-----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, GyxiFGBo6IePKCCCB3fHp0v4u8PqdMMH76N9VyjJ2so6VmeBT6qj8zvt76k+NBah H2N6E1wHCsR5uZX3r2wHaQ== 0001005477-01-501967.txt : 20020410 0001005477-01-501967.hdr.sgml : 20020410 ACCESSION NUMBER: 0001005477-01-501967 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-23971 FILM NUMBER: 1788141 BUSINESS ADDRESS: STREET 1: 245 WEST MAIN STREET CITY: GASTONIA STATE: NC ZIP: 28053 BUSINESS PHONE: 7048685200 MAIL ADDRESS: STREET 1: 245 WEST MAIN STREET CITY: GASTONIA STATE: NC ZIP: 28053 10QSB 1 d01-35167.txt FORM 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM 10-QSB (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 |_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to _____________________ Commission File Number 0-23971 GASTON FEDERAL BANCORP, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) United States 56-2063438 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 245 West Main Avenue, Gastonia, North Carolina 28052-4140 --------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (704)-868-5200 -------------- - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check |X| whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: There were 4,209,434 shares of the Registrant's common stock outstanding as of November 9, 2001. GASTON FEDERAL BANCORP, INC. INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements............................ 2 Consolidated Statements of Financial Condition as of September 30, 2001 and December 31, 2000 .................... 2 Consolidated Statements of Operations for the three and nine months ended September 30, 2001 and 2000..................... 3 Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2001 and 2000................ 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000.................................. 5 Notes to Consolidated Financial Statements....................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 8 PART II. OTHER INFORMATION................................................. 12 1 PART I. FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements Gaston Federal Bancorp, Inc. and Subsidiary Consolidated Statements of Financial Condition (in thousands)
September30, December 31, 2001 2000 ------------ ------------ (unaudited) Assets Cash and cash equivalents ...................................... 32,796 26,709 Investment securities available-for-sale, at fair value ........ 28,332 32,822 Mortgage-backed securities available-for-sale, at fair value ... 25,015 22,955 Loans, net ..................................................... 165,743 158,820 Premises and equipment, net .................................... 4,857 4,163 Accrued interest receivable .................................... 1,303 1,352 Federal Home Loan Bank stock ................................... 2,177 2,177 Other assets ................................................... 6,375 3,752 -------- -------- Total assets ................................................ $266,598 $252,750 ======== ======== Liabilities and Equity Deposits ....................................................... $180,155 $167,931 Advances from borrowers for taxes and insurance ................ 918 351 Borrowed money ................................................. 42,158 42,737 Other liabilities .............................................. 1,740 1,968 -------- -------- Total liabilities ........................................... 224,971 212,987 Retained earnings, substantially restricted .................... 25,015 23,931 Common stock and additional paid in capital, net of ESOP loan .. 15,211 15,241 Unrealized gain on securities available-for-sale, net of tax ... 1,401 591 -------- -------- Total equity ................................................ 41,627 39,763 -------- -------- Total liabilities and equity ................................... $266,598 $252,750 ======== ========
See accompanying notes to consolidated financial statements. 2 Gaston Federal Bancorp, Inc. and Subsidiary Consolidated Statements of Operations (unaudited) (in thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Interest income Loans .................................................. $ 3,091 $ 3,417 $ 9,392 $ 9,884 Investment securities .................................. 421 517 1,386 1,507 Interest-bearing deposits .............................. 215 13 771 70 Mortgage-backed and related securities ................. 363 329 1,127 1,002 ---------- ---------- ---------- ---------- Total interest income ................................ 4,090 4,276 12,676 12,463 Interest Expense Deposits ............................................... 1,848 1,864 5,938 5,299 Borrowed funds ......................................... 593 614 1,813 1,788 ---------- ---------- ---------- ---------- Total interest expense ................................. 2,441 2,478 7,751 7,087 ---------- ---------- ---------- ---------- Net interest income .................................... 1,649 1,798 4,925 5,376 Provision for loan losses .............................. 30 8 90 22 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses .. 1,619 1,790 4,835 5,354 Noninterest Income Service charges on deposit accounts .................... 459 175 1,301 460 Gain on sale of assets ................................. 0 33 0 260 Other income ........................................... 280 387 853 1,031 ---------- ---------- ---------- ---------- Total noninterest income ............................. 739 595 2,154 1,751 Noninterest Expense Compensation and benefits .............................. 940 941 2,710 2,838 Occupancy and equipment expense ........................ 179 152 510 469 Loss on sale of assets ................................. 0 2 9 3 Other expenses ......................................... 548 378 1,588 1,270 ---------- ---------- ---------- ---------- Total noninterest expense ............................ 1,667 1,473 4,817 4,580 Income before income taxes ............................. 691 912 2,172 2,525 Provision for income taxes ............................. 230 304 689 840 ---------- ---------- ---------- ---------- Net income ............................................. $ 461 $ 608 $ 1,483 $ 1,685 ========== ========== ========== ========== Basic earnings per share ............................... $ 0.11 $ 0.15 $ 0.36 $ 0.41 Diluted earnings per share ............................. $ 0.11 $ 0.15 $ 0.36 $ 0.41 Basic weighted average outstanding shares .............. 4,068,575 4,058,156 4,080,122 4,096,542 Diluted weighted average outstanding shares ............ 4,100,312 4,058,156 4,091,723 4,097,648 Dividends paid per share ............................... $ 0.075 $ 0.060 $ 0.225 $ 0.180
3 Gaston Federal Bancorp, Inc. and Subsidiary Consolidated Statements of Comprehensive Income (unaudited) (in thousands)
Nine Months Ended September 30, ------------------ 2001 2000 ------ ------- Net income .............................................................. $1,483 $ 1,685 Other comprehensive income, net of tax: Unrealized gains on securities: Unrealized holding gains arising during period ................. 804 278 Reclassification adjustment for losses included in net income ... 6 (144) ------ ------- Other comprehensive income .......................................... 810 134 ------ ------- Comprehensive income .................................................... $2,293 $ 1,819 ------ -------
4 Gaston Federal Bancorp, Inc. and Subsidiary Consolidated Statements of Cash Flows (unaudited) (in thousands)
Nine Months Ended September 30, ---------------------- 2001 2000 -------- -------- Cash flows from operating activities: Net income ......................................................................... $ 1,483 $ 1,685 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ...................................................... 90 22 Depreciation ................................................................... 302 304 Purchase of bank-owned life insurance .......................................... (2,578) (2,097) (Gain) loss on sale of investments, available for sale ......................... 9 (225) (Gain) on sale of loans ........................................................ 0 (1) (Gain) on sale of other assets ................................................. 0 (31) (Increase) decrease in other assets ............................................ 17 480 Increase (decrease) in other liabilities ....................................... (228) 11 -------- -------- Net cash provided by (used for) operating activities ......................... (905) 148 -------- -------- Cash flows from investing activities: Net (increase) in loans receivable ................................................. (6,942) (7,043) Proceeds from the sale of investment securities .................................... 0 2,257 Proceeds from the sale of mortgage-backed securities ............................... 1,257 595 Proceeds from the sale of loans .................................................... 0 10 Proceeds from the sale of other assets ............................................. 196 276 Maturities and prepayments of investment securities ................................ 10,720 1,107 Maturities and prepayments of mortgage-backed securities ........................... 5,716 2,648 Purchases of investments ........................................................... (5,420) (4,600) Purchases of mortgage-backed securities ............................................ (9,041) (4,149) Purchases of FHLB stock ............................................................ 0 (402) Net cash flows from other investing activities ..................................... (1,192) (1,484) -------- -------- Net cash (used for) investment activities .................................... (4,706) (10,785) -------- -------- Cash flows from financing activities: Net increase in deposits ........................................................... 12,224 2,749 Dividends to stockholders .......................................................... (398) (621) Repurchase of common stock ......................................................... (115) (897) Net increase (decrease) in borrowed money .......................................... (579) 5,105 Increase in advances from borrowers for insurance and taxes ........................ 566 659 -------- -------- Net cash provided by financing activities .................................... 11,698 6,995 -------- -------- Net increase (decrease) in cash and cash equivalents ................................. 6,087 (3,642) Cash and cash equivalents at beginning of period ..................................... 26,709 7,197 -------- -------- Cash and cash equivalents at end of period ........................................... $ 32,796 $ 3,555 ======== ========
5 GASTON FEDERAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - Basis of Presentation In management's opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three and nine month periods ended September 30, 2001 and 2000, in conformity with generally accepted accounting principles. The financial statements include the accounts of Gaston Federal Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Gaston Federal Bank (the "Bank"). Operating results for the three and nine month periods ended September 30, 2001, are not necessarily indicative of the results that may be expected for future periods. The organization and business of the Company, accounting policies followed, and other information are contained in the notes to the consolidated financial statements of the Company as of and for the years ended September 30, 2000 and 1999, filed as part of the Company's annual report on Form 10-KSB. These consolidated financial statements should be read in conjunction with the annual consolidated financial statements. During the quarter ended December 31, 2000, the Company's Board of Directors adopted a resolution to change the Company's fiscal year end from September 30th to December 31st, effective October 1, 2000. The Company filed a Form 8-K providing public notice of the change in the Company's fiscal year. All prior period financial information is presented for comparable periods of the preceding calendar year. Note B - Earnings per Share Earnings per share has been determined under the provisions of the Statement of Financial Accounting Standards No. 128, Earnings Per Share. For the quarters ended September 30, 2001 and 2000, basic earnings per share has been computed based upon the weighted average common shares outstanding of 4,068,575 and 4,058,156, respectively. For the nine months ended September 30, 2001 and 2000, basic earnings per share has been computed based upon the weighted average common shares outstanding of 4,080,122 and 4,096,542, respectively. The only potential stock of the Company as defined in the Statement of Financial Accounting Standards No. 128, Earnings Per Share, is stock options granted to various directors and officers of the Bank. The following is a summary of the diluted earnings per share calculation for the three and nine months ended September 30, 2001, and 2000: (in thousands, except share data)
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net income ............................ $ 461 $ 608 $ 1,483 $ 1,685 Weighted average outstanding shares ... 4,068,575 4,058,156 4,080,122 4,096,542 Dilutive effect of stock options ...... 31,737 0 11,601 1,106 ---------- ---------- ---------- ---------- Weighted average diluted shares ....... 4,100,312 4,058,156 4,091,723 4,097,648 Diluted earnings per share ........... $ 0.11 $ 0.15 $ 0.36 $ 0.41
6 Options were excluded from the calculation of diluted earnings per share for the three month period ended September 30, 2000, because the exercise prices of $12.00 for 192,569 shares and $13.00 for 10,000 shares exceeded the average market price of $10.53 for the quarter. Note C - Stock Compensation Plans On April 12, 1999, the Company's shareholders approved the Gaston Federal Bank 1999 Stock Option Plan that provided for the issuance of 211,335 options for directors and officers to purchase the Company's common stock. As of September 30, 2001, 191,748 options had been awarded under the plan at a weighted average exercise price of $12.05 and a weighted average contractual life of 91 months. There were 134,449 options fully vested as of September 30, 2001. The Company applies the provisions of Accounting Principles Board Opinion No. 25 in accounting for the Stock Option Plan described above and, accordingly, no compensation expense has been recognized in connection with the granting of the stock options. Note D - Impact of Recently Adopted 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 Company adopted the provisions of this statement effective October 1, 2000. In connection with the adoption of the provisions of SFAS No. 133, the Company transferred all securities previously designated as held-to-maturity at September 30, 2000, into the available-for-sale category. The transfer was accounted for at the fair values of the securities at September 30, 2000. The effect of the transfer was to decrease carrying values of these securities by approximately $603,000 and increase deferred tax assets by approximately $236,000. 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements provided that the Company notes that a variety of factors could cause the Company's actual results to differ materially from the anticipated results expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, and results of the Company's business include, but are not limited to, changes in economic conditions, changes in interest rates, and changes in laws and regulations. Accordingly, past results and trends should not be used by investors to anticipate future results or trends. Statements included in this report should be read in conjunction with the Company's Annual Report on Form 10-KSB and are incorporated into this discussion by this reference. Comparison of Financial Condition Assets. Total assets of the Company increased by $13.8 million, or 5.2%, from $252.8 million as of December 31, 2000, to $266.6 million as of September 30, 2001. During the nine month period ended September 30, 2001, net mortgage loans decreased by $11.4 million, or 10.1%, to $101.5 million, while net nonmortgage loans increased by $18.3 million, or 39.9%, to $64.2 million. This shift in the loan portfolio composition reflects management's efforts to make the Company's balance sheet more reflective of a community bank. Management plans to continue to grow the loan portfolio in a safe and sound manner with an emphasis on the origination and retention of short-term, high-yielding nonmortgage loans and the origination and sale of mortgage loans. Nonperforming assets remained low at 0.16% of total assets, and loan loss reserves amounted to 0.93% of total loans. Also during the period, cash and cash equivalents increased $6.1 million to $32.8 million, investment securities decreased by $4.5 million to $28.3 million, and mortgage-backed securities increased by $2.1 million to $25.0 million. The increases in cash and cash equivalents and mortgage-backed securities were primarily funded by increases in deposits and maturities and calls of investment securities. Liabilities. Total liabilities increased by $12.0 million, or 5.3%, from $213.0 million as of December 31, 2000, to $225.0 million as of September 30, 2001. The primary reason for the change was a $12.2 million, or 6.8%, increase in total deposits from $167.9 million to $180.1 million. Deposits increased due to competitive interest rates, aggressive marketing, and employee incentives. All deposit growth came from the Bank's primary market area. Management plans to continue in its efforts to gain deposit market share through new product development and branch expansion with an emphasis on demand deposits. Borrowed money decreased by $579,000, or 1.4%, to $42.2 million. Borrowed money is primarily comprised of various callable and fixed-term Federal Home Loan Bank advances with a weighted average interest rate of 5.74%. Equity. Total equity increased by $1.9 million, or 4.5%, from $39.8 million as of December 31, 2000, to $41.6 million as of September 30, 2001. This increase was primarily due to the $1.4 million in earnings during the period and a $810,000 increase in unrealized gains on available-for-sale securities. Also during the period, the Company paid $398,000 in cash dividends and repurchased 9,500 shares of common stock at a cost of $115,000, or $12.16 per share. The Company has been authorized to repurchase a total of 581,797 shares of common stock, or 136,335 additional shares, as of September 30, 2001. Management will continue to repurchase common stock of the Company at prices that are considered to be attractive. 8 Comparison of Results of Operations for the Three Months Ended September 30, 2001 and 2000 General. Net income for the Company for the three months ended September 30, 2001, amounted to $461,000, or $0.11 per share, as compared to $608,000, or $0.15 per share, for the three months ended September 30, 2000. Net income for the quarter ended September 30, 2000, included a $31,000 nonrecurring net gain on sale of assets, resulting in net operating income of $588,000, or $0.15 for the quarter. Net interest income. Net interest income decreased by $149,000, or 8.3%, to $1.6 million for the three months ended September 30, 2001. Interest income decreased by $186,000 due, in part, to an 85 basis point decrease in the average yield on interest earning assets to 6.58%. This decrease in yield was offset, in part, by a $15.7 million increase in average interest earning assets to $246.7 million. The Bank continues to maintain a large balance of low-yielding short-term bank deposits to be used for funding a portion of the acquisition of all of the common stock of Innes Street Financial Corp. This transaction, which is subject to shareholder and regulatory approval, is expected to cost $37.4 million and should be completed by the fourth quarter of 2001. These bank balances averaged $25.3 million during the quarter at an average yield of 3.43%. These excess short-term bank balances would normally be used to purchase higher-yielding investments or fund loan originations. Interest expense decreased by $37,000, primarily due to 34 basis point decrease in the average cost of funds to 4.54%. This decrease in cost of funds was offset, in part, by a $10.6 million increase in average costing liabilities to $212.8 million. Provision for loan losses. The provision for loan losses amounted to $30,000 for the three months ended September 30, 2001, as compared to $7,500 for the three months ended September 30, 2000. This represents an increase of $22,500. The amount of the provision for loan losses was increased, in part, due to the increased emphasis on the origination and retention of higher-yielding commercial and consumer loans. These loans possess a higher level of risk than owner-occupied mortgage loans and require a higher level of reserves. The ratio of loan loss reserves to gross loans was 0.93% as of September 30, 2001, and 0.86% as of September 30, 2000. Noninterest income. Noninterest income, net of nonrecurring gains on sales of assets, amounted to $739,000 for the three months ended September 30, 2001, as compared to $562,000 for the three months ended September 30, 2000. This increase of $177,000, or 31.5%, was primarily due to increased fees generated by the Bank's mortgage-banking department and additional fee income derived from deposit products. Management plans to continue in its efforts to increase its outstanding balance of fee-generating demand deposit accounts through targeted advertising and branch expansion. Total demand deposit accounts increased by 26.0% during the past 12 months to $24.3 million as of September 30, 2001. During the quarter ended September 30, 2000, the Company recognized a nonrecurring gain of $33,000 from the sale of originated mortgage loan servicing rights for 221 loans totaling $17.4 million Noninterest expense. Noninterest expense increased by $193,000, or 13.1%, to $1.7 million as of September 30, 2001. This increase was primarily due to higher occupancy and equipment associated with the opening of the Bank's sixth full-service office in February 2001, and increased expenses associated with servicing the Bank's growing demand deposit account portfolio. This increase was offset, in part, by lower compensation expense, professional services expense, and advertising expense. Income taxes. Income taxes amounted to $230,000, or 33.3% of taxable income, for the quarter ended September 30, 2001, as compared to $304,000, or 33.4% of taxable income, for the quarter ended September 30, 2000. 9 Comparison of Results of Operations for the Nine Months Ended September 30, 2001 and 2000 General. Net income for the Company for the nine months ended September 30, 2001, amounted to $1,483,000, or $0.36 per share, as compared to $1,685,000, or $0.41 per share, for the nine months ended September 30, 2000. Net income for the nine months ended September 30, 2000, included a $257,000 nonrecurring net gain on sale of assets, resulting in net operating income of $1,528,000, or $0.37 per share, for the period. Net interest income. Net interest income decreased by $451,000, or 8.4%, to $4.9 million for the nine months ended September 30, 2001. Interest income increased by $213,000, primarily due to a $14.3 million increase in average interest earning assets to $244.5 million. This increase was offset, in part, by a 36 basis point decrease in the average yield on interest earning assets to 6.92%. The Bank continues to maintain a large balance of low-yielding short-term bank deposits to be used for funding a portion of the acquisition of all of the common stock of Innes Street Financial Corp. This transaction, which is subject to shareholder and regulatory approval, is expected to cost $37.4 million and should be completed by the fourth quarter of 2001. These excess short-term bank balances would normally be used to purchase higher-yielding investments or fund loan originations. Interest expense increased by $664,000, primarily due to a $11.6 million increase in average costing liabilities to $212.3. This increase in costing liabilities was offset, in part, by a 16 basis point decrease in the average cost of funds to 4.88% during the nine month period ended September 30, 2001. Provision for loan losses. The provision for loan losses amounted to $90,000 for the nine months ended September 30, 2001, as compared to $22,500 for the nine months ended September 30, 2000. This represents an increase of $67,500. The amount of the provision for loan losses was increased, in part, due to the increased emphasis on the origination and retention of higher-yielding commercial and consumer loans. These loans possess a higher level of risk than owner-occupied mortgage loans and require a higher level of reserves. The ratio of loan loss reserves to gross loans was 0.93% as of September 30, 2001, and 0.86% as of September 30, 2000. Noninterest income. Noninterest income, net of nonrecurring gains on sales of assets, amounted to $2.2 million for the nine months ended September 30, 2001, as compared to $1.5 million for the nine months ended September 30, 2000. This increase of $663,000, or 44.5%, was primarily due to increased fees generated by the Bank's mortgage-banking department and additional fee income derived from deposit products. Management plans to continue in its efforts to increase its outstanding balance of fee-generating demand deposit accounts through targeted advertising and branch expansion. Outstanding demand deposit accounts increased by 23.9% during the past 12 months to $25.2 million as of September 30, 2001. During the nine months ended September 30, 2000, the Company recognized a nonrecurring gain of $227,000 from the sale of $2.7 million in investment and mortgage-backed securities and a $33,000 gain on the sale of the sale of originated mortgage loan servicing rights for 221 loans totaling $17.4 million. Noninterest expense. Noninterest expense increased by $239,000, or 5.2%, to $4.8 million as of September 30, 2001. This increase was primarily due to higher occupancy and equipment associated with the opening of the Bank's sixth full-service office in February 2001, and increased expenses associated with servicing the Bank's growing demand deposit account portfolio. This increase was offset, in part, by lower compensation expense, data processing expense, professional services expense, and advertising expense. Income taxes. Income taxes amounted to $689,000, or 31.7% of taxable income, for the nine month period ended September 30, 2001, as compared to $840,000, or 33.3% of taxable income, for the nine month period ended September 30, 2000. The decrease in the effective tax rate was primarily due to the increased income received from tax-advantaged assets such as Federal Home Loan Bank deposits and Bank-Owned Life Insurance ("BOLI"). 10 Liquidity and Capital Resources The objective of the Bank's liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for expansion. Liquidity management addresses the Bank's ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise. The Bank's primary sources of internally generated funds are principal and interest payments on loans receivable and cash flows generated from operations. External sources of funds include increases in deposits and advances from the Federal Home Loan Bank of Atlanta. The Bank is subject to various regulatory capital requirements administered by the banking regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. As of September 30, 2001, Gaston Federal Bank's level of capital substantially exceeded all applicable regulatory requirements. 11 PART II. OTHER INFORMATION Legal Proceedings There are various claims and lawsuits in which the Bank is periodically involved incidental to the Bank's business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits. Changes in Securities Not applicable. Defaults Upon Senior Securities Not applicable. Submission of Matters to a Vote of Security Holders There were no meetings of the Company's shareholders during the quarter ended September 30, 2001. Exhibits and Report on Form 8-K. On July 25, 2001, Gaston Federal Bancorp, Inc. ("the Company") filed a Form 8-K to provide public notice that on July 16, 2001, the Company entered into an Agreement and Plan of Merger with Innes Street Financial Corporation ("Innes Street"). Innes Street is the holding company for Citizens Bank, Inc., a savings bank headquartered in Salisbury, North Carolina, which operates three full-service offices in Salisbury, Statesville, and Rockwell, North Carolina. As of September 30, 2001, Citizens Bank had total assets of $218.3 million, total loans of $190.9 million, total deposits of $175.1 million, and stockholders' equity of $25.5 million. Under the terms of the agreement, the Company will pay $18.50 per share in cash for each of the 1,974,325 outstanding shares of Innes Street's common stock. This represents 138% of Innes Street's tangible book value per share as of March 31, 2001, and 28.5 times Innes Street's earnings per share for the 12 months ended March 31, 2001. Innes Street will be merged into a subsidiary of the Company and all shares of Innes Street will be cancelled. The aggregate purchase price is approximately $37.4 million. Upon completion of the transaction, the Company will have approximately $485 million in assets and will have a total of nine offices in the southern piedmont region of North Carolina. Management estimates that the cost savings opportunities between the two companies equals 38% of Innes Street's annualized operating income, or $1.7 million pretax. As a result of the anticipated cost savings, management believes that the transaction will be immediately accretive to earnings. Consummation of the merger is subject to approval by Innes Street's shareholders and the receipt of all required regulatory approvals. It is anticipated that the transaction will be completed in the fourth quarter of 2001. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. GASTON FEDERAL BANCORP, INC. Date: November 13, 2001 By: /s/ Kim S. Price ------------------------------------- Kim S. Price President and Chief Executive Officer Date: November 13, 2001 By: /s/ Gary F. Hoskins ------------------------------------- Gary F. Hoskins Senior Vice President, Chief Financial Officer and Treasurer 13 -----END PRIVACY-ENHANCED MESSAGE-----