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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the period ended March 31,
1999
[ ] Transition report under Section 13 or 15(d) of the Exchange
Act for the transition period from to
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Commission file number: 000-24137
GATEWAY BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
Georgia 58-2202210
(State of Incorporation) (I.R.S. Employer Identification No.)
5102 Alabama Highway
Ringgold, Georgia 30736
(Address of principal executive offices)
(706) 965-5500
(Issuer's telephone number, including area code)
Check 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 past 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
<TABLE>
<CAPTION>
Class
-----
<S> <C>
Common Stock, $5.00 par value 679,048
</TABLE>
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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GATEWAY BANCSHARES, INC.
March 31, 1999 Form 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet.......................................... 3
Consolidated Statement of Income.................................... 4
Consolidated Statement of Comprehensive Income...................... 5
Consolidated Statement of Cash Flows................................ 6
Notes to Consolidated Financial Statements.......................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 18
Item 2. Changes in Securities and Use of Proceeds .......................... 18
Item 3. Defaults Upon Senior Securities .................................... 18
Item 4. Submission of Matters to a Vote of Security Holders................. 18
Item 5. Other Information................................................... 18
Item 6. Exhibits and Reports on Form 8-K.................................... 18
</TABLE>
* * * * *
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 1999 December 31,
(UNAUDITED) 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash $ 384,470 $ 397,459
Due from banks 1,087,367 1,015,443
Federal funds sold -0- 4,700,000
Securities available-for-sale 18,163,055 24,526,907
Securities held to maturity 6,310,395 7,562,904
Restricted investments 230,800 118,300
Loans 45,854,911 36,464,131
Allowance for loan losses (456,119) (366,158)
------------ ------------
Net loans 45,398,792 36,097,973
Premises and equipment, net 1,675,821 1,694,514
Accrued interest 683,983 678,770
Other assets 151,639 146,841
------------ ------------
TOTAL ASSETS $ 74,086,322 $ 76,939,111
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 5,170,051 $ 6,249,127
Interest-bearing 59,703,261 62,586,245
------------ ------------
TOTAL DEPOSITS 64,873,312 68,835,372
Long term debt 1,000,000 1,000,000
Federal funds purchased 1,120,000 -0-
Accrued interest 274,020 276,995
Other liabilities 306,722 240,127
------------ ------------
TOTAL LIABILITIES 67,574,054 70,352,494
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock ($5 par value; 10,000,000 shares
authorized, 679,048 shares issued and outstanding) 3,395,240 3,395,240
Capital surplus 3,357,637 3,357,637
Accumulated deficit (113,376) (173,497)
Accumulated other comprehensive income:
Unrealized gains on investment securities
available-for-sale, net of tax (127,233) 7,237
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 6,512,268 6,586,617
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 74,086,322 $ 76,939,111
============ ============
</TABLE>
See notes to consolidated financial statements.
3
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GATEWAY BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 1998
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<S> <C> <C>
REVENUE FROM EARNING ASSETS:
Loans $ 1,049,775 $555,655
Interest on investment securities:
Taxable securities 409,644 170,840
Non-taxable securities -0- 694
Interest on federal funds sold 11,362 28,548
----------- --------
TOTAL REVENUE FROM EARNING ASSETS 1,470,781 755,737
INTEREST EXPENSE:
Interest on deposits 754,696 349,703
Interest on notes payable 14,104 322
Interest on federal funds purchased 3,495 -0-
----------- --------
TOTAL INTEREST EXPENSE 772,295 350,025
----------- --------
NET INTEREST INCOME: 698,486 405,712
Provision for loan losses 95,000 40,000
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NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES: 603,486 365,712
NONINTEREST INCOME:
Service charges 47,613 22,914
Commissions on insurance 1,291 848
Investment gains 9,218 604
Other income 7,977 6,154
----------- --------
TOTAL NONINTEREST INCOME 66,099 30,520
NONINTEREST EXPENSES:
Salaries and employee benefits 254,393 177,067
Occupancy expense 27,034 24,002
Furniture and equipment expense 30,086 24,296
Other operating expenses 266,951 123,008
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TOTAL NONINTEREST EXPENSES 578,464 348,373
Income before income taxes 91,121 47,859
Income tax (provision) benefit (31,000) -0-
----------- --------
NET INCOME $ 60,121 $ 47,859
=========== ========
EARNINGS PER COMMON SHARE - PRIMARY
AND FULLY DILUTED
Net income per common share $ 0.09 $ 0.07
Weighted average common shares outstanding 679,048 679,048
</TABLE>
See notes to consolidated financial statements.
4
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GATEWAY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
--------- --------
<S> <C> <C>
Net Income $ 60,121 $ 47,859
Other comprehensive, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses)
arising during the period (203,742) (21,450)
Less: reclassification adjustments
for gains (losses) included in net income -0- -0-
--------- --------
(203,742) (21,450)
Income tax (expense) benefit related
items of other comprehensive income 69,272 5,148
--------- --------
Other comprehensive income (loss) (134,470) (16,302)
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Comprehensive income (loss) $ (74,349) $ 31,557
========= ========
</TABLE>
See notes to consolidated financial statements.
5
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GATEWAY BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 60,120 $ 47,859
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for loan losses 95,000 40,000
Provision for depreciation and amortization 36,470 27,533
Amortization of investment security
premiums and accretion of discounts 15,126 (13,512)
Gain on sale of investment securities (9,218) (604)
Deferred tax provision 31,000 -0-
Increase in accrued interest receivable (5,213) (71,694)
Increase in accrued interest payable (2,975) 60,518
Other 97,094 35,607
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES 317,404 125,707
----------- -----------
INVESTING ACTIVITIES:
Net increase in loans (9,395,819) (4,596,747)
Proceeds from maturities, calls, and principal pay-downs
of securities 4,825,164 3,959,325
Proceeds from sales of available-for-sale securities 4,174,844 3,296,460
Proceeds from sales of held to maturity securities 750,703 -0-
Purchase of available-for-sale securities (2,456,499) (5,905,318)
Purchase of held to maturity securities -0- (49,970)
Capital expenditures (14,802) (17,610)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,116,409) (3,313,860)
----------- -----------
FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts,
and savings accounts (764,605) (4,345,015)
Net increase in certificates of deposit (3,197,455) 7,105,218
Borrowing under line of credit -0- 1,000,000
Purchase of federal funds 1,120,000 -0-
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES (2,842,060) 3,760,203
----------- -----------
Net increase in cash and cash equivalents (4,641,065) 572,050
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,112,902 2,132,418
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,471,837 $ 2,704,468
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 775,270 $ 1,317,469
Income taxes $ -0- $ -0-
</TABLE>
See notes to consolidated financial statements.
6
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GATEWAY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
March 31, 1999
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Gateway
Bancshares, Inc., and its wholly-owned subsidiary, Gateway Bank & Trust. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Regulation
S-B. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual financial report filed
under cover Form 10-KSB for the year ended December 31, 1998.
NOTE 2 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Gateway Bancshares, Inc. (the "Company") is a one-bank holding which engages in
providing a full range of banking services through its subsidiary bank in
Ringgold, Georgia, Gateway Bank & Trust (the "Bank"). The Bank received
preliminary charter approval on December 11, 1995 and a permit to begin business
on April 21, 1997. The Bank was granted a charter by the Georgia Department of
Banking and Finance, and began full operation on April 21, 1997. Further
discussion of the Company's financial condition and results of operations is
included in the Company's consolidated financial statements presented in the
Company's annual report on Form 10-KSB for the year ended December 31, 1998.
Income Taxes
The Company and the Bank are subject to federal and state income taxes. Income
taxes have been accrued during the first three months of 1999 at a rate of 34
percent of income before income taxes. For the same period in 1998, the
effective income tax rate was -0- percent due to the reversing effects of the
valuation allowance on the deferred tax asset.
Net Income (Loss) Per Common Share
Net income per common share is based on the weighted-average number of shares
outstanding for the periods presented.
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NOTE 3 - INVESTMENT SECURITIES
The Company has applied the accounting and reporting requirements of Statement
of Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities ("SFAS 115"). This pronouncement requires that all
investments in debt securities be classified as either "held-to-maturity"
securities, which are reported at amortized cost; trading securities, which are
reported at fair value, with unrealized gains and losses included in earnings;
or "available-for-sale" securities, which are reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a separate
component of shareholder's equity (net of deferred tax effect).
At March 31, 1999, the Company had net unrealized losses of $192,777 in
available-for-sale securities which are reflected in the presented assets and
resulted in an decrease in shareholders' equity of $127,233 net of deferred tax
asset. There were no trading securities. The net decrease in shareholder's
equity as a result of the SFAS No. 115 adjustment from December 31, 1998 to
March 31, 1999 was $134,470.
NOTE 4 - NOTES PAYABLE
In January, 1998, the Company obtained a $1 million loan from the Federal Home
Loan Bank. The note requires monthly interest payments at an interest rate of
5.72 percent. Principal is due in full on January 13, 2003. The note is secured
by specifically identified single family first mortgage loans.
NOTE 5 - Recently Issued Accounting Standards
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", issued
by FASB, which establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Statement requires that an enterprise classify items
of other comprehensive income by their nature in the financial statement and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. Management does not believe that the adoption
of SFAS No. 130 will have a material impact on the Company's consolidated
financial statements.
Effective for years ending after December 15, 1998, SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" was issued by FASB
which standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain other
disclosures previously required. Management does not believe that the adoption
of SFAS No. 132 will have a material impact on the Company's consolidated
financial statements.
Effective for years beginning after December 15, 1998, Statement of Position
(SOP) 98-5 requires costs of start-up activities and organization costs to be
expensed as incurred. Initial application of the SOP is to be reported as the
cumulative effect of a change in accounting principle. Management adopted the
statement in 1999, the application of which does not have a material impact on
the Company's financial statements.
Effective for fiscal quarters ending after June 15, 1999, SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" establishes
accounting and reporting standards
8
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for derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. Management does not believe
that the adoption of SFAS No.133 will have a material impact on the Company's
consolidated financial statements.
PART I.- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion is intended to assist in an understanding of the Company's
financial condition and results of operations. This analysis should be read in
conjunction with the financial statements and related notes appearing in Item 1
of the March 31, 1999 Form 10-QSB and Management's Discussion and Analysis of
Financial Condition and Results of Operations appearing in the Company's Form
10-KSB for the year ended December 31, 1998.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-QSB and the
exhibits hereto which are not statements of historical fact constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act (the "Act"). In addition, certain statements in future filings by the
Company with the Securities and Exchange Commission, in press releases, and in
oral and written statements made by or with the approval of the Company which
are not statements of historical fact constitute forward-looking statements
within the meaning of the Act. Examples of forward-looking statements include
but are not limited to: (1) projections of revenues, income or loss, earnings or
loss per share, the payment or non-payment of dividends, capital structure and
other financial items; (2) statements of plans and objectives of the Company or
its management or Board of Directors, including those relating to products or
services; (3) statements of future economic performance' and (4) statements of
assumptions underlying such statements. Words such as "believes," "anticipates,"
"expects," "intends," "targeted," and similar expressions are intended to
identify forward-looking statements but are not the exclusive means of
identifying such statements.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those in such statements. Facts that
could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (1) the strength of the U.S. economy
in general and the strength of the local economies in which operations are
conducted; (2) the effects of and changes in trade monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System; (3) inflation, interest rate, market and monetary
fluctuations; (4) the timely development of and acceptance of new products and
services and perceived overall value of these products and
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services by users: (5) changes in consumer spending, borrowing, and saving
habits; (6) the impact of Year 2000 and technological changes; (7) consumer
spending, borrowing and saving habits; (8) acquisitions; (9) the ability to
increase market share and control expenses; (10) the effect of changes in laws
and regulations (including laws and regulations concerning taxes, banking,
securities and insurance) with which the Company and its subsidiary must comply;
(11) the effect of changes in accounting policies and practices, as may be
adopted by the regulatory agencies, as well as the Financial Accounting
Standards Board; (12) changes in the Company's organization, compensation, and
benefit plans; (13) the costs and effects of litigation and of unexpected or
adverse outcomes in such litigation; and (14) the success of the Company at
managing the risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
EARNINGS SUMMARY
The Company's net income for the three months ended March 31, 1999 was $60,121
compared to net income of $47,859 the same period in 1998. The increase in net
income resulted from the increased net interest income from growth in the
Company's loan and deposit base.
RESULTS OF OPERATIONS
INTEREST INCOME
Interest income on loans and investment securities is the principal source of
the Company's earnings stream. Fluctuations in interest rates as well as volume
and mix changes in earning assets materially affect interest income. Interest
income was $1,470,781 for the three months ended March 31, 1999, compared to
interest income of $755,737 for the same period in 1998. The increase in
interest income resulted from the increase in the Company's loan and investment
portfolios.
INTEREST EXPENSE
Interest expense on deposits for the three months ended March 31, 1999 was
$772,295 compared to interest expense of $350,025 for the same period in 1998.
The increase in interest expense relates to the increase in customer deposits
since opening April 21, 1997 as well as the $1,000,000 note from the Federal
Home Loan Bank obtained in January, 1998, and federal funds purchased during
1999.
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PROVISION FOR LOAN LOSSES
The provision for loan losses represents the charge against current earnings
necessary to maintain the allowance for loan losses at a level which management
considers adequate to provide for probable losses in the loan portfolio. This
level is determined based upon management's assessment of current economic
conditions, the composition of the loan portfolio and the levels of nonaccruing
and past due loans. The provision for loan losses was $95,000 for the three
months ended March 31, 1999. The allowance for loan losses as a percent of
outstanding loans was 0.99 percent and 1.06 percent at March 31, 1999 and at
December 31, 1998, respectively.
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 1999 was $66,099
compared to $30,520 for the same period in 1998. Noninterest income consisted
primarily of service charges on customer deposits ($47,613 through March 31,
1999), ATM and credit card fees, and rental of safe deposit boxes.
NONINTEREST EXPENSE
Noninterest expense totaled $578,464 for the three months ended March 31, 1999,
compared to $348,373 for the same period in 1998. The increases reflect the
hiring of additional staff, and increased occupancy, furniture and fixtures, and
other expenses necessary for the operation of the Company and are reflective of
the growth of the Bank. Other operating expenses consist primarily of data
processing, advertising, professional fees, printing and postage and other
miscellaneous expenses.
The Bank has a potential loss of $280,000 on the fraudulent use of debit cards
through its system. Unauthorized withdrawals were drafted from the Bank's system
and processed by the Bank's outside contractor. Based on information available
at this time, the Bank believes that these fraudulent transactions were the
direct result of the outside contractor's failure to ensure verification
controls were in place to protect the Bank's check cards from potential fraud.
The outside contractor has filed a demand for arbitration alleging that the Bank
failed to honor a contract calling for recovery of the transactions. The Bank
has denied all liability in this action and is in the process of filing a
counterclaim against the outside contractor based upon the outside contractor's
gross negligence in its failure to ensure that the Bank's check cards were being
protected from potential fraud. The amount of additional losses, if any, cannot
be determined. As of March 31, 1999, a $220,000 loss has been accrued, pending
the outcome of arbitration or settlement.
INCOME TAXES
The Company's net operating losses from prior periods of approximately $41,000
were utilized in the current year to offset future income. Income taxes of
$31,000 have been provided for the net income for the first three months of
1999.
FINANCIAL CONDITION
EARNING ASSETS
The Company's earning assets include loans, investment securities and federal
funds sold. The
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mix of earning assets reflects management's attempt to maximize interest income
while maintaining acceptable levels of risk.
INVESTMENT SECURITIES AND FEDERAL FUNDS SOLD
The composition of the Company's investment securities portfolio reflects the
Company's investment strategy of maximizing portfolio yields subject to risk and
liquidity considerations. The primary objectives of the Company's investment
strategy are to maintain an appropriate level of liquidity and provide a tool to
assist in controlling the Company's interest rate position while at the same
time producing adequate levels of interest income. For securities classified as
available-for-sale, management intends to hold such securities for the
foreseeable future except for funds for increases in loan demand. Management of
the maturity of the portfolio is necessary to provide liquidity and to control
interest rate risk.
Investment securities and federal funds sold decreased $12,203,861 or 33.07
percent from December 31, 1998 to March 31, 1999. The decrease is due to the
growth in loans since year end 1998, which required the reallocation of funds
for those loans. The investment securities portfolio is adjusted to make various
term investments, to provide a source of liquidity and to serve as collateral to
secure certain government deposits. Investment securities at March 31, 1999 were
$24,704,250 compared to $32,208,111 at December 31, 1998, reflecting a decrease
of $7,503,861. Federal funds sold decreased from $4,700,000 at December 31, 1998
to $-0- at March 31, 1999.
LOANS
Loans comprised the single largest category of the Company's earning assets on
March 31, 1999. At March 31, 1999, the Company had outstanding loans amounting
to $45,398,792 net of its allowance for loan losses, or 61.3 percent of total
assets, compared to net loans of $36,097,973, or 46.9 percent of total assets at
December 31, 1998. The Company will continue to search for loan opportunities in
its market area while assuming acceptable levels of risk.
ASSET QUALITY
Asset quality is measured by three key ratios: The ratio of loan loss allowance
to total nonperforming assets (defined as nonaccrual loans, loans past due 90
days or greater, restructured loans, nonaccruing securities, and other real
estate), nonperforming assets to total assets, and nonperforming assets to total
loans. At March 31, 1999, the Company had nonperforming assets of $148,775, or
.32 percent of all loans and .20 percent of total assets. At December 31, 1998,
the Company had no nonperforming loans.
NONEARNING ASSETS
Nonearning assets include premises and equipment of $1,675,821 at March 31,
1999, a decrease of $18,693 from December 31, 1998. The decrease results
primarily from depreciation of $33,495 provided for those assets that have been
previously placed in service.
The Bank leases the site for the Bank at the rate of $1,707 per month. The lease
term is for a maximum of fifty years, including extensions after the initial
twenty-year period, and subject to certain conditions after the initial
forty-year period.
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Accrued interest was $683,983 at March 31, 1999, an increase of $5,213 from
December 31, 1998. The increase is due to related increases in earning assets
since year end 1998.
Other assets consist primarily of accrued interest receivable on earning assets
and the deferred tax asset. The deferred tax asset consists primarily of tax
benefits related to timing differences in the tax and financial reporting
treatment of the allowance of loan losses, as well as other factors.
DEPOSITS
At March 31, 1999, the Company had outstanding deposits of $64,873,312 compared
to $68,835,372 at December 31, 1998. Deposits are the Company's primary source
of funds to support its earning assets. Non-interest bearing deposits decreased
from $6,249,127 at December 31, 1998 to $5,170,051 at March 31, 1999. Time
deposits of $100,000 or more decreased by $2,666,358. The decrease in deposits
reflects management's philosophy of maximizing the interest income spread on
earning assets to interest bearing liabilities. As a result, management has
consciously not aggressively sought to maintain high cost deposits.
OTHER LIABILITIES
Liabilities consists primarily of accrued interest payable and accounts payable.
Accrued interest payable decreased $2,975 from December 31, 1998 to March 31,
1999. The decrease relates to the decrease in the Company's deposit base.
SHAREHOLDERS' EQUITY
Shareholders' equity decreased $74,349 from December 31, 1998 to March 31, 1999,
due primarily to the increase in unrealized losses on securities
available-for-sale totaling $134,470 net of deferred tax liability.
YEAR 2000
The Company utilizes and depends upon data processing systems and software to
conduct its business. The approach of the Year 2000 presents a problem in that
many computer programs have been written using two digits rather than four to
define the applicable year. Computer programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the Year 2000. For
example, computer systems may compute payment, interest, delinquency or other
amounts important to the operations of the Company based on the wrong date. This
could result in internal system failure or miscalculation, and also creates risk
for the Company from third parties with whom the Company deals on financial
transactions.
The FDIC has issued guidelines for insured financial institutions with respect
to Year 2000 compliance. The Company has developed a Year 2000 action plan based
in part on the guidelines and timetables issued by the FDIC. The Company's
action plan focuses on four primary areas: (1) information systems, (2) embedded
systems located at the Bank's offices and within its off-site ATM machines, (3)
third-party and customer relationships, and (4) contingency planning. The
Company has designated a Year 2000 compliance team, headed by its Chief
Financial Officer and Chief Operating Officer, who are making Year 2000
readiness assessments and remediation where necessary.
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Information Systems. The Company has identified all mission critical information
technology ("IT") systems and has developed a schedule for testing and
remediation of such systems. Testing of key computer hardware and mission
critical hardware modification or replacement has been completed. The Company
has completed its inventory of mission critical software and is in the process
of contacting software vendors for certification of Year 2000 compliance. The
Company completed programming changes to critical systems and commenced testing
of the new programming in the fourth quarter of 1998. Testing of internal
mission critical systems began during the first quarter of 1999 and
implementation is scheduled to be complete by June 30, 1999.
Embedded Systems. The Company is performing a comprehensive inventory of its
embedded systems, such as microcontrollers used to operate security systems and
elevators, and has completed its inventory of mission critical non-IT systems.
The Company is in the process of contacting manufacturers and vendors of those
components utilized in operations to determine whether such components are Year
2000 compliant. The Company intends to remediate or replace, as applicable, any
non-compliant components and expects to complete this process for mission
critical systems by June 30, 1999. The quality of the responses from
manufacturers and vendors, the estimated impact of the individual system or
component on the Bank's operations, and the ability of the Company to perform
meaningful and verifiable tests will influence its decision regarding whether to
have independent tests conducted on its embedded systems.
Third Party and Customer Relationships. The Company is in the process of
initiating communications with all suppliers and vendors to determine the
potential impact of such third parties' failure to remediate their own Year 2000
issues. These third parties include other financial institutions, office supply
vendors and telephone, electric and other utility companies. The Company is
encouraging its counterparts and customers to conduct their own Year 2000
assessments and take appropriate steps to become Year 2000 compliant.
The Company outsources its principal data processing activities to another
financial institution, and the Company is actively communicating with and
monitoring the progress of such institution to assess the impact of Year 2000
issues on such institution and its ability to provide such data processing
services. The Company will consider new business relationships with alternate
providers of products and services if necessary.
Additionally, the Company has initiated communications with its larger and
commercial borrowers to assess the potential impact of Year 2000 on them and
their ability to remain current on loan repayments. The Bank's credit review
process has also been modified to identify and address this risk. The Company's
current plan is to help the Bank's customers understand the potential Year 2000
risks, to share the Bank's strategies, and to encourage those customers to
satisfy their own Year 2000 compliance requirements on time lines that are
consistent with those of the Company.
Contingency Plans. As part of the Company's normal business practice, it
maintains contingency plans to follow in the event of emergency situations, some
of which could arise from Year 2000-related problems. The Company is in the
process of formulating a detailed Year 2000 contingency plan, which will assess
several possible scenarios to which the Company may be required to react. The
Company's formal Year 2000 contingency plan is expected to be completed by the
end of May, 1999.
14
<PAGE> 15
Financial Implications. The Company believes that, since a majority of its
equipment is relatively new, the Year 2000 issue will not pose significant
internal operational problems or generate material additional expenditures.
Maintenance, testing, and modification costs will be expensed as incurred, while
the costs of new software or hardware will be capitalized and amortized over
their useful lives. The Company does not expect the amounts required to be
expensed to resolve Year 2000 issues to have a material effect on its financial
position or results of operations. The Company currently estimates that the
costs of assessing, testing, and remediation of Year 2000 issues will total
$25,000 in 1999. The anticipated costs associated with the Company's Year 2000
compliance program do not include time and costs that may be incurred as a
result of any potential failure of third parties to become Year 2000 compliant
or costs to implement the Company's contingency plans.
Potential Risks. The Year 2000 issue presents a number of risks to the business
and financial condition of the Company and the Bank. External factors, which
include but are not limited to electric, telephone and water service, are beyond
the control of the Company and the failure of such systems could have a negative
impact on the Company, its customers and third parties on whom the Company
relies for its day-to-day operations. The business of many of the Company's
customers may be negatively affected by the Year 2000 issue, and any financial
difficulties incurred by the Company's customers in connection with the century
change could negatively affect such customers' ability to repay loans to the
Company. The failure of the Bank's computer system or applications or those
operated by customers or third parties could have a material adverse effect on
the Company's results of operations and financial condition.
The foregoing are forward-looking statements reflecting management's current
assessment and estimates with respect to the Company's Year 2000 compliance
efforts and the impact of Year 2000 issues on the Company's business and
operations. Various factors could cause actual plans and results to differ
materially from those contemplated by such assessments, estimates and
forward-looking statements, many of which are beyond the control of the Company.
Some of these factors include, but are not limited to representations by the
Company's vendors and counterparties, technological advances, economic
considerations, and consumer perceptions. The Company's Year 2000 compliance
program is an ongoing process involving continual evaluation and may be subject
to change in response to new developments.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Management
Liquidity is defined as the ability of a company to convert assets into cash or
cash equivalents without significant loss. Liquidity management involves
maintaining the Bank's ability to meet the day-to-day cash flow requirements of
its customers, whether they are depositors wishing to withdraw funds or
borrowers requiring funds to meet their credit needs. Without proper liquidity
management, the Bank would not be able to perform the primary function of a
financial intermediary and therefore would not be able to meet the production
and growth needs of the communities it serves.
The primary function of assets and liabilities management is not only to assure
adequate liquidity in order for the Bank to meet the needs of its customer base,
but also to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Bank can also meet the investment
requirements of its shareholders. Daily monitoring of the sources and
15
<PAGE> 16
uses of funds is necessary to maintain an acceptable cash position that meets
both requirements. In the banking environment, both assets and liabilities are
considered sources of liquidity funding and both are, therefore, monitored on a
daily basis.
The asset portion of the balance sheet provides liquidity primarily through loan
principal repayments or sales of investment and trading account securities.
Outstanding loans that mature in one year or less, excluding outstanding credit
card debts equaled approximately $18 million at March 31, 1999. Investment
securities maturing in one year or less equaled $485 thousand. Other sources of
liquidity include short-term investments such as federal funds sold and maturing
interest-bearing deposits with other banks.
The liability portion of the balance sheet provides liquidity through various
customers' interest-bearing and non interest-bearing deposit accounts. At the
end of second quarter 1999, funds were also available through the purchase of
federal funds from correspondent commercial banks. Purchases can be made from
available lines of up to an aggregate of $3.1 million. Liquidity management
involves the daily monitoring of the sources and uses of funds to maintain an
acceptable cash position.
Capital Resources
A strong capital position is vital to the profitability of the Company because
it promotes depositor and investor confidence and provides a solid foundation
for future growth of the organization. The Company has provided for its capital
requirements with proceeds from its initial stock offering in 1996 and through
the retention of earnings.
Note Payable - Federal Home Loan Bank
In an effort to maintain and improve the liquidity position of the Bank,
management approved membership with the Federal Home Loan Bank of Atlanta. As a
member of the FHLB, the Bank improved its ability to manage liquidity and reduce
interest rate risk by having a funding source to match longer term loans. In
January, 1998, the Company obtained a $1 million loan from the FHLB of Atlanta.
At March, 1999, the balance on the note was $1,000,000. Interest on the
outstanding amounts under the note is payable on a monthly basis at 5.72
percent. Principal is due in full on January 13, 2003. The note is secured by
specifically identified single family first mortgage loans.
Federal Capital Standards
Regulatory capital guidelines take into consideration risk factors, as defined
by regulators, associated with various categories of assets, both on and off the
balance sheet. Under the guidelines, capital strength is measured in two tiers
which are used in conjunction with risk-adjusted assets to determine the
risk-based capital ratios. Tier I capital, which consists of common equity less
goodwill, amounted to $6.5 million at March 31, 1999. Tier II capital components
include supplemental capital components such as qualifying allowance for loan
losses and qualifying subordinated debt. Tier I capital plus the Tier II capital
components is referred to as Total Risk-Based capital and was $6.9 million at
March 31, 1999. The percentage ratios as calculated under FDIC guidelines were
11.96 percent and 12.70 percent for Tier I and Total Risk- based capital,
respectively, to risk-weighted assets at March 31, 1999. Both levels exceeded
the minimum ratios of 4 percent and 8 percent, respectively. Management has
16
<PAGE> 17
reviewed and will continue to monitor the Company's asset mix and product
pricing, and the loan loss allowance, which are the areas it believes are most
affected by these requirements.
Other important indicators of capital adequacy in the banking industry are the
leverage ratio and the tangible leverage ratio. The leverage ratio is defined as
the ratio that the Bank's shareholders equity minus goodwill bears to total
assets minus goodwill. The tangible leverage ratio is defined as the Bank's
shareholders equity minus all intangibles, divided by total assets minus all
intangibles. The Bank's leverage ratios as of March 31, 1999 exceeded the
regulatory minimum requirements which are generally 3 percent plus an additional
cushion of at least 100-200 basis points depending on risk profiles and other
factors.
Georgia Department of Banking and Finance Capital Requirement
In addition to the capital standards imposed by federal banking regulators, the
Georgia Department of Banking and Finance (DBF) imposed its 8 percent primary
capital ratio as a condition to the approval of the Bank's charter. This
requirement, which exceeds the FDIC capital requirements, is calculated as the
ratio of total equity to total assets, each as adjusted for unrealized gains and
losses on securities and allowance for loan losses. This heightened requirement
will continue through the first three years of the Bank's operation, at which
time the Bank will be subject to a 6 percent minimum capital ratio. At March 31,
1999, the capital ratio as calculated under the DBF standard was 8.79 percent.
As of March 31, 1999 the Bank was in compliance with the 8 percent requirement.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1- LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any pending legal proceedings
which management believes would have a material adverse effect upon the
operations or financial condition of the Bank.
ITEM 2- CHANGES IN SECURITIES AND USE OF PROCEEDS-NONE
ITEM 3- DEFAULTS UPON SENIOR SECURITIES- NONE
ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY- HOLDERS - NONE
ITEM 5 - OTHER INFORMATION
Pursuant to Rule 14a-4 (c) (1) promulgated under the Securities Exchange Act of
1934, as amended, shareholders desiring to present a proposal for consideration
at the Company's 2000 Annual Meeting of Shareholders must notify the Company in
writing at its principal office at 5102 Alabama Highway, Ringgold, Georgia 30736
of the contents of such proposal no later than February 7, 2000. Failure to
timely submit such a proposal will enable the proxies appointed by management to
exercise their discretionary voting authority when the proposal is raised at the
Annual Meeting of Shareholders without any discussion to the matter in the proxy
statement.
ITEM 6 - EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit Page number
-------------- ---------------------- -----------
<S> <C> <C>
10.3 Advances, Specific Collateral Pledge and Security
Agreement, dated November 19, 1998; Application
for Advance Agreement Federal Home Loan Bank,
dated January 9, 1999; and Assignment of Mortgages
and Deeds of Trust, dated January 3, 1999***
27 Financial Data Schedule
(for the SEC use only )
</TABLE>
*** Incorporated herein by reference to exhibit of same number in the
Company's Quarterly Report on Form 10-QSB for the quarter ended June 30,
1998.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended March
31, 1999.
18
<PAGE> 19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: May 14, 1999
GATEWAY BANCSHARES, INC.
/s/ Robert G. Peck
--------------------------------------
Robert G. Peck,
President and CEO
(Principal Executive Officer)
/s/ Harle B. Green
--------------------------------------
Harle B. Green,
Chairman and Chief Financial Officer
(Principal Financial Officer)
19
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF GATEWAY BANCSHARES, INC. FOR THE THREE MONTH PERIOD
ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,471,837
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,163,055
<INVESTMENTS-CARRYING> 6,541,195
<INVESTMENTS-MARKET> 6,306,950
<LOANS> 45,854,911
<ALLOWANCE> 456,119
<TOTAL-ASSETS> 74,086,322
<DEPOSITS> 64,873,312
<SHORT-TERM> 1,120,000
<LIABILITIES-OTHER> 580,742
<LONG-TERM> 1,000,000
0
0
<COMMON> 3,395,240
<OTHER-SE> 3,117,028
<TOTAL-LIABILITIES-AND-EQUITY> 74,086,322
<INTEREST-LOAN> 1,049,775
<INTEREST-INVEST> 409,644
<INTEREST-OTHER> 11,362
<INTEREST-TOTAL> 1,470,781
<INTEREST-DEPOSIT> 754,696
<INTEREST-EXPENSE> 772,295
<INTEREST-INCOME-NET> 698,486
<LOAN-LOSSES> 95,000
<SECURITIES-GAINS> 9,218
<EXPENSE-OTHER> 578,464
<INCOME-PRETAX> 91,121
<INCOME-PRE-EXTRAORDINARY> 91,121
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60,121
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
<YIELD-ACTUAL> 4.05
<LOANS-NON> 148,775
<LOANS-PAST> 8,123
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 366,158
<CHARGE-OFFS> 5,039
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<ALLOWANCE-CLOSE> 456,119
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<ALLOWANCE-UNALLOCATED> 0
</TABLE>
