-----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, Q3Y+rjiqWbZ18P1pDui17SwIvJQY/uo+5Oe9CcTJgRaltNfCQdTRz6mBJcqbmmO5 zfV2L+ITlxya8QPfOOmiUw== 0001005477-99-003642.txt : 19990816 0001005477-99-003642.hdr.sgml : 19990816 ACCESSION NUMBER: 0001005477-99-003642 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-23971 FILM NUMBER: 99687062 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 10QSB 1 FORM 10-QSB 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 June 30, 1999 |_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ______________ Commission File Number 0-23971 GASTON FEDERAL BANCORP, INC. ---------------------------- (Exact name of registrant as specified in its charter) United States 56-2063438 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 245 West Main Avenue, Gastonia, North Carolina 28052-4140 --------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (704)-868-5200 -------------- - -------------------------------------------------------------------------------- ormer 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 4,374,634 shares of the Registrant's common stock outstanding as of August 10, 1999. GASTON FEDERAL BANCORP, INC. INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements.............................. 2 Consolidated Statements of Financial Condition as of June 30, 1999 and September 30, 1998 ............................................ 2 Consolidated Statements of Operations for the three and nine months ended June 30, 1999 and 1998....................................... 3 Consolidated Statements of Comprehensive Income for the nine months ended June 30, 1999 and 1998....................................... 4 Consolidated Statements of Cash Flows for the nine months ended June 30, 1999 and 1998....................................... 5 Notes to Consolidated Financial Statements........................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 8 PART II. OTHER INFORMATION............................................... 11 1 PART I. FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements Gaston Federal Bancorp, Inc. and Subsidiary Consolidated Statements of Financial Condition (unaudited) (in thousands) June 30, September 30, 1999 1998 -------- ------------- Assets Cash and cash equivalents .......................... 3,341 13,798 Investment securities available-for-sale, at fair value .................................... 22,483 20,919 Investment securities held-to-maturity, at amortized cost ................................ 13,365 15,588 Mortgage-backed securities available-for-sale, at fair value .................................... 11,363 8,350 Mortgage-backed securities held-to-maturity, at amortized cost ................................ 4,109 6,357 Loans, net ......................................... 168,234 136,501 Premises and equipment, net ........................ 2,374 2,247 Accrued interest receivable ........................ 1,043 1,238 Federal Home Loan Bank stock ....................... 1,650 1,300 Other assets ....................................... 2,094 1,705 -------- -------- Total assets ..................................... $230,056 $208,003 ======== ======== Liabilities and Equity Deposits ........................................... $154,427 $143,901 Advances from borrowers for taxes and insurance .... 1,062 728 Advances from Federal Home Loan Bank ............... 33,000 19,500 Other liabilities .................................. 1,347 2,304 -------- -------- Total liabilities ................................ 189,836 166,433 Retained earnings, substantially restricted ........ 22,412 21,430 Common stock and additional paid in capital, net of ESOP loan ................................. 17,294 18,602 Unrealized gain on securities available-for-sale, net of tax ....................................... 514 1,538 -------- -------- Total equity ..................................... 40,220 41,570 -------- -------- Total liabilities and equity ....................... $230,056 $208,003 ======== ======== 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 Nine Months Ended June 30, Ended June 30, -------------- -------------- 1999 1998 1999 1998 ---- ---- ---- ---- Interest income Loans ................................ $ 3,088 $ 2,774 $ 8,902 $ 8,248 Investment securities ................ 562 741 1,856 1,645 Mortgage-backed and related securities 236 140 606 449 ---------- ---------- ---------- ---------- Total interest income .............. 3,886 3,655 11,364 10,342 Interest Expense Deposits ............................. 1,602 1,421 4,738 4,889 Borrowed funds ....................... 398 297 1,060 404 ---------- ---------- ---------- ---------- Total interest expense ............. 2,000 1,718 5,798 5,293 ---------- ---------- ---------- ---------- Net interest income .................. 1,886 1,937 5,566 5,049 Provision for loan losses ............ 25 90 90 240 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses .................. 1,861 1,847 5,476 4,809 Noninterest Income Service charges on deposit accounts .. 102 67 262 203 Gain on sale of securities ........... 1,171 0 1,177 185 Gain on sale of other assets ......... 27 0 165 0 Other income ......................... 165 142 459 256 ---------- ---------- ---------- ---------- Total noninterest income ........... 1,465 209 2,063 644 Noninterest Expense Compensation and benefits ............ 1,807 614 3,168 1,839 Occupancy and equipment expense ...... 103 145 313 358 Other expenses ....................... 462 375 1,440 1,078 ---------- ---------- ---------- ---------- Total noninterest expense .......... 2,372 1,134 4,921 3,275 Income before income taxes ........... 954 922 2,618 2,178 Provision for income taxes ........... 338 312 939 763 ---------- ---------- ---------- ---------- Net income ........................... $ 616 $ 610 $ 1,679 $ 1,415 ========== ========== ========== ========== Basic earnings per share ............. $ 0.14 $ 0.14 $ 0.38 NA Diluted earnings per share ........... $ 0.14 $ 0.14 $ 0.38 NA Basic weighted average outstanding shares ............................. 4,461,911 4,496,500 4,464,578 NA Diluted weighted average outstanding shares ............................. 4,473,623 4,496,500 4,468,482 NA Dividends paid per share ............. $ 0.055 $ 0.000 $ 0.155 $ 0.000
3 Gaston Federal Bancorp, Inc. and Subsidiary Consolidated Statements of Comprehensive Income (unaudited) Nine Months Ended June 30, ------------------- 1999 1998 ------- ------- (in thousands) Net income ............................................. $ 1,679 $ 1,415 Other comprehensive income, net of tax: Unrealized gains on securities: Unrealized holding gains/(losses) arising during period ................................... (271) 352 Reclassification adjustment for (gains)/losses included in net income ........................... (753) (118) ------- ------- Other comprehensive income ........................... (1,024) 234 ------- ------- Comprehensive income .................................. $ 655 $ 1,649 ------- ------- 4 Gaston Federal Bancorp, Inc. and Subsidiary Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended June 30, -------------------- 1999 1998 -------- -------- (in thousands) Cash flows from operating activities: Net income ........................................... $ 1,679 $ 1,415 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses .......................... 90 240 Depreciation ....................................... 245 238 (Gain) loss on sale of investment securities ....... (1,177) (185) (Gain) loss on sale of other assets ................ (138) 0 (Increase) decrease in other assets ................ (170) (200) Increase (decrease) in other liabilities ........... (957) (245) -------- -------- Net cash provided by (used for) operating activities ..................................... (428) 1,263 -------- -------- Cash flows from investing activities: Net (increase) in loans receivable ................... (30,566) (4,806) Sale of investment securities ........................ 5,727 2,713 Maturities and prepayments of investment securities .. 7,734 6,431 Maturities and prepayments of mortgage-backed securities ......................................... 3,705 2,532 Purchases of investments ............................. (10,639) (25,989) Purchases of mortgage-backed securities .............. (6,480) (4,430) Net cash flows from other investing activities ....... (746) (293) -------- -------- Net cash provided by (used for) investment activities ..................................... (31,265) (23,842) -------- -------- Cash flows from financing activities: Dividends to stockholders ............................ (697) 0 Repurchase of common stock ........................... (2,427) 0 Net increase (decrease) in deposits .................. 10,526 (5,655) Net increase (decrease) in borrowed money ............ 13,500 15,000 Increase (decrease) in advances from borrowers for insurance and taxes ................................ 334 (194) Net proceeds from sale of common stock ............... 0 18,590 -------- -------- Net cash provided by (used for) financing activities ..................................... 21,236 27,741 -------- -------- Net increase (decrease) in cash and cash equivalents ... (10,457) 5,162 Cash and cash equivalents at beginning of period ....... 13,798 4,625 -------- -------- Cash and cash equivalents at end of period ............. $ 3,341 $ 9,787 ======== ======== 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 June 30, 1999 and 1998, in conformity with generally accepted accounting principles. The financial statements include the accounts of Gaston Federal Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Gaston Federal Bank (the "Bank"). Operating results for the three and nine month periods ended June 30, 1999, are not necessarily indicative of the results that may be expected for future periods. The organization and business of the Company, accounting policies followed, and other information are contained in the notes to the consolidated financial statements of the Company as of and for the years ended September 30, 1998 and 1997, filed as part of the Company's annual report on Form 10-KSB. These consolidated financial statements should be read in conjunction with the annual consolidated financial statements. Note B - Plan of Reorganization and Stock Offering On April 9, 1998, the Bank converted from a federally chartered mutual savings and loan association to a federally chartered stock savings bank and became the wholly-owned subsidiary of Gaston Federal Bancorp, Inc., a Federal corporation (the "Reorganization"). The Company was incorporated on March 18, 1998, to serve as the Bank's holding company, and prior to April 9, 1998, had no operations and insignificant assets and liabilities. In addition, the Company sold 2,113,355 shares of its common stock to the Bank's customers for $10.00 per share (the "Offering"), and issued 2,383,145 shares of its common stock to Gaston Federal Holdings, MHC (the "Mutual Holding Company"), a federal mutual holding company formed as part of the Reorganization. At the conclusion of the Offering, the Mutual Holding Company owned 53.0% of the Company's outstanding shares of common stock and purchasers in the Offering owned 47.0%. Gross proceeds of the Offering totaled $21,133,550, expenses totaled approximately $853,000, and purchases by the Bank's employee stock ownership plan formed in connection with the Offering totaled $1,690,680 for net proceeds of approximately $18,590,000. Note C - 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 June 30, 1999 and 1998, basic earnings per share has been computed based upon the weighted average common shares outstanding of 4,461,911 and 4,496,500, respectively. For the nine months ended June 30, 1999, basic earnings per share has been computed based on the weighted average common shares outstanding of 4,464,578. Earnings per share for the nine months ended June 30, 1998, is not presented since the common stock was not outstanding during the entire period. 6 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 June 30, 1999, and 1998: (in thousands, except per share data) Three Months Nine Months Ended June 30, Ended June 30, -------------- -------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net income ..................... $ 616 $ 610 $ 1,679 $1,415 Weighted average outstanding shares ....................... 4,461,911 4,496,500 4,464,578 NA Dilutive effect of stock options ...................... 11,712 0 3,904 NA ---------- ---------- ---------- ------ Weighted average diluted shares ....................... 4,473,623 4,496,500 4,468,482 NA Diluted earnings per share .... $ 0.14 $ 0.14 $ 0.38 NA Options for 10,000 shares granted with an exercise price of $13.00 per share were excluded from the calculation of diluted earnings per share because the exercise price exceeded the average market price of $12.79. Note D - Stock Compensation Plans On April 12, 1999, the Company's shareholders, among other actions, approved the Gaston Federal Bank 1999 Recognition and Retention Plan. Subsequently, 84,534 shares of common stock were awarded under the plan to directors and management. All such awards vested during the quarter ended June 30, 1999. In addition, the Company's shareholders approved the Gaston Federal Bank 1999 Stock Option Plan that provided for the issuance of 211,335 options for directors and officers to purchase the Company's common stock. As of June 30, 1999, 200,069 options had been awarded under the plan at a weighted average exercise price of $12.05 and a weighted average contractual life of 118 months. There were 82,819 options fully vested as of June 30, 1999. During the quarter ended June 30, 1999, compensation expense of $1.0 million was recognized in connection with the stock awards described above. The Company applies the provisions of Accounting Principles Board Opinion No. 25 in accounting for the Stock Option Plan described above and, accordingly, no compensation expense has been recognized in connection with the granting of the stock options. 7 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 $22.1 million, or 10.6%, from $208.0 million as of September 30, 1998, to $230.1 million as of June 30, 1999. The primary reason for the increase was a $31.7 million, or 23.2%, increase in total loans from $136.5 million to $168.2 million. Mortgage loans increased by $24.3 million, or 20.1%, to $145.2 million, and nonmortgage loans increased by $7.4 million, or 47.4%, to $23.0 million. These loans were funded from existing interest-earning bank balances, additional deposit accounts, and additional advances from the Federal Home Loan Bank of Atlanta. Management plans to continue to grow the loan portfolio in a safe and sound manner with an emphasis on short-term, high-yielding nonmortgage loans. Due to the strong growth in the loan portfolio, cash and cash equivalents decreased by $10.5 million, or 75.8%. Investment securities decreased by 1.8% to $35.8 million, while mortgage-backed securities increased by 5.2% to $15.5 million. Liabilities. Total liabilities increased by $23.4 million, or 14.1%, from $166.4 million as of September 30, 1998, to $189.8 million as of June 30, 1999. The primary reasons for the change was a $10.5 million, or 7.3%, increase in total deposits from $143.9 million to $154.4 million and a $13.5 million, or 69.2%, increase in borrowed money from $19.5 million to $33.0 million. The increase in deposits was primarily the result of the introduction of a new menu of personal and business demand accounts, which have been marketed aggressively in order to gain market share in the local community. Management plans to continue in its efforts to gain deposit market share through new product development and aggressive marketing. The additional borrowed money was a part of various leverage strategies in which the funds were used to purchase or fund investment securities, mortgage-backed securities, and loans. The borrowed money is comprised of various callable and fixed-term Federal Home Loan Bank advances at fixed interest rates ranging from 4.69% to 5.75%, with a weighted average interest rate of 5.15%. Equity. Total equity decreased by $1.4 million, or 3.5%, from $41.6 million as of September 30, 1998, to $40.2 million as of June 30, 1999. This decrease was primarily due to the payment of $698,000 in dividends ($0.155 per share) and the repurchase of 178,400 shares of common stock for $2.4 million, or a weighted average price of $13.61 per share. The Company has been authorized to repurchase a total of 401,437 shares of common stock, or 223,137 additional shares. This decrease in equity was partly offset by $1.7 million in earnings. 8 Comparison of Results of Operations for the Three Months Ended June 30, 1999 and 1998 General. Net income for the Company for the three months ended June 30, 1999, amounted to $616,000, as compared to $610,000 for the three months ended June 30, 1998. This represents an increase of $6,000, or 1.0%. Net interest income. Net interest income amounted to $1.89 million for the three months ended June 30, 1999, as compared to $1.94 million for the three months ended June 30, 1998. This decrease of $51,000, or 2.6%, was due to a $231,000 increase in interest income and a $282,000 increase in interest expense. Interest income improved primarily as a result of a $29.2 million increase in total loans and a $4.0 million increase in mortgage-backed securities. This improvement was tempered by the receipt of an additional $187,000 in interest income due to the favorable effects of the temporary investment of approximately $100 million of oversubscriptions of the Company's initial public offering during the June 30, 1998 quarter. Interest expense increased primarily as a result of a $14.6 million increase in deposits and a $14.5 million increase in borrowed money. Provision for loan losses. The provision for loan losses amounted to $25,000 for the three months ended June 30, 1999, as compared to $90,000 for the three months ended June 30, 1998. This represents a decrease of $65,000. The amount of the provision for loan losses was reduced due to an overall reduction in the percentage of nonperforming assets from 0.74% of total assets as of June 30, 1998, to 0.24% of total assets as of June 30, 1999. The ratio of loan loss reserves to gross loans was 0.88% as of June 30, 1999, and 0.96% as of June 30, 1998. Noninterest income. Total noninterest income amounted to $1.5 million for the three months ended June 30, 1999, as compared to $209,000 for the three months ended June 30, 1998. This increase of $1.3 million was primarily due to $1.2 million in gains on sale of assets during the quarter ended June 30, 1999. Without these nonrecurring items, noninterest income would have increased by $58,000, or 21.7%, due to additional fee income derived from loan and deposit products and commissions on the sale of financial products through the Bank's wholly-owned subsidiary. Noninterest expense. Total noninterest expense amounted to $2.4 million for the three months ended June 30, 1999, as compared to $1.1 million for the three months ended June 30, 1998. This increase of $1.2 million was primarily due to a nonrecurring $1.0 million increase in compensation as the result of the implementation of the 1999 Gaston Federal Bank Recognition and Retention Plan that was adopted by the Company's shareholders in April 1999. The remaining increase in noninterest expense was primarily due to an increase in the cost of professional services as a result of being a public company and additional expenses associated with implementing new products and services. Income taxes. Income taxes amounted to $338,000, or 35.4% of taxable income, for the three month period ended June 30, 1999, as compared to $312,000, or 33.8% of taxable income, for the three month period ended June 30, 1998. This represents an increase of $26,000, or 8.3%. This difference was primarily due to a $32,000 increase in net income before taxes for the three months ended June 30, 1999. 9 Comparison of Results of Operations for the Nine Months Ended June 30, 1999 and 1998 General. Net income for the Company for the nine months ended June 30, 1999, amounted to $1,679,000, as compared to $1,415,000 for the nine months ended June 30, 1998. This represents an increase of $264,000, or 18.7%. Net interest income. Net interest income amounted to $5.6 million for the nine months ended June 30, 1999, as compared to $5.0 million for the nine months ended June 30, 1998. This represents an increase of $517,000, or 10.4%. This increase was due to a $1.0 million increase in total interest income that was offset by a $505,000 increase in interest expense. Interest income improved primarily as a result of a $29.2 million increase in total loans and a $4.0 million increase in mortgage-backed securities. This improvement was tempered by the receipt of additional interest income derived from the temporary investment of approximately $100 million of oversubscriptions of the Company's initial public offering in April 1998. Interest expense increased primarily as a result of a $14.6 million increase in deposits and a $14.5 million increase in borrowed money. Provision for loan losses. The provision for loan losses amounted to $90,000 for the nine months ended June 30, 1999, as compared to $240,000 for the nine months ended June 30, 1998. This represents a decrease of $150,000. The amount of the provision for loan losses was reduced due to an overall reduction in the percentage of nonperforming assets from 0.74% of total assets as of June 30, 1998, to 0.24% of total assets as of June 30, 1999. The ratio of loan loss reserves to gross loans was 0.88% as of June 30, 1999, and 0.96% as of June 30, 1998. Noninterest income. Total noninterest income amounted to $2.1 million for the nine months ended June 30, 1999, as compared to $644,000 for the nine months ended June 30, 1998. This represents an increase of $1.4 million, or 220.3%. Gains on sale of assets amounted to $1.3 million in 1999 and $185,000 in 1998. Without these nonrecurring items, noninterest income would have increased by $262,000, or 57.1%. This increase was primarily due to additional fee income derived from loan and deposit products and commissions on the sale of financial products through the Bank's wholly-owned subsidiary. Noninterest expense. Total noninterest expense amounted to $4.9 million for the nine months ended June 30, 1999, as compared to $3.3 million for the nine months ended June 30, 1998. This represents an increase of $1.6 million or 48.5%. This increase was primarily due to a nonrecurring $1.0 million increase in compensation as the result of the implementation of the 1999 Gaston Federal Bank Recognition and Retention Plan that was adopted by the Company's shareholders in April 1999. The remaining increase in noninterest expense was primarily due to an increase in the cost of professional services as a result of being a public company and additional expenses associated with implementing new products and services. Income taxes. Income taxes amounted to $939,000, or 35.9% of taxable income, for the nine month period ended June 30, 1999, as compared to $763,000, or 35.0% of taxable income, for the nine month period ended June 30, 1998. This represents an increase of $176,000, or 23.1%. This difference was primarily due to a $440,000, or 20.2%, increase in net income before taxes for the nine months ended June 30, 1999. 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 required under applicable federal regulations to maintain specified levels of liquid investments in qualifying types of investments having maturities of five years or less. Current OTS regulations require that a savings bank maintain liquid assets of not less that 4% of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet applicable liquidity requirements. At June 30, 1999, the Bank's liquidity, as measured for regulatory purposes, was 14.4%, or $17.0 million in excess of the minimum OTS requirement. The Bank is subject to various regulatory capital requirements administered by the banking regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. As of June 30, 1999, Gaston Federal Bank's level of capital substantially exceeded all applicable regulatory requirements. The Year 2000 Like all financial institutions, the Bank relies upon computers for conducting its daily operations. There is concern among industry experts that on January 1, 2000, computers will be unable to "read" the new year and, as a consequence, there may be widespread computer malfunctions. Since the Bank processes all of its loan, deposit, and accounting operations on an internal data processing system, the Year 2000 issue could have a material adverse effect on the operations of the Bank if proper modifications and conversions are not made in a timely manner. As a result, Management has conducted a comprehensive review of its computer systems to identify systems that could be affected by the Year 2000, and has developed a Year 2000 Plan to modify or replace the affected systems and test them for Year 2000 readiness. To date, the Company has taken the following actions to mitigate the potential effects of the Year 2000 issue: o The Bank has upgraded its mainframe computer system (including hardware and software) to be Year 2000 ready. Management has successfully tested the new computer system to ensure that there are no material Year 2000 problems. These tests have been validated by a qualified third party; o The Board of Directors has adopted a Year 2000 Plan that has been implemented by Management. The Plan addresses the overall status of the Year 2000 project, details the Bank's contingency plan, describes mission critical systems and non-mission critical systems, and identifies test dates. The Company also has a written Year 2000 Business Resumption Contingency Plan which contains all mission critical systems and services and details policy, public relations statements, and workaround procedures for each system. A general contingency plan has been developed for non-mission critical systems; 11 o The Board of Directors has engaged an outside technology consultant to assist Management in identifying any and all exposures that the Bank may have and help make all appropriate changes necessary to allow a smooth transition to the new millennium; o The Bank's Year 2000 Business Resumption Contingency Plan has been completed and validated; o The Company has established a Year 2000 Committee consisting of members of senior management that currently meets regularly to discuss progress on the Year 2000 Plan; and o A Year 2000 budget has been developed which estimates the cost associated with Year 2000 readiness to be less than $250,000. To date, the Company has expensed approximately $200,000 on Year 2000 readiness, including $125,000 for a new mainframe computer system (hardware and software) which is being depreciated over a three-year period. While the Bank has completed its Year 2000 plan, there can be no assurance that the mission critical systems of the other companies and vendors on which the Bank's systems may rely will be completed in a timely fashion. The failure of such outside entities to address the Year 2000 issue adequately could have an adverse effect on the Bank's ability to conduct its business. Workaround procedures for these possible scenarios are detailed in the Company's Year 2000 Business Resumption Contingency Plan. 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 On April 12, 1999, the Company's shareholders, among other actions, approved the Gaston Federal Bank 1999 Recognition and Retention Plan. Subsequently, 84,534 shares of common stock were awarded under the plan to directors and management. All such awards vested during the quarter ended June 30, 1999. In addition, the Company's shareholders approved the Gaston Federal Bank 1999 Stock Option Plan that provided for the issuance of 211,335 options for directors and officers to purchase the Company's common stock. As of June 30, 1999, 200,069 options had been awarded under the plan and 82,819 options had fully vested. Exhibits and Report on Form 8-K. No Form 8-K reports were filed during the quarter. 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: August 13, 1999 By: /s/ Kim S. Price ------------------------------------- Kim S. Price President and Chief Executive Officer Date: August 13, 1999 By: /s/ Gary F. Hoskins ------------------------------------- Gary F. Hoskins Senior Vice President, Chief Financial Officer and Treasurer 13 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 9-MOS Sep-30-1999 Oct-01-1998 Jun-30-1999 3,436 0 0 0 22,483 13,365 12,934 168,234 1,496 230,056 154,427 10,500 2,409 22,500 0 0 17,294 22,926 230,056 8,902 1,856 606 11,364 4,738 5,798 5,566 90 1,177 4,921 2,618 2,618 0 0 1,679 0.14 0.14 2.7 152 0 259 1,602 1,476 0 0 1,496 1,496 0 0
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