were funded by FHLB advances. Interest earned on investment securities and interest-earning deposits decreased by $214,000, or 9.4%, due to a $1.9 million decrease in the average outstanding balance from $37.4 million to $35.5 million and a decrease in yield from 6.1% to 5.8%. The decrease in yield was primarily caused by a lower interest rate environment which resulted in faster prepayments on higher-yielding securities, downward adjustments on adjustable-rate securities, and the reinvestment of matured and called securities at lower interest rates. Interest Expense For the fiscal year ended September 30, 1999, interest expense increased by $761,000, or 10.7%, from $7.1 million to $7.9 million. This change was due to a $1.0 million increase in interest expense on borrowed money, the effects of which were offset by a $287,000 decrease in interest paid on deposits. The increase in interest expense on borrowed money was due to a $20.8 million increase in the average balance from $7.9 million to $28.7 million, the effects of which were offset by a 33 basis point decrease in the interest rate paid on borrowed funds. Interest paid on deposits decreased as a result of a $2.0 million reduction in the average outstanding balance from $153.2 million to $151.2 million and a reduction in the rate paid from 4.4% to 4.2%. The average outstanding balance of deposits in 1998 included the effects of approximately $113 million in deposits held in escrow in connection with the mutual holding company reorganization completed in April 1998. Net Interest Income Net interest income increased by $549,000, or 8.1%, from $6.8 million in 1998 to $7.4 million in 1999. Net interest margin decreased slightly from 3.5% for fiscal 1998 to 3.3% for fiscal 1999. Average interest-earning assets increased $28.3 million while average interest-bearing liabilities increased $18.8 million. This change was primarily due to the receipt of $18.5 million in net proceeds from the stock conversion. Provision for Loan Losses The Company provided $105,000 and $300,000 in loan loss provisions for the fiscal years ended September 30, 1999 and 1998, respectively. The reduction in the provision for loan losses was primarily the result of the decrease in the ratio of nonperforming loans to total loans from 0.91% in 1998 to 0.06% in 1999. The Company's allowance for loan losses was $1.5 million and $1.4 million, 0.86% and 0.98% of total loans, for the fiscal years ended September 30, 1999 and 1998, respectively. [GRAPHIC] MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED Noninterest Income Operating noninterest income is composed of service charges on deposit accounts, commissions on the sale on investment products, FHLB dividends, and other income. Operating noninterest income increased by $301,000, or 43.8%, from $684,000 for the fiscal year ended September 30, 1998, to $985,000 for the fiscal year ended September 30, 1999. The primary reasons for the change were a $108,000 increase in service charges on deposit accounts, and a $193,000 increase in other income. The increase in service charges on deposit accounts resulted from an aggressive marketing program to increase fee generating demand deposit accounts. Other income increased due to fees generated as a result of strong loan demand and increased commissions generated on the sale of uninsured investment products by the Bank's wholly-owned subsidiary. Noninterest income also includes gains on the sale of assets, which is considered to be a nonrecurring source of noninterest income. During the fiscal year ended September 30, 1999, the Company sold $5.9 million in investment securities and $492,000 in mortgage-backed securities at a gain of $1.3 million, and $13.1 million in loans and $49,000 in premises and equipment at a gain of $117,000. During the fiscal year ended September 30, 1998, the Company sold $2.6 million in investment securities at a gain of $184,000 and $9.6 million in loans at a gain of $88,000. This resulted in an increase of $1.1 million in nonrecurring gains on the sale of assets from 1998 to 1999. Noninterest Expense Noninterest expense is composed of salaries and benefits, office occupancy, deposit insurance, data processing, advertising, professional services, and other expenses. Noninterest expense increased $1.7 million, or 37.1%, from $4.6 million to $6.3 million. The primary reason for the change was a $1.5 million increase in salary and benefits. There were also modest increases in professional services, data processing, and other noninterest expenses, the effects of which were partially offset by small decreases in office occupancy, deposit insurance, and advertising. The increase in salary and benefits was primarily due to a $1.0 million nonrecurring expense associated with the award of common stock in accordance with the Gaston Federal Bank 1999 Recognition and Retention Plan approved by the shareholders in April 1999. Also, there was an increase in the number of employees resulting, in part, from the preparation of the opening of the Shelby Loan Production Office and the implementation of extended drive-thru hours at each of the branch office locations. Professional services increased as a result of the additional expenses associated with operating a publicly traded company and data processing expenses increased due to the purchase of updated software and hardware and the added expense of preparing and testing for Year 2000 readiness. Provision for Income Taxes The Company's provision for income taxes was $1.2 million and $1.0 million for the fiscal years ended September 30, 1999, and 1998, respectively. The change was primarily due to a $470,000 increase in income before taxes and a slight increase in the effective tax rate from 34.7% to 35.7%. Management of Market Risk The Company's most significant form of market risk is interest rate risk, as the majority of the Company's assets and liabilities are sensitive to changes in interest rates. The Bank's Asset/Liability Committee (the "ALCO") is responsible for monitoring and managing exposure to interest rate risk and ensuring that the level of sensitivity of the Bank's net portfolio value is maintained within limits established by the Board of Directors. Through such management, the ALCO seeks to reduce the vulnerability of the Bank's operations to changes in interest rates. During the past year, the ALCO utilized the following strategies to manage interest rate risk: (1) emphasizing the origination and retention of short-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 adjustable-rate mortgage loans; and (4) investing in shorter-term investment securities. [GRAPHIC] MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED The Office of Thrift Supervision, the Bank's primary regulator, requires the computation of amounts by which the net present value of the Bank's cash flow from assets, liabilities, and off balance sheet items (the Bank's net portfolio value or "NPV") would change in the event of a range of assumed changes in market interest rates. These computations estimate the effect on an institution's NPV from instantaneous and permanent one hundred the three hundred basis point increases and decreases in market interest rates. The following table presents the Bank's projected change in NPV at September 30, 2000, as calculated by Risk Analytics, an independent third party, based upon information provided by the Bank.
Changes in Interest Rates Projected NPV Change Board Limit - ---------------------------------- ---------------------- ------------ 300 basis point rise -30.00% -45.00% 200 basis point rise -19.78% -30.00% 100 basis point rise -9.74% -15.00% No change 0.00% 0.00% 100 basis point decline 7.76% -15.00% 200 basis point decline 10.47% -30.00% 300 basis point decline 7.63% -45.00%
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in NPV require the making of certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. 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. Capital Resources and Liquidity The Company's liquidity management objective is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for expansion. Liquidity management addresses the ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise. The Company's primary sources of internally generated funds are principal and interest payments on loans receivable, cash flows generated from operations, and cash flows generated by investments. External sources of funds include increases in deposits and FHLB advances. The Company is required under applicable federal regulations to maintain specified levels of "liquid" investments in qualifying types of United States Government, federal agency and other investments having maturities of five years of less. Current OTS regulations require that a savings association maintain liquid assets of not less than 4% of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet applicable liquidity requirements. At September 30, 2000, the Company's liquidity, as measured for regulatory purposes, was in excess of the minimum OTS requirement. At September 30, 2000, the Company had loan commitments (excluding undisbursed portions of construction loans of $4.5 million) of $1.1 million and unused lines of credit of $24.3 million. The Company believes that it has adequate resources to fund loan commitments as they arise. If the Company requires funds beyond its internal funding capabilities, the Company has $8.8 million in additional advances available from its line of credit from the FHLB. At September 30, 2000, approximately $89.5 million of time deposits were scheduled to mature within a year, and the Company expects that a portion of these time deposits will not be renewed upon maturity. [GRAPHIC] MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED Impact of Inflation and Changing Prices The consolidated financial statements and related notes have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, nearly all the assets and liabilities of the Company are financial in nature. As a result, interest rates have a more significant impact on the Company's performance than the effect of inflation. Interest rates do not necessarily change in the same magnitude as the price of goods and services. Impact of New Accounting Standards In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which, establishes accounting and reporting requirements for derivative instruments, including derivative instruments imbedded other contracts. The Company adopted the provisions of SFAS No. 133 effective October 1, 2000. In conjunction with the adoption of SFAS 133, the Company transferred $12.9 million in investment securities and $2.8 million in mortgage-backed securities previously designated as held-to-maturity to available-for-sale. This transfer will allow management more flexibility in managing the Company's investment and mortgage-backed securities portfolios. Based upon the market value of these investment and mortgage-backed securities as of September 30, 2000, this transfer would have increased the accumulated unrealized losses on securities available for sale, net of tax, by approximately $367,000. Adoption of SFAS 133 is not expected to have any other material impact on the consolidated financial statements of the Company. [GRAPHIC] REPORT OF INDEPENDENT AUDITORS The Board of Directors Gaston Federal Bancorp, Inc. We have audited the accompanying consolidated statements of condition of Gaston Federal Bancorp, Inc. and subsidiaries as of September 30, 2000 and 1999 and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for the years then ended. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gaston Federal Bancorp, Inc. and subsidiaries as of September 30, 2000 and 1999 and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. [GRAPHIC] Gastonia, North Carolina October 20, 2000, except for Note 3, as to which the date is November 30, 2000 [GRAPHIC] LOCATIONS Gaston Federal Bank Corporate Office 245 West Main Avenue Post Office Box 2249 Gastonia, NC 28053-2249 (704) 868-5200 Akers Center Office 1535 Burtonwood Drive Gastonia, NC 28054-4011 (704) 868-5210 Martha Rivers Office 1670 Neal Hawkins Road Gastonia, NC 28056-6429 (704) 868-5215 Mount Holly Office 233 South Main Street Mount Holly, NC 28120-1620 (704) 827-6744 Dallas Office 3135 Dallas High Shoals Road Dallas, NC 28034-1307 (704) 922-9292 Stanley Office 412 South Highway 27 Stanley, NC 28164-2055 (704) 263-1212 (Opening in Spring 2001) Gaston Financial Services, Inc. 245 West Main Avenue Post Office Box 2249 Gastonia, NC 28053-2249 (704) 868-5200 Gaston Federal Mortgage Center Gastonia Loan Production Office 1670 Neal Hawkins Road Post Office Box 6250 Gastonia, NC 28056-6000 (704) 868-5227 Community First Mortgage Company Shelby Loan Production Office Mason Square Building 201 South Washington Street, Suite 101 Shelby, NC 28150-2614 (704) 487-4744 Gaston Federal Service 24 24 hour telephone banking (704) 868-5222 [GRAPHIC] STOCKHOLDER INFORMATION Common Stock and Related Matters The Company's common stock is listed on the Nasdaq National Market under the symbol "GBNK." As of November 15, 2000, the Company had 941 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 4,218,934 shares outstanding. As of such date, Gaston Federal Holdings, MHC (the "Mutual Company"), the Company's mutual holding company, held 2,431,645 shares of common stock and stockholders other than the Mutual Company held 1,787,289 shares. The following brokers make a market in the Company's stock: McDonald Investments .............. 1-800-340-6321 Friedman, Billings, Ramsey & Co. .. 1-800-846-5417 AnPac Securities,Group, Inc. ...... 1-800-897-0384 Spear, Leeds & Kellogg ............ 1-800-526-3160 Knight Securities L.P. ............ 1-212-336-8690
Form 10-KSB A copy of the Company's Form 10-KSB, as filed with the Securities and Exchange Commission, for the fiscal year ended September 30, 2000, may be obtained without charge upon written request to the Shareholder Relations Officer at Gaston Federal Bancorp, Inc., P.O. Box 2249, Gastonia, North Carolina 28053-2249. Market Price of Common Stock The following table sets forth quarterly market price for the Common Stock over the past two years.
High Low Fiscal Year 2000 First quarter ......... $ 12 5/8 $11 1/8 Second quarter ........ $ 11 7/8 $11 1/8 Third quarter ......... $ 11 5/16 $10 3/8 Fourth quarter ........ $10 15/16 $ 10
High Low Fiscal Year 1999 First quarter .......... $14 7/8 $ 10 1/8 Second quarter ......... $13 1/2 $ 11 1/2 Third quarter .......... $13 7/8 $ 11 1/2 Fourth quarter ......... $14 1/4 $12 7/16
Annual Meeting of Stockholders The Annual Meeting of Stockholders will be held at 10:30 A.M. on Thursday, February 15, 2001, at the Gaston County Public Library at 1555 East Garrison Boulevard, Gastonia, North Carolina, 28054-5156. [GRAPHIC] [GRAPHIC] [GRAPHIC] CORPORATE INFORMATION [GRAPHIC] Standing from left to right: James J. Fuller, Charles D. Massey, Ben R. Rudisill, II, Kim S. Price, and Martha Barnett Beal. Seated from left to right: William H. Keith, Eugene R. Matthews, II, and Senator David W. Hoyle. Board of Directors Senator David W. Hoyle, Chairman of the Board Ben R. Rudisill, II, Vice Chairman of the Board Kim S. Price, President, CEO, and Director Martha Barnett Beal, Director James J. Fuller, Director William H. Keith, Director Charles D. Massey, Director Eugene R. Matthews, II, Director Executive Officers Kim S. Price, President and Chief Executive Officer Paul L. Teem, Jr., Executive Vice President, Secretary, and Chief Administrative Officer Gary F. Hoskins, Senior Vice President, Treasurer, and Chief Financial Officer Michael R. Maguire, Senior Vice President and Chief Credit Officer Service Corporation Gaston Financial Services, Inc. 245 West Main Avenue Post Office Box 2249 Gastonia, NC 28053-2249 (704) 868-5200 Directors Emeriti Henry L. Fowler, Sr. Thomas M. Holland B. Frank Matthews, II General Counsel Stott, Hollowell, Palmer, and Windham, L.L.P. 401 East Franklin Boulevard Post Office Box 995 Gastonia, NC 28053-0995 Special Counsel Luse Lehman Gorman Pomerenk & Schick, P.C. 5335 Wisconsin Avenue, N.W., Suite 400 Washington, D.C. 20015-2052 Independent Auditors Cherry, Bekaert & Holland, L.L.P. 2020 Remount Road Post Office Box 1064 Gastonia, NC 28053-1064 Transfer Agent and Registrar Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016-3572 (800) 368-5948 EX-21 3 0003.txt SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARIES OF THE COMPANY Company Percent Owned - ------- ------------- Gaston Federal Bank 100% owned by the Company. Gaston Financial Services, Inc. 100% owned by the Bank. (dba Gaston Federal Investment Services) EX-23.1 4 0004.txt CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors Gaston Federal Bancorp, Inc. We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-77657) of Gaston Federal Bancorp, Inc. of our report dated October 20, 2000, except for note 3, as to which the date is November 30, 2000, relating to the consolidated statements of condition, operations, comprehensive income, changes in equity and cash flows as of and for the years ended September 30, 2000 and 1999, which report is incorporated by reference in the September 30, 2000 annual report on Form 10-KSB of Gaston Federal Bancorp, Inc. /s/ Cherry, Bekaert & Holland, L.L.P. Gastonia, North Carolina December 21, 2000 EX-27 5 0005.txt FDS
9 1,000 12-MOS SEP-30-2000 OCT-01-2000 SEP-30-2000 3,555 0 0 0 20,066 12,864 12,285 176,963 1,537 244,651 161,352 3,109 1,490 37,500 0 0 15,201 24,086 244,651 12,986 2,127 1,302 16,414 6,968 9,219 7,195 30 225 5,960 3,272 3,272 0 0 2,185 0.53 0.53 2.5 257 0 0 2,096 1,509 3 0 1,537 1,537 0 0
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