<PAGE> 1
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 June 30, 1999
[ ] Transition report under Section 13 or 15(d) of the Exchange Act for
the transition period from _____ to ________
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:
Class
-----
Common Stock, $5.00 par value 679,048
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
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GATEWAY BANCSHARES, INC.
June 30, 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 Sheets.................................................... 3
Consolidated Statements of Income.............................................. 4
Consolidated Statements of Comprehensive Income................................ 5
Consolidated Statements of Cash Flows.......................................... 6
Notes to Consolidated Financial Statements..................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 9
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 SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1999 December 31,
(UNAUDITED) 1998
------------- ------------
<S> <C> <C>
ASSETS
Cash $ 570,398 $ 397,459
Due from banks 1,239,482 1,015,443
Federal funds sold 800,000 4,700,000
Securities available-for-sale 17,070,345 24,526,907
Securities held-to-maturity 4,558,635 7,562,904
Restricted investments 230,800 118,300
Loans 51,487,675 36,464,131
Allowance for loan losses (547,824) (366,158)
------------ ------------
Net loans 50,939,851 36,097,973
Premises and equipment, net 1,664,505 1,694,514
Accrued interest 620,772 678,770
Other assets 395,826 146,841
------------ ------------
TOTAL ASSETS $ 78,090,614 $ 76,939,111
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 6,217,846 $ 6,249,127
Interest-bearing 64,110,092 62,586,245
------------ ------------
TOTAL DEPOSITS 70,327,938 68,835,372
Long-term debt 1,000,000 1,000,000
Accrued interest 304,006 276,995
Other liabilities 152,875 240,127
------------ ------------
TOTAL LIABILITIES 71,784,819 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 (66,059) (173,497)
Accumulated other comprehensive income:
Unrealized gains (losses) on investment securities
available-for-sale, net of tax (381,023) 7,237
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 6,305,795 6,586,617
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 78,090,614 $ 76,939,111
============ ============
</TABLE>
See notes to consolidated financial statements.
3
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GATEWAY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1999 1998 1999 1998
---- ---- ----- ----
<S> <C> <C> <C> <C>
REVENUE FROM EARNING ASSETS:
Loans $ 1,143,224 $ 658,501 $ 2,134,969 $ 1,170,082
Interest on investment securities
Taxable securities 350,324 269,309 759,968 440,843
Non-taxable securities -0- -0- -0- -0-
Interest on federal funds sold 14,155 27,723 25,517 56,271
Interest on deposits in other banks 423 2,172 423 2,172
----------- ----------- ----------- -----------
TOTAL REVENUE FROM EARNING ASSETS 1,508,126 957,705 2,920,877 1,669,368
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 796,129 513,830 1,550,825 851,092
Interest on notes payable 14,261 14,200 28,365 26,641
Interest on federal funds purchased 2,687 -0- 6,182 322
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 813,077 528,030 1,585,372 878,055
----------- ----------- ----------- -----------
NET INTEREST INCOME 695,049 429,675 1,335,505 791,313
Provision for loan losses 100,000 78,000 195,000 118,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 595,049 351,675 1,140,505 673,313
----------- ----------- ----------- -----------
NON INTEREST INCOME:
Service charges 48,870 32,339 96,483 55,253
Mortgage lending fees 26,572 34,263 84,602 78,337
Commissions on insurance 1,867 1,072 3,158 1,920
Investment gains 215 -0- 9,433 604
Other income 9,293 14,679 17,270 20,833
----------- ----------- ----------- -----------
TOTAL NON INTEREST INCOME 86,817 82,353 210,946 156,947
----------- ----------- ----------- -----------
NON INTEREST EXPENSE
Salaries and employee benefits 257,338 189,253 511,731 366,320
Occupancy expense 23,948 25,026 50,982 49,028
Furniture and equipment expense 44,090 27,461 74,176 51,757
Other operating expenses 272,173 144,045 539,124 267,054
----------- ----------- ----------- -----------
TOTAL NON INTEREST EXPENSE 597,549 385,785 1,176,013 734,159
----------- ----------- ----------- -----------
Income Before Income Taxes 84,317 48,243 175,438 96,101
Income Tax Provision 37,000 -0- 68,000 -0-
----------- ----------- ----------- -----------
NET INCOME $ 47,317 $ 48,243 $ 107,438 $ 96,101
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE - PRIMARY AND
FULLY DILUTED
Net income per common share $ .07 $ .07 $ .16 $ .14
Basic weighted average shares outstanding 679,048 679,048 679,048 679,048
Diluted earnings per common share $ .07 $ .07 $ .16 $ .14
Diluted weighted average shares outstanding 679,212 679,048 679,212 679,048
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 47,317 $ 48,243 $ 107,438 $ 96,101
----------- ----------- ----------- -----------
Other comprehensive, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising
during the period (384,532) (26,294) (588,274) (2,131)
Less: reclassification adjustments for gains
(losses) included in net income -0- -0- -0- 604
----------- ----------- ----------- -----------
(384,532) (26,294) (588,274) (1,527)
Income tax (expense) benefit related items
of other comprehensive income 130,741 8,985 200,013 520
----------- ----------- ----------- -----------
Other comprehensive income (loss) (253,791) (17,309) (388,261) (1,007)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ (206,474) $ 30,934 $ (280,823) $ 95,094
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
5
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GATEWAY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 107,438 $ 96,101
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for loan losses 195,000 118,000
Provision for depreciation and amortization 85,215 65,130
Amortization of investment security premiums and
accretion of discounts 28,025 (14,210)
Gain on sale of investment securities (9,433) (604)
Deferred tax provision 68,000 -0-
Decrease (increase) in accrued interest receivable 57,998 (339,320)
Increase (decrease) in accrued interest payable 27,011 124,769
Other (221,876) (39,672)
------------ ------------
NET CASH PROVIDED IN OPERATING ACTIVITIES 337,378 10,194
------------ ------------
INVESTING ACTIVITIES:
Net increase in loans (15,036,878) (11,536,907)
Proceeds from maturities, calls, and principal pay-downs
of securities 5,273,356 2,124,133
Proceeds from sales of available-for-sale securities 4,949,028 3,296,460
Proceeds from sale of held-to-maturity securities 2,500,937 -0-
Purchase of available-for-sale securities (2,869,356) (6,546,292)
Purchase of held-to-maturity securities (112,500) (4,457,278)
Capital expenditures (37,553) (41,513)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES
(5,332,966) (17,161,397)
------------ ------------
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, and
savings accounts (3,374,440) 6,743,119
Net increase in certificates of deposit 4,867,006 9,986,505
Borrowing under line of credit -0- 1,000,000
Purchase of federal funds 1,120,000 -0-
Repayments of federal funds purchased (1,120,000) -0-
------------ ------------
NET CASH PROVIDED IN FINANCING ACTIVITIES 1,492,566 17,729,624
------------ ------------
Net increase (decrease) in cash and cash equivalents (3,503,022) 578,421
Cash and cash equivalents at beginning of period 6,112,902 2,132,418
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,609,880 $ 2,710,839
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 786,006 $ 538,735
Income taxes $ 108,000 $ -0-
</TABLE>
See notes to consolidated financial statements.
6
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GATEWAY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 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 month and six month periods ended
June 30, 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 six 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 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 June 30, 1999, the Company had net unrealized losses of $577,308 in
available-for-sale securities which are reflected in the presented assets and
resulted in an decrease in shareholders' equity of $381,023 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
June 30, 1999 was $388,260.
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 - STOCK OPTION PLAN
On March 18, 1999 the Company issued a total of 164,350 options to purchase its
common shares to its directors and executive officers. Each director received
13,550 shares and the executive officers received varying amounts of shares
ranging from 13,550 to 20,350 shares. Each of the stock option agreements
contained an option price of $12.00 per share, the market value of the shares
at the time of issuance. The options vest on an equal incremental basis over a
period of five years.
NOTE 6 - 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.
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" effective for its year ending December 31, 1998. This
Statement, which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements, requires the reporting of selected financials and descriptive
information about its reportable operating segments. The Company operates a
commercial bank, through its wholly owned subsidiary, and provides financial
services to its
8
<PAGE> 9
customers in the Northwest Georgia area. The services provided constitute one
business segment, and are all related to accepting deposits from customers,
providing loans for customers, related banking services and management of the
bank's assets and liabilities. The Company's internal reporting considers all
activities as one business segment. The Company considers its entire operations
as one operating segment. The adoption of SFAS No. 131 had no effect on the
Company's net income or stockholders' equity.
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. 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 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.
NOTE 7 - RECLASSIFICATIONS
Certain amounts in 1998 have been reclassified to conform with the 1999
presentation.
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 June 30, 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.
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<PAGE> 10
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
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 and six months ended June 30, 1999 was
$47,317 and $107,438, respectively, compared to net income of $48,243 and
$96,101 for the same periods in 1998. The increase in net income resulted
primarily from the increased net interest income from growth in the Company's
loan and deposit base.
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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 $1,508,126 and $2,920,877 for the three and six months ended June
30, 1999, respectively, compared to interest income of $957,705 and $1,669,368
for the same periods 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 and six months ended June 30, 1999
was $813,077 and $1,585,372, respectively, compared to interest expense of
$528,030 and $878,055 for the same periods in 1998. The increase in interest
expense relates to the increase in Company's deposit base, the $1,000,000 note
due to the Federal Home Loan Bank obtained in January, 1998, and federal funds
purchased during 1999.
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 $100,000 and $195,000 for
the three and six months ended June 30, 1999. The allowance for loan losses as
a percent of outstanding loans was 1.06 percent and 1.01 percent at June 30,
1999 and at December 31, 1998, respectively.
NONINTEREST INCOME
Noninterest income for the three and six months ended June 30, 1999 was $86,817
and $210,946, respectively, compared to $82,353 and $156,947 for the same
periods in 1998. Noninterest income consisted primarily of service charges on
customer deposits ($96,483 through June 30, 1999), mortgage lending fees, ATM
and credit card fees, and rental of safe deposit boxes.
NONINTEREST EXPENSE
Noninterest expense totaled $597,549 and $1,176,013 for the three and six
months ended June 30, 1999, respectively, compared to $385,785 and $734,159 for
the same periods 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 $292,000 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
11
<PAGE> 12
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 June 30, 1999, a cumulative loss of
$292,000 has been recognized, 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 and $37,000 have been provided for the net income for the three and six
months ended June 30, 1999, respectively.
FINANCIAL CONDITION
EARNING ASSETS
The Company's earning assets include loans, investment securities and federal
funds sold. The 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 to fund 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 $14,248,331 or 38.61
percent from December 31, 1998 to June 30, 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 June
30, 1999 were $21,859,780 compared to $32,208,111 at December 31, 1998,
reflecting a decrease of $10,348,331. Federal funds sold decreased from
$4,700,000 at December 31, 1998 to $800,000 at June 30, 1999.
LOANS
Loans comprised the single largest category of the Company's earning assets on
June 30, 1999. At June 30, 1999, the Company had outstanding loans amounting to
$50,939,851 net of its allowance for loan losses, or 65.2 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.
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<PAGE> 13
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 June 30, 1999, the Company had nonperforming assets of
$233,062, or .45 percent of all loans and .30 percent of total assets. At
December 31, 1998, the Company had no nonperforming loans.
NONEARNING ASSETS
Nonearning assets include premises and equipment of $1,664,505 at June 30,
1999, a decrease of $30,009 from December 31, 1998. The decrease results
primarily from depreciation of $67,562 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.
Accrued interest was $620,772 at June 30, 1999, a decrease of $57,998 from
December 31, 1998. The decrease is due to changes in the mix of earning assets
since year end 1998, primarily in the decrease in investment securities.
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 June 30, 1999, the Company had outstanding deposits of $70,327,938 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 $6,217,846 at June 30, 1999. Time
deposits of $100,000 or more decreased by $223,208. The increase in deposits
reflects management's philosophy of aggressively seeking new deposits while
maximizing the interest income spread on earning assets to interest bearing
liabilities.
OTHER LIABILITIES
Liabilities consists primarily of accrued interest payable and accounts
payable. Accrued interest payable increased $27,011 from December 31, 1998 to
June 30, 1999. The increase relates to the increase in the Company's deposit
base.
SHAREHOLDERS' EQUITY
Shareholders' equity decreased $280,822 from December 31, 1998 to June 30,
1999, due primarily to the increase in unrealized losses on securities
available-for-sale totaling $388,260, net of deferred tax liability.
13
<PAGE> 14
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.
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 was completed 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 has contacted manufacturers and vendors of those components
utilized in operations to determine whether such components are Year 2000
compliant. As a result, the Company has remediated or replaced, as applicable,
any non-compliant components and completed 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 has of initiated
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
14
<PAGE> 15
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 has
formulated 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 was completed by June 30, 1999.
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.
15
<PAGE> 16
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 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 $27 million at June 30,
1999. Investment securities maturing in one year or less equaled $550 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 $4 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 fun ding source to match longer term
loans. In January, 1998, the Company obtained a $1 million loan from the FHLB
of Atlanta. At June, 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
16
<PAGE> 17
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 $6.0 million at June 30, 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 $6.6
million at June 30, 1999. The percentage ratios as calculated under FDIC
guidelines were 9.82 percent and 10.72 percent for Tier I and Total Risk-based
capital, respectively, to risk-weighted assets at June 30, 1999. Both levels
exceeded the minimum ratios of 4 percent and 8 percent, respectively.
Management has 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 June 30, 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 June 30, 1999, the capital ratio as calculated under the DBF
standard was 8.83 percent. As of June 30, 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 June
30, 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: August 5, 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/GA FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 570,398
<INT-BEARING-DEPOSITS> 1,239,482
<FED-FUNDS-SOLD> 800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,070,345
<INVESTMENTS-CARRYING> 4,789,435
<INVESTMENTS-MARKET> 4,686,855
<LOANS> 51,487,675
<ALLOWANCE> 547,824
<TOTAL-ASSETS> 78,090,614
<DEPOSITS> 70,327,938
<SHORT-TERM> 0
<LIABILITIES-OTHER> 456,881
<LONG-TERM> 1,000,000
0
0
<COMMON> 3,395,240
<OTHER-SE> 2,910,555
<TOTAL-LIABILITIES-AND-EQUITY> 78,090,614
<INTEREST-LOAN> 2,134,969
<INTEREST-INVEST> 759,968
<INTEREST-OTHER> 25,940
<INTEREST-TOTAL> 2,920,877
<INTEREST-DEPOSIT> 1,550,825
<INTEREST-EXPENSE> 1,585,372
<INTEREST-INCOME-NET> 1,335,505
<LOAN-LOSSES> 195,000
<SECURITIES-GAINS> 9,433
<EXPENSE-OTHER> 1,176,013
<INCOME-PRETAX> 175,438
<INCOME-PRE-EXTRAORDINARY> 175,438
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107,438
<EPS-BASIC> .16
<EPS-DILUTED> .16
<YIELD-ACTUAL> 4.12
<LOANS-NON> 233,062
<LOANS-PAST> 92
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 366,158
<CHARGE-OFFS> 13,334
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 547,824
<ALLOWANCE-DOMESTIC> 547,824
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
