<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For fiscal year ended DECEMBER 31, 1998
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission file number 000-24137
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GATEWAY BANCSHARES, INC.
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(Name of Small Business Issuer in Its Charter)
GEORGIA 58-2202210
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5102 ALABAMA HIGHWAY, P.O. BOX 129, RINGGOLD, GEORGIA 30736
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(Address of Principal Executive Offices) (Zip Code)
(706) - 965-5500
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
PAR VALUE $5.00.
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 past 90 days. Yes X No
-- --
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $4,546,537.
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Aggregate market value of the voting stock held by non-affiliates computed by
reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within the past 60 days:
$7,230,202 AS OF MARCH 8, 1999.
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APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 679,048 AS OF MARCH 26,
1998.
Transitional Small Business Disclosure format (check one): Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
December 31, 1998 are incorporated by reference into Part II. Portions of the
Proxy Statement for the Annual Meeting of Shareholders, scheduled to be held
April 15, 1999, are incorporated by reference into Part III.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I............................................................................................................1
ITEM 1. DESCRIPTION OF BUSINESS...............................................................................1
ITEM 2. DESCRIPTION OF PROPERTIES............................................................................16
ITEM 3. LEGAL PROCEEDINGS....................................................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................17
PART II..........................................................................................................17
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................................................17
ITEM 7. FINANCIAL STATEMENTS.................................................................................17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................................................18
PART III.........................................................................................................18
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.........................................18
ITEM 10. EXECUTIVE COMPENSATION...............................................................................18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.....................................................................................18
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................................18
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K..............................................................19
</TABLE>
i
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
The Company was incorporated as a Georgia business corporation on
October 3, 1995, and became a bank holding company by acquiring all of the
Common Stock of Gateway Bank & Trust (the "Bank"). The Bank began operations in
April 1997. The Bank is the only subsidiary of the Company.
The Company was organized to facilitate the Bank's ability to serve
its customers' requirements for financial services. The holding company
structure provides flexibility for expansion of the Company's banking business
through the possible acquisition of other financial institutions and the
provision of additional banking-related services that a traditional commercial
bank may not provide under present laws. For example, banking regulations
require the Bank to maintain a minimum ratio of capital to assets. In the event
that the Bank's growth prevents it from maintaining this minimum ratio, the
Company may borrow funds, subject to capital adequacy guidelines of the Federal
Reserve and contribute them to the capital of the Bank and otherwise raise
capital in a manner unavailable to the Bank under the existing banking
regulations.
The Company has no present plans to acquire any additional operating
subsidiaries. The Company may, however, make additional acquisitions in the
future in the event that the acquisitions are deemed to be in the best
interests of the Company and its shareholders. Such acquisitions, if any, will
be subject to certain regulatory approvals and requirements. See "Supervision
and Regulation."
THE BANK
GENERAL
The Bank began business on April 21, 1997 as a full-service commercial
bank. The Bank offers personal and business checking accounts, interest-bearing
checking accounts, savings accounts and various types of certificates of
deposit. The Bank also offers consumer/installment loans, construction loans,
commercial loans and home equity lines of credit. In addition, the Bank
provides such services as official bank checks and money orders, Mastercard and
Visa credit cards, Visa check cards, safe deposit boxes, traveler's checks,
bank-by-mail, direct deposit of payroll and Social Security checks, U.S.
Savings Bonds, wire transfer of funds and a night depository.
PHILOSOPHY
The philosophy of the Bank's management is to emphasize prompt and
responsive personal service to residents of Ringgold, Georgia, as well as other
communities located in Catoosa County, in order to attract customers and
acquire market share controlled by other financial institutions in the Bank's
market area. Management believes that the Bank offers residents in Catoosa and
surrounding counties the benefits associated with a locally owned and managed
bank. Management has implemented an active call program, by which officers and
directors promote the Bank by personally describing the products, services and
philosophy of the Bank to both existing customers and new business prospects.
In addition, the President, Executive Vice President and Chief Financial
Officer of the Bank have
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<PAGE> 4
substantial banking experience in Catoosa County, which gives the Bank an
important asset in its efforts to provide products and services designed to
meet the needs of the Bank's customer base. The Bank's directors are active
members of the business communities in Ringgold and around Catoosa County, and
their continued active community involvement provides them with an opportunity
to promote the Bank and its products and services.
MARKET AREA AND COMPETITION
The Bank is located in Ringgold, Georgia. The Bank's primary market
area is defined as Catoosa County, Georgia, from which the Bank draws a
majority of its business. The Bank's marketing efforts also are focused in the
adjacent counties of Walker and Whitfield in Georgia and Hamilton County in
Tennessee. The Bank competes for deposits and loan customers with other
financial institutions whose resources are equal to or greater than those
available to the Bank and the Company. There are four commercial banks with
nine offices and two federal credit unions located in Catoosa County. These
financial institutions offer all of the services that the Bank offers.
LOAN PORTFOLIO
LENDING POLICY. The Bank was established to support Catoosa County and
the immediately-surrounding counties of Walker and Whitfield in Georgia and
Hamilton County in Tennessee. Consequently, the Bank aggressively seeks
creditworthy loans within a limited geographic area. The Bank's primary
commercial lending function is to make consumer loans to individuals and
commercial loans to small and medium-sized businesses and professional
concerns. In addition, the Bank makes real estate-related loans, including
construction loans for residential and commercial properties, and primary and
secondary mortgage loans for the acquisition or improvement of personal
residences. The Bank plans to avoid concentrations of loans to a single
industry or based on a single type of collateral.
REAL ESTATE LOANS. The Bank's real estate loans consist primarily of
single-family residential construction loans for one-to-four unit family
structures. The Bank requires a first lien position on the land associated with
the construction project and will offer these loans to professional building
contractors and homeowners. Loan disbursements require on-site inspections to
assure the project is on budget and that the loan proceeds are being used for
the construction project and not being diverted to another project. The
loan-to-value ratio for such loans is predominantly 75% of the lower of the
as-built appraised value or project cost, and may be a maximum of 80% if the
loan is amortized. Loans for construction can present a high degree of risk to
the lender, depending upon, among other things, whether the builder can sell
the home to a buyer, whether the buyer can obtain permanent financing, whether
the transaction produces income in the interim and the nature of changing
economic conditions.
CONSUMER LOANS. The Bank's consumer loans consist primarily of
installment loans to individuals for personal, family and household purposes,
including loans for automobiles, home improvements and investments. Risks
associated with consumer loans include, but are not limited to, fraud,
deteriorated or non-existing collateral, general economic downturn and customer
financial problems.
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<PAGE> 5
COMMERCIAL LOANS. The Bank's commercial lending is directed
principally toward small to mid-size businesses whose demand for funds fall
within the legal lending limits of the Bank. This category of loans includes
loans made to individual, partnership or corporate borrowers, and obtained for
a variety of business purposes. Risks associated with these loans can be
significant and include, but are not limited to, fraud, bankruptcy, economic
downturn, deteriorated or non-existing collateral and changes in interest
rates.
INVESTMENTS. In addition to loans, the Bank makes other investments
primarily in obligations of the United States or obligations guaranteed as to
principal and interest by the United States, other taxable securities and other
obligations of states and municipalities. As of December 31, 1998, investment
securities comprised approximately 42% of the Bank's assets, with net loans
comprising approximately 47% of the Bank's assets. The Bank also engages in
Federal funds transactions with its principal correspondent banks and
anticipates it will primarily act as a net seller of funds. The sale of Federal
funds amounts to a short-term loan from the Bank to another bank.
DEPOSITS. The Bank offers a wide range of commercial and consumer
deposit accounts, including checking accounts, money market accounts, a variety
of certificates of deposit, and individual retirement accounts. The primary
sources of deposits are residents of, and businesses and their employees
located in, Catoosa County, and to a lesser extent, Walker County and Whitfield
County in Georgia and Hamilton County in Tennessee. Deposits are obtained
through personal solicitation by the Bank's officers and directors, direct mail
solicitations and advertisements published in the local media. The Bank offers
a broad array of competitively priced deposit services, including demand
deposits, regular savings accounts, money market deposits (transaction and
investment), certificates of deposit, retirement accounts, and other deposit or
funds transfer services which may be permitted by law or regulation and which
may be offered to remain competitive in the market.
ASSET AND LIABILITY MANAGEMENT. It is the Bank's objective to manage
its assets and liabilities to provide a satisfactory and consistent level of
profitability within the framework of established cash, loan, investment,
borrowing and capital policies. Certain Bank officers are responsible for
developing and monitoring policies and procedures that ensure acceptable
composition of the asset/liability mix. Management's overall philosophy is to
support asset growth primarily through growth of core deposits, which include
deposits of all categories made by individuals, partnerships and corporations.
Management seeks to invest the largest portion of the Bank's assets in
consumer/installment, commercial and construction loans.
The Bank's asset/liability mix is monitored to control
interest-sensitive assets and liabilities so as to minimize the impact of
substantial movements in interest rates on the Bank's earnings.
EMPLOYEES
At December 31, 1998, the Company and its subsidiary employed 21
full-time employees and one part-time employee. The Company considers its
relationship with its employees to be excellent.
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<PAGE> 6
SELECTED STATISTICAL INFORMATION
The following tables set forth certain statistical information and should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations incorporated by reference in this Report
and the Company's consolidated financial statements and notes thereto also
incorporated by reference in this Report. The average statistical data
presented in this report are generally based on daily average balances.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL
The table below shows, for the periods indicated, the daily average balances
outstanding for the major categories of interest earning assets and interest
bearing liabilities, and the average interest rate earned or paid thereon. Such
yields are calculated by dividing income or expense by the average balance of
the corresponding assets or liabilities.
AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis (in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 Year Ended December 31, 1997
----------------------------- ----------------------------
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
BALANCE EXPENSE RATE Balance Expense Rate
------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets
Earning assets:
Loans, net of unearned income (1)................ $ 27,335 $ 3,014 11.03% $ 5,778 $ 744 12.88%
Investment Securities:
Taxable........................................ 19,630 1,241 6.32 6,643 391 5.89
Tax-exempt..................................... 0 0 0 0 0 0
---------- ---------- ------- ---------- ----- ---------
Total investment securities.................. 19,630 1,241 6.32 6,643 391 5.89
Federal funds sold............................. 1,605 99 6.17 1,238 67 5.65
---------- ---------- ---------- ----- ---------
Total interest-earning assets (2)............ 48,570 4,354 8.96 13,659 1,202 8.80
---------- ---------- ----- ---------
Non interest-earning assets:
Cash and due from banks.......................... 1,992 622
Premises and equipment........................... 1,707 1,698
Accrued interest and other assets................ 621 233
Allowance for loan losses........................ (268) (52)
---------- ----------
Total assets................................... $ 52,622 $ 16,160
========== ==========
Liabilities and Shareholders' Equity Interest-bearing
liabilities:
Demand deposits.................................. $ 7,702 288 3.74 $ 2,739 92 3.35
Savings deposits................................. 6,635 332 5.00 1,275 61 4.78
Time deposits.................................... 26,957 1,646 6.11 4,478 276 6.16
---------- --------- -------- ----------- ----- ------
41,294 2,266 5.49 8,492 429 5.05
Other short-term borrowings...................... 1,109 61 5.50 19 1 5.26
---------- --------- -------- ----------- ----- ------
Total interest-bearing liabilities............. 42,403 2,327 5.49 8,511 430 5.05
--------- -------- ----- ------
Non interest-bearing liabilities:
Demand deposits.................................. 3,506 1,290
Accrued interest and other liabilities........... 239 32
Shareholders' equity 6,474 6,327
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Total liabilities and shareholders' equity..... $ 52,622 $ 16,160
========== ===========
Net interest income/net interest spread.............. 2,027 3.47% 772 3.75%
--------- ====== ------
Net yield on earning assets.......................... 4.17% 5.65%
====== ======
Taxable equivalent adjustment:
Loans.............................................. 0 0
Investment securities.............................. 0 0
--------- --------
Total taxable equivalent adjustment.............. 0 0
--------- --------
Net interest income.................................. $ 2,027 $ 772
========= ========
</TABLE>
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(1) Average loans include nonaccrual loans. All loans and deposits are
domestic.
(2) Tax equivalent adjustments have been based on an assumed tax rate of 34
percent, and do not give effect to the disallowance for federal income tax
purpose of interest expense related to certain tax-exempt earning assets.
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<PAGE> 7
The following table sets forth, for the years ended December 31, 1998 and 1997,
a summary of the changes in interest income and interest expense resulting from
changes in interest rates and in changes in the volume of earning assets and
interest-bearing liabilities, segregated by category. The change due to volume
is calculated by multiplying the change in volume by the prior year's rate. The
change due to rate is calculated by multiplying the change in rate by the prior
year's volume. The change attributable to both volume and rate is calculated by
multiplying the change in volume by the change in rate. Figures are presented
on a taxable equivalent basis.
<TABLE>
<CAPTION>
RATE/VOLUME VARIANCE ANALYSIS
CHANGE INTEREST VARIANCE (1)
AVERAGE VOLUME IN VOLUME AVERAGE RATE INCOME/EXPENSES VARIANCE ATTRIBUTED TO
------------------- ---------- ------------- --------------- --------- ---------------
1998 1997 1998-97 1998 1997 1998 1997 1998-97 VOLUME RATE
---- ------- ------- ---- ---- ---- ---- ------- ------ ----
((in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans, net of unearned
Income................. $ 27,335 $ 5,778 $21,557 11.03% 12.88% $3,014 $ 744 $ 2,270 $2,377 $ (107)
Investment securities:
Taxable.................. 19,630 6,643 12,987 6.32 5.89 1,241 391 850 821 29
Tax exempt............... -0- -0- -0- -0- -0- -0- -0- -0- -0- -0-
--------- -------- ------- ------ ------ ------- ------ -------
Total investment
Securities........... 19,630 6,643 12,987 6.32 5.89 1,241 391 850 821 29
Federal funds sold......... 1,605 1,238 367 6.17 5.33 99 67 32 22 10
--------- -------- ------- ------ ------ ------- ------ -------
Total earning assets... $ 48,570 $ 13,659 $34,911 8.96 8.80 $4,354 $1,202 $ 3,152 $3,220 $ (68)
========= ======== ======= ====== ====== ======= ====== =======
INTEREST-BEARING LIABILITIES:
Deposits:
Demand................... $ 7,702 $ 2,739 $ 4,963 3.74 4.31 $ 288 $ 92 $ 196 $ 212 $ (16)
Savings.................. 6,635 1,275 5,360 5.00 4.78 332 61 271 268 3
Time..................... 26,957 4,478 22,479 6.11 6.16 1,646 276 1,370 1,372 (2)
--------- -------- ------- ------ ------ -------- ----- -------
Total interest-bearing
deposits............. 41,294 8,492 32,802 5.49% 5.05% 2,266 429 1,837 1,852 (15)
Other short-term
borrowings.............. 1,109 19 1,090 5.50% 5.26% 61 1 60 60 -0-
--------- -------- ------- ------ ------ ------- ------ -------
Total interest-bearing
Liabilities......... $ 42,403 $ 8,511 $33,892 5.49% 5.05 2,327 430 1,897 1,912 (15)
========= ======== ======= ----- ------ ------- ------ -------
Net interest income/net
interest spread......... 3.47% 3.75% $2,027 $ 772 $ 1,255 $1,308 $ (53)
===== ===== ====== ====== ======= ====== =======
Net yield on earning assets 4.17% 5.65%
==== ====
Net cost of funds.......... 4.79% 3.15%
==== ====
</TABLE>
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(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
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<PAGE> 8
INVESTMENT PORTFOLIO
The carrying amount of investment securities at the end of the year is set
forth in the following table.
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1998 1997
---- -----
(in Thousands)
<S> <C> <C>
SECURITIES HELD TO MATURITY:
- ----------------------------
U.S. Government agencies.......................... $ 7,513 $ 945
Municipal securities.............................. 50 -0-
------------ ------------
$ 7,563 $ 945
============ ============
SECURITIES AVAILABLE FOR SALE:
- ------------------------------
U.S. Government agencies.......................... $ 12,332 $ 13,733
Mortgage backed securities........................ 12,195 514
Equity: Federal Home Loan Bank securities......... 118 17
------------ ------------
$ 24,645 $ 14,264
============ ============
</TABLE>
Average taxable securities were 100 percent of the portfolio in 1998 which
reflects management's intent to maximize investment yields until the Company
reaches a level of cumulative profitability and becomes subject to income
taxation.
The maturities and weighted average yields of the investments in the 1998
portfolio of investment securities are presented below. The average maturity of
the investment portfolio is 11.03 with an average yield of 6.32 percent.
INVESTMENT PORTFOLIO MATURITY SCHEDULE
<TABLE>
<CAPTION>
Maturing
------------------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Year Ten Year
-------- ----------------- --------------- --------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES - AVAILABLE FOR SALE:
- --------------------------------
U. S. Government agencies........ $ 4,751 5.84% $ 3,614 5.87% $ 4,010 6.15% $ -0- 0.00%
Mortgage backed securities....... -0- 0.00 2,676 6.10 4,909 6.27 4,563 6.55
Other: Federal Home
Loan Bank..................... 118 7.58 -0- 0.00 -0- 0.00 -0- 0.00
------- --------- ---------
Total..................... $ 4,869 5.87 $ 6,290 5.96 $ 8,919 6.21 $ 4,563 6.55
======= ========= ========= =======
SECURITIES HELD TO MATURITY:
- ----------------------------
U.S. Government agencies......... $ 501 6.25 $ 2,262 6.09 $ 4,750 6.39 $ -0- 0.00
Municipal securities............. 50 9.05 -0- 0.00 -0- 0.00 -0- 0.00
------- --------- ---------- -------
$ 551 6.50 $ 2,262 6.09 $ 4,750 6.39 $ -0- 0.00
======= ========= ========== =======
</TABLE>
There were no securities held by the Company, whose aggregate value on December
31, 1998 exceeded ten percent of the Company's shareholders' equity at that
date. (1)
- -------------
(1) Securities which are payable from and secured by the same source of revenue
or taxing authority are considered to be securities of a single issuer.
Securities of the U. S. Government and U. S. Government agencies and
corporations are not included.
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<PAGE> 9
LOAN PORTFOLIO
The following table shows the classification of loans by major category at
December 31, 1998 and 1997.
TYPES OF LOANS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 December 31, 1997
----------------- -----------------
PERCENT Percent
AMOUNT OF TOTAL Amount of Total
------ -------- ------ --------
(in Thousands) (in Thousands)
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural ............. $10,600 29.1% $ 6,993 40.7%
Real estate - construction ..... 4,161 11.4% 2,992 17.4%
Real estate - other ............ 15,136 41.5% 3,482 20.3%
Consumer ....................... 6,431 17.6% 3,696 21.50%
Other loans .................... 136 .4% 32 .1%
------- ------- ------- ------
36,464 100.0% 17,195 100.0%
=======
Less:
Allowance for
loan losses .............. (366) (170)
-------- -------
Net loans .................. $ 36,098 $17,025
======== =======
</TABLE>
The Company has intentionally avoided the growing national market in loans to
finance leveraged buy-outs, participating in no nationally syndicated leveraged
buy-out loans. Concurrently, it has avoided exposure to lesser developed
country ("LDC") debt, having no LDC loans in its portfolio.
The following table provides maturities of certain loan classifications at
December 31, 1998 and 1997 and an analysis of these loans maturing in over one
year.
SELECTED LOAN MATURITY
<TABLE>
<CAPTION>
RATE STRUCTURE FOR LOANS
MATURITY MATURING OVER ONE YEAR
------------------------- -----------------------------
OVER ONE
YEAR
ONE THROUGH OVER PREDETERMINED FLOATING OR
YEAR OR FIVE FIVE INTEREST ADJUSTABLE
LESS YEAR YEAR TOTAL RATE RATE
---------- ----------- ---- ----- ---------------- -----------
(in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural............. $ 8,508 $ 2,092 $ -0- $ 10,600 $ 3,561 $ 7,039
Real estate -
construction................. 4,113 48 -0- 4,161 1,088 3,073
--------- --------- ------- --------- ---------- ----------
$ 12,621 $ 2,140 $ -0- $ 14,761 $ 4,649 $ 10,112
========== ========= ======= ========= ========== ==========
</TABLE>
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<PAGE> 10
NONPERFORMING ASSETS
The following table presents information concerning outstanding balances of
nonperforming assets at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 December 31, 1997
----------------- -----------------
(in Thousands) (in Thousands)
<S> <C> <C>
Nonaccruing loans................................. $ 15 $ -0-
Loans past due 90 days or more.................... 0 -0-
Restructured loans................................ 0 -0-
----------------- -------------
Total nonperforming loans......................... 15 -0-
Nonaccruing securities............................ 0 -0-
Other real estate................................. 0 -0-
----------------- --------------
Total nonperforming assets........................ $ 15 $ -0-
================= ==============
RATIOS:
Loan loss allowance to
total nonperforming assets...................... 24.40 N/A
================
Total nonperforming loans to total
loans (net of unearned interest)................ 0.0004 N/A
================
Total nonperforming assets
to total assets................................. 0.0002 N/A
================
</TABLE>
It is the general policy of the Company to stop accruing interest income and
place the recognition of interest on a cash basis when any commercial,
industrial or real estate loan is past due as to principal or interest and the
ultimate collection of either is in doubt. Accrual of interest income on
consumer installment loans is suspended when any payment of principal or
interest, or both, is more than ninety days delinquent. When a loan is placed
on a nonaccrual basis any interest previously accrued but not collected is
reversed against current income unless the collateral for the loan is
sufficient to cover the accrued interest or a guarantor assures payment of
interest.
There has been no significant impact on the Company's financial statements as a
result of the provisions of Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan, or Statement of
Accounting Standards No. 118, Accounting by Creditors for Impairment of a Loan
Income Recognition and Disclosures.
PROVISION FOR LOAN LOSSES, NET CHARGE-OFFS AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses, which is charged to operations, is based on the
growth of the loan portfolio, the amount of net loan losses incurred and
management's estimation of potential future losses based on an evaluation of
the risk in the loan portfolio. Management believes that the $366,158 in the
allowance for loan losses at December 31, 1998 (1% of total net outstanding
loans at that date) was adequate to absorb known risks in the portfolio based
upon the Company's historical experience. No assurance can be given, however,
that increased loan volume, adverse economic conditions or other circumstances
will not result in increased losses in the Company's loan portfolio.
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<PAGE> 11
The following table sets forth certain information with respect to the
Company's loans, net of unearned income, and the allowance for loan losses for
the years ended December 31, 1998 and 1997.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
(in Thousands) (in Thousands)
<S> <C> <C>
Allowance for loan losses at beginning of year............ $ 170 $ -0-
------- ---------
Total loans charged off - consumer loans.................. (39) (1)
Recoveries on loans previously charged off................ 0 -0-
-------- ---------
Net loans charged off..................................... (39) (1)
Provision for loan losses................................. 235 171
-------- ---------
Allowance for loan losses at end of period................ $ 366 $ 170
======== ---------
Loans, net of unearned income, at end of period........... $ 36,464 $ 17,195
======== =========
Average loans, net of unearned income,
outstanding for the period.............................. $ 27,335 $ 5,778
======== =========
Ratios:
Allowance at end of period to loans, net of
unearned income....................................... 1.00% 0.99%
Allowance at end of period to average loans,
net of unearned income................................ 1.34% 2.94%
Net charge-offs to average loans, net of
unearned income....................................... .14% .02%
Net charge-offs to allowance at end of period........... 10.66% .39%
Recoveries to prior year charge-offs.................... 0.00% 0.00%
</TABLE>
In assessing adequacy, management relies predominantly on its ongoing review of
the loan portfolio, which is undertaken both to ascertain whether there are
probable losses which must be charged off and to assess the risk
characteristics of the portfolio in the aggregate. This review takes into
consideration the judgments of the responsible lending officers and senior
management, and also those of bank regulatory agencies that review the loan
portfolio as part of the regular bank examination process.
In evaluating the allowance, management also considers the loan loss experience
of Gateway Bancshares, Inc. & Subsidiary, the amount of past due and
nonperforming loans, current and anticipated economic conditions, lender
requirements and other appropriate information.
-9-
<PAGE> 12
Management allocated the reserve for loan losses to specific loan classes as
follows:
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
DECEMBER 31, 1998 DECEMBER 31,1997
----------------- ----------------
PERCENT Percent
AMOUNT OF TOTAL Amount of Total
------ -------- ------ --------
(in Thousands) (in Thousands)
<S> <C> <C> <C> <C>
Domestic loans
Commercial,
financial and
and agricultural.......................... $ 110 30.0% $ 70 41.2%
Real estate - construction & other........ 66 18.1 64 37.6%
Consumer.................................. $ 190 51.9 36 21.2%
---------- --------- --------- ----------
$ 366 100.0% $ 170 100.0%
========== ========= ========= ==========
</TABLE>
[CAPTION]
(1) The Company had no foreign loans.
DEPOSITS
The Company's primary source of funds is derived from its deposits. Continued
enhancement of existing products and emphasis upon better customer service
fuels the growth in the deposit base. Emphasis has been placed upon attracting
consumer deposits. It is the Company's intent to expand its consumer base in
order to continue to fund asset growth.
The average amounts of and the average rate paid on each of the following
categories of deposits for the years ended December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997
---------------------- ---------------------
(in Thousands)
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 3,506 -0-% $1,290 -0-%
------- ------
Demand ............................ 7,702 3.74 2,739 3.35
Savings ........................... 6,635 5.00 1,275 4.78
Time deposits ..................... 26,957 6.11 4,478 6.16
------- ------
Total interest-bearing deposits 41,294 5.49 8,492 5.05
------- ------
Total average deposits .... $44,800 5.06 $9,782 4.39
======= ======
</TABLE>
-10-
<PAGE> 13
The two categories of lowest cost deposits comprised the following percentages
of total deposits during 1998: average noninterest-bearing demand deposits -
7.8 percent; and average interest-bearing demand deposits - 17.2 percent. Of
total time deposits, approximately 53.0 percent were large denomination
certificates of deposit. The maturities of the time certificates of deposit and
other time deposits of $100,000 or more issued by the Company at December 31,
1998 are summarized in the table below.
MATURITIES OF LARGE TIME DEPOSITS
<TABLE>
<CAPTION>
TIME
CERTIFICATES
OF DEPOSIT
--------------
(IN THOUSANDS)
<S> <C>
Three months or less $ 4,373
Over three through six months 6,861
Over six through twelve months 2,405
Over twelve months 655
--------
Total $ 14,294
========
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table summarizes certain financial ratios for the Company for the
years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
--------- ---------
(in Thousands)
<S> <C> <C>
Return on average assets 0.44% (1.70)%
Return on average equity 4.10% (4.33)%
Dividend payout ratio 0.00% 0.00%
Average equity to average assets ratio 10.78% 39.15%
</TABLE>
-11-
<PAGE> 14
SUPERVISION AND REGULATION
The following discussion describes the material elements of the
regulatory framework that applies to banks and bank holding companies and
provides certain specific information related to the Company.
GENERAL
The Company is a bank holding company registered with the Board of
Governors of the Federal Reserve System under the Bank Holding Company Act of
1956, as currently in effect. As a result, the Company and any future non-bank
subsidiaries the Company establishes is and will be subject to the supervision,
examination, and reporting requirements of the Bank Holding Company Act and the
regulations of the Federal Reserve.
The Bank Holding Company Act requires every bank holding company to
obtain the Federal Reserve's prior approval before: (1) it may acquire direct
or indirect ownership or control of any voting shares of any bank if, after the
acquisition, the bank holding company will directly or indirectly own or
control more than 5% of the bank's voting shares; (2) it or any of its non-bank
subsidiaries may acquire all or substantially all of the assets of any bank; or
(3) it may merge or consolidate with any other bank holding company.
The Bank Holding Company Act also provides that the Federal Reserve
may not approve any transaction that would result in or tend to create a
monopoly, substantially lessen competition or otherwise function as a restraint
of trade, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider
the financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. The Federal Reserve's consideration of financial resources generally
focuses on capital adequacy, which is discussed below.
The Company and any other bank holding company located in Georgia may
acquire a bank located in any other state, and any bank holding company located
outside of Georgia may acquire any Georgia-based bank, regardless of state law
to the contrary. In either case, certain deposit-percentage, aging
requirements, and other restrictions apply. National and state-chartered banks
may branch across state lines by acquiring banks in other states. By adopting
legislation prior to June 1, 1997, a state could elect either to "opt in" and
accelerate the date after which interstate branching would be permissible or
"opt out" and prohibit interstate branching altogether. The Georgia Interstate
Banking Act provides that interstate acquisitions by or of institutions located
in Georgia are permitted in states that also allow national interstate
acquisitions. The Georgia Interstate Branching Act permits Georgia-based banks
and bank holding companies owning or acquiring banks outside of Georgia and all
non-Georgia banks and bank holding companies owning or acquiring banks in
Georgia to merge any lawfully acquired bank into an interstate branch network.
The Georgia Interstate Branching Act also allows banks to establish new
branches throughout Georgia.
The Bank Holding Company Act generally prohibits the Company from
engaging in activities other than banking or managing or controlling banks or
other permissible subsidiaries. The Bank Holding Company Act also prohibits the
Company from acquiring or keeping direct or indirect control of any company
engaged in any activities other than those activities that the Federal Reserve
determines to be closely related to banking or managing or controlling banks.
In determining whether a particular
-12-
<PAGE> 15
activity is permissible, the Federal Reserve must consider whether the activity
reasonably can be expected to produce benefits to the public, such as greater
convenience, increased competition, or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased
or unfair competition, conflicts of interest, or unsound banking practices. For
example, the Federal Reserve has determined that factoring accounts receivable,
acquiring or servicing loans, leasing personal property, conducting discount
securities brokerage activities, performing certain data processing services,
acting as agent or broker in selling credit life insurance and certain other
types of insurance in connection with credit transactions, and performing
certain insurance underwriting activities are permissible activities of bank
holding companies. The Bank Holding Company Act does not place territorial
limitations on permissible non-banking activities of bank holding companies.
Despite prior approval, the Federal Reserve may order a holding company or its
subsidiaries to terminate any activity or ownership or control of any
subsidiary when it has reasonable cause to believe that the holding company's
continued activity, ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any bank subsidiaries.
The Bank's deposits are insured by the FDIC to the maximum extent
provided by law. The Bank is also be subject to numerous state and federal
statutes and regulations that affect its business, activities and operations,
and it is supervised and examined by one or more state or federal bank
regulatory agencies.
The FDIC and the Georgia Department of Banking and Finance regularly
examine the operations of the Bank and have the authority to approve or
disapprove mergers, the establishment of branches, and similar corporate
actions. Both regulatory agencies also have the power to prevent the
continuance or development of unsafe or unsound banking practices or other
violations of law.
PAYMENT OF DIVIDENDS
The Company is a legal entity separate and distinct from the Bank. The
principal source of the Company's cash flow, including cash flow to pay
dividends to its shareholders, is dividends that the Bank pays to the Company.
Statutory and regulatory limitations apply to the Bank's payment of dividends
to the Company as well as to the Company's payment of dividends to its
shareholders.
If, in the opinion of the federal banking regulator, the Bank were
engaged in or about to engage in an unsafe or unsound practice, the federal
banking regulator could require, after notice and a hearing, that the Bank
cease and desist from its practice. The federal banking agencies have indicated
that paying dividends that deplete a depository institution's capital base to
an inadequate level would be an unsafe and unsound banking practice. Under the
Federal Deposit Insurance Corporation Improvement Act of 1991, a depository
institution may not pay any dividend if payment would cause it to become
undercapitalized or if it already is undercapitalized. Moreover, the federal
agencies have issued policy statements that provide that bank holding companies
and insured banks should generally only pay dividends out of current operating
earnings. See "--Prompt Corrective Action" below.
Under the dividend restrictions imposed by federal and state law and
the conditions included in the Georgia Department of Banking and Finance's
approval of the Bank's Charter application, at December 31, 1998, the Bank
could not declare dividends to the Company.
The payment of dividends by the Company and the Bank may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines.
-13-
<PAGE> 16
CAPITAL ADEQUACY
The Company and the Bank are required to comply with the capital
adequacy standards established by the Federal Reserve in the case of the
Company and the appropriate federal banking regulator in the case of the Bank.
The Federal Reserve has established two basic measures of capital adequacy for
bank holding companies -- a risk-based measure and a leverage measure. A bank
holding company must satisfy all applicable capital standards to be considered
in compliance.
The risk-based capital standards are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among banks
and bank holding companies, to account for off-balance-sheet exposure, and to
minimize disincentives for holding liquid assets. Assets and off-balance-sheet
items are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance-sheet items.
The minimum guideline for the ratio of total capital to risk-weighted
assets is 8%. At least one-half of total capital must comprise common stock,
minority interests in the equity accounts of consolidated subsidiaries,
noncumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less goodwill and certain other intangible assets.
This portion of total capital is referred to as Tier 1 Capital. The remainder
may consist of subordinated debt, other preferred stock, and a limited amount
of loan loss reserves and is referred to as Tier 2 Capital. At December 31,
1998, the Company's consolidated ratio of total capital to risk-weighted assets
was 12.76% and its consolidated ratio of Tier 1 Capital to risk-weighted assets
was 12.05%.
In addition, the Federal Reserve has established minimum leverage
ratio guidelines for bank holding companies. These guidelines provide for a
minimum ratio of Tier 1 Capital to average assets, less goodwill and certain
other intangible assets, of 3% for bank holding companies that meet the
specified criteria including having the highest regulatory rating. All other
bank holding companies generally are required to maintain a leverage ratio of
at least 3%, plus an additional cushion of 100 to 200 basis points. The
Company's leverage ratio at December 31, 1998 was 9.21%. The guidelines also
provide that bank holding companies experiencing internal growth, or making
acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. Furthermore, the Federal Reserve has indicated that it
will consider a bank holding company's Tier 1 Capital leverage ratio, after
deducting all intangibles, and other indicators of capital strength in
evaluating proposals for expansion or new activities.
The Bank is subject to risk-based and leverage capital requirements
adopted by the FDIC, which are substantially similar to those adopted by the
Federal Reserve for bank holding companies. In addition, as a condition to
granting the Bank's charter, the Georgia Department of Banking and Finance
requires the Bank to maintain a Tier 1 Capital to assets ratio of at least 8%
for the first three years of the Bank's operation.
Failure to meet capital guidelines could subject a bank to a variety
of enforcement remedies, including the issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking of
brokered deposits, and certain other restrictions on its business. As described
below, substantial additional restrictions can be imposed on FDIC-insured
depository institutions that fail to meet applicable capital requirements. See
"--Prompt Corrective Action."
-14-
<PAGE> 17
SUPPORT OF SUBSIDIARY INSTITUTIONS
Under Federal Reserve policy, the Company is expected to act as a
source of financial strength for, and to commit resources to support, the Bank.
This support may be required at times when, without this Federal Reserve
policy, the Company might not be inclined to provide it. In addition, any
capital loans by a bank holding company to its subsidiary bank will be repaid
only after its deposits and certain other indebtedness are repaid in full. In
the event of a bank holding company's bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital of
a banking subsidiary will be assumed by the bankruptcy trustee and entitled to
a priority of payment.
PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Corporation Improvement Act of 1991
established a system of prompt corrective action to resolve the problems of
undercapitalized institutions. Under this system, the federal banking regulators
have established five capital categories (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized), and are required to take certain mandatory supervisory
actions, and are authorized to take other discretionary actions, relating to
institutions in the three undercapitalized categories. The severity of the
action depends upon the capital category in which the institution is placed.
Generally, subject to a narrow exception, the banking regulator must appoint a
receiver or conservator for an institution that is critically undercapitalized.
The federal banking agencies have specified by regulation the relevant capital
level for each category.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency. A
bank holding company must guarantee that a subsidiary depository institution
meets its capital restoration plan, subject to certain limitations. The
controlling holding company's obligation to fund a capital restoration plan is
limited to the lesser of 5% of an undercapitalized subsidiary's assets or the
amount required to meet regulatory capital requirements. An undercapitalized
institution is also generally prohibited from increasing its average total
assets, making acquisitions, establishing any branches, or engaging in any new
line of business, except under an accepted capital restoration plan or with FDIC
approval. In addition, the appropriate federal banking agency may treat an
undercapitalized institution in the same manner as it treats a significantly
undercapitalized institution, if it determines that those actions are necessary.
At December 31, 1998, the Bank's capital level placed it in the well
capitalized category.
FDIC INSURANCE ASSESSMENTS
The FDIC has adopted a risk-based assessment system for insured
depository institutions that takes into account the risks attributable to
different categories and concentrations of assets and liabilities. The system
assigns an institution to one of three capital categories: (1) well
capitalized; (2) adequately capitalized; and (3) undercapitalized. These three
categories are substantially similar to the prompt corrective action categories
described above, with the "undercapitalized" category including institutions
that are undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. The FDIC also assigns
an institution to one of three supervisory subgroups within each capital group.
The supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation that the institution's primary federal regulator
provides to the FDIC and information that the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds. The FDIC determines an institution's insurance assessment rate
-15-
<PAGE> 18
based on the institution's capital category and supervisory category. Under the
risk-based assessment system, there are nine combinations of capital groups and
supervisory subgroups to which different assessment rates are applied.
Assessments range from 0 to 27 cents per $100 of deposits, depending on the
institution's capital group and supervisory subgroup.
Effective January 1, 1997, the FDIC imposed assessments to help repay
the $780 million in annual interest payments on the $8 billion of Financing
Corporation bonds issued in the late 1980s as part of the government rescue of
the thrift industry. The FDIC will assess banks at a rate of 1.3 cents per $100
of deposits until December 31, 1999. Thereafter, it will add approximately 2.4
cents per $100 of deposits to each assessment.
The FDIC may terminate an institution's deposit insurance if it finds
that the institution has engaged in unsafe and unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC.
PROPOSED LEGISLATION AND REGULATORY ACTION
New regulations and statutes are regularly proposed that contain
wide-ranging proposals for altering the structures, regulations and competitive
relationships of the nation's financial institutions. We cannot predict whether
or in what form any proposed regulation or statute will be adopted or the
extent to which our business may be affected by any new regulation or statute.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's corporate office and the Bank are located at 5102
Alabama Highway, Ringgold, Georgia. The property is leased by the Bank.
On August 9, 1995, the organizers of the Company entered into a Ground
Lease For Lease (the "Lease Agreement") to lease vacant property located at
5102 Alabama Highway for 20 years with options to renew the lease for
additional 10 years thereafter. The maximum term is fifty years but may be
limited to forty years in certain events. The annual rental for the first three
years of the lease term is $20,480. Annual rent for the fourth and subsequent
years will be increased each year by the increase in the Consumer Price Index
as set forth in The Wall Street Journal or other nationally recognized
publication.
A director of the Company is a co-owner of the property. In the
opinion of the organizers, the terms of this Lease Agreement are at least as
favorable to the Company as terms available from unrelated third parties.
The Bank building is a two-story building consisting of 12,000 square
foot. The building contains six teller stations and four drive-through
stations.
Other than normal real estate commercial lending activities of the
Bank, the Company generally does not invest in real estate, interests in real
estate, real estate mortgages, or securities of or interests in persons
primarily engaged in real estate activities.
-16-
<PAGE> 19
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company
is a party or of which any of its properties are subject; nor are there
material proceedings known to the Company to be contemplated by any
governmental authority; nor are there material proceedings known to the
Company, pending or contemplated, in which any director, officer or affiliate
or any principal security holder of the Company or any associate of any of the
foregoing, is a party or has an interest adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The response to this Item is partially included in the Company's
Annual Report to Shareholders at page 37 and is incorporated herein by
reference.
The Company has not sold any unregistered shares of its Common Stock,
no par value, during fiscal years 1998, 1997, or 1996.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The response to this Item is included in the Company's Annual Report
to Shareholders under the heading, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," at pages 1 through 11, and is
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are included in the Company's
Annual Report to Shareholders at pages 13 through 36, and are incorporated
herein by reference.
Independent Auditors' Report
Financial Statements
Consolidated Balance Sheets dated as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31,
1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, and 1997
-17-
<PAGE> 20
Consolidated Statements of Cash Flows for the years ended December 31,
1998 and 1997
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The responses to this Item are included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held April 15, 1999,
under the following headings, and are incorporated herein by reference.
"Proposal One: Election of Directors - Director Nominees," at page 5;
"Executive Officers," at page 6;
"Security Ownership of Certain Beneficial Owners and Management," at
pages 2 through 4; and
"Section 16(a) Beneficial Ownership Reporting Compliance," at page 2.
ITEM 10. EXECUTIVE COMPENSATION
The responses to this Item are included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held April 15, 1999,
under the heading, "Compensation of Executive Officers and Directors," at page
7, and are incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The responses to this Item are included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held April 15, 1999,
under the headings, "Security Ownership of Certain Beneficial Owners," at pages
2 through 4, and are incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The responses to this Item are included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held April 29, 1999,
under the headings, "Certain Relationships and Related Transactions," at pages
7 through 8, and "Compensation of Executive Officers and Directors," at page 7,
and are incorporated herein by reference.
-18-
<PAGE> 21
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
Exhibit
Number Exhibit
------ -------
<S> <C>
3.1 Articles of Incorporation.(1)
3.2 Bylaws.(1)
4.1 Instruments Defining the Rights of Security Holders. See Articles of Incorporation at Exhibit
3.1 hereto and Bylaws at Exhibit 3.2 hereto.
10.1 Ground Lease Agreement by and between Gateway Bancshares, Inc. and Ringgold Mining and
Manufacturing Company, dated as of May 1, 1996.(2)
10.3 Gateway Bancshares, Inc. 1999 Stock Option Plan.(3)
13.1 Gateway Bancshares, Inc. 1998 Annual Report to Shareholders. Except with respect to those
portions specifically incorporated by reference into this Report, the Company's 1998 Annual
Report to Shareholders is not deemed to be filed as part of this Report.
22.1 Subsidiaries of Gateway Bancshares, Inc.(4)
24.1 Power of Attorney (appears on the signature pages to this Annual
Report on 10-KSB).
27.1 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K filed in the fourth quarter of 1998: None.
</TABLE>
- ----------------------------
(1) Incorporated herein by reference to exhibit of same number in the Company's
Registration Statement on Form SB-2, Registration No. 33-80855, filed
December 20, 1995.
(2) Incorporated herein by reference to exhibit of same number in the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30, 1996.
(3) Incorporated herein by reference to Appendix A of the Company's Proxy
Statement for the Meeting of Shareholders to be held on April 15, 1999.
filed under cover of Schedule 14A.
(4) Incorporated herein by reference to exhibit of same number in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997.
-19-
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GATEWAY BANCSHARES, INC.
By: /s/ Robert G. Peck
--------------------------------
Robert G. Peck
President and Chief Executive Officer
Date: March 18, 1999
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on the
signature page to this Report constitutes and appoints Robert G. Peck and Harle
B. Green, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place, and stead, in any and all capacities, to sign any and all amendments to
this Report, and to file the same, with all exhibits hereto, and other
documents in connection herewith with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Jack Joseph Babb Director March 18, 1999
- ------------------------------------
Jack Joseph Babb
/s/ William H.H. Clark Director March 18, 1999
- ------------------------------------
William H.H. Clark
</TABLE>
-20-
<PAGE> 23
<TABLE>
<CAPTION>
<S> <C> <C>
Director
- ------------------------------------
Patricia Yvonne Cochran
/s/ Jeannette Wilson Dupree Director March 18, 1999
- ------------------------------------
Jeannette Wilson Dupree
/s/ Harle B. Green Director, Chief Financial March 18, 1999
- ------------------------------------ Officer (Principal Financial
Harle B. Green And Accounting Officer)
Director
- ------------------------------------
Walter Lee Jackson
- ------------------------------------
Ernest Kresch Director
/s/ Robert G. Peck Director, President March 18, 1999
- ------------------------------------ Chief Executive Officer
Robert G. Peck
/s/ James Arthell Gray, Sr. Director March 18, 1999
- ------------------------------------
James Arthell Gray, Sr.
</TABLE>
-21-
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
3.1 Articles of Incorporation.(1)
3.2 Bylaws.(1)
4.1 Instruments Defining the Rights of Security Holders. See Articles of
Incorporation at Exhibit 3.1 hereto and Bylaws at Exhibit 3.2 hereto.
10.1 Ground Lease Agreement by and between Gateway Bancshares, Inc. and Ringgold
Mining and Manufacturing Company, dated as of May 1, 1996.(2)
10.3 Gateway Bancshares, Inc. 1999 Stock Option Plan.(3)
13.1 Gateway Bancshares, Inc. 1998 Annual Report to Shareholders. Except with
respect to those portions specifically incorporated by reference into this
Report, the Company's 1998 Annual Report to Shareholders is not deemed to be
filed as part of this Report.
22.1 Subsidiaries of Gateway Bancshares, Inc.(4)
24.1 Power of Attorney (appears on the signature pages to this Annual Report on 10-KSB).
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
- --------
(1) Incorporated herein by reference to exhibit of same number in the Company's
Registration Statement on Form SB-2, Registration No. 33-80855, filed December
20, 1995.
(2) Incorporated herein by reference to exhibit of same number in the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30, 1996.
(3) Incorporated herein by reference to Appendix A of the Company's Proxy
Statement for the Meeting of Shareholders to be held on April 15, 1999, filed
under cover of Schedule 14A.
(4) Incorporated herein by reference to exhibit of same number in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997.
-22-
<PAGE> 1
EXHIBIT 13.1
TO OUR STOCKHOLDERS
Thanks to you, people do make a difference! We have truly seen the results of
people working together. Our Shareholders, Directors, Officers and Employees
have been our greatest strength and the outcome has exceeded our expectations.
Our total assets, deposits and loans more than doubled from last year, with
total assets of $76,939,111, deposits of $68,835,372 and loans of $36,464,131.
On the income side, we have been profitable every month in 1998 with net income
of $233,832 for the year. This profitability also came much earlier than
originally forecasted. This reflects additional funding for the year of $235,000
to the loan loss reserve and $150,000 for possible loss on the debit card issue
with Honor and Visa.
Our emphasis in the coming year will continue to be quality service for our
customers, as well as maximizing efficiency to achieve higher earnings in 1999.
Our staff has shown their commitment in their dedication and hard work to being
one of the best community banks and we recognize that they are our greatest
assets.
During 1998 we added four additional full time employees and one part time
employee. Three of these are in our loan department. Kay Wilson joined our staff
as Vice President with several years of commercial lending experience, Donna
Cordell as an assistant to loan operations, Trudy Snider as mortgage loan
processor, Julie Ward as customer service representative and LeeAnn Lewis is
working part time in our loan operations department. Also, in January of this
year, Marcia Teeters join our staff as Loan Administrator. We are very proud to
have these individuals on our staff.
Our challenge for 1999 will be to focus on high quality loan growth, as we
expect continued deposit growth. We are devoted to obtaining a much higher ratio
of loans to deposits in order to improve earnings. Also, as we continue to grow
our loan portfolio, we will be increasing our reserves for possible loan losses
this will impact earnings but strengthen our balance sheet.
As we mentioned above, we have allocated $150,000 as a possible loss resulting
from the $280,000 worth of fraudulent charges on our Visa Check Cards Program
that we noted in our letter of November 13, 1998. We are now in the arbitration
process and look forward to a positive disposition of this matter in the early
part of the third quarter.
Our mission statement is printed on the adjoining page. We are hopeful Gateway
Bank & Trust lives up to its goal and strives to do so with every customer.
<PAGE> 2
There has been a lot of public attention concerning the impact of the new
millennium on our lives. We want you to know we are taking steps to make sure
our systems will operate smoothly in the year 2000. Federal regulators have
conducted specific examinations of the bank to insure the necessary steps are
taken to be ready for the year 2000. The Federal Deposit Insurance Corporation
will continue to protect your deposits up to $100,000 into the New Year.
As always we solicit and appreciate your support in doing business with your
bank, and recommending us to your friends.
We look forward to the challenges of this year and we welcome your comments and
suggestions.
Robert G. Peck Harle B. Green
President & CEO Chairman & CFO
[GRAPH OF LOANS, DEPOSITS AND ASSETS.]
<PAGE> 3
OUR MISSION STATEMENT
WHY WE EXIST:
TO GLORIFY GOD, PROVIDE ECONOMIC BENEFITS FOR OUR EMPLOYEES AND COMMUNITY AND TO
PLEASE OUR CUSTOMERS WITH QUALITY PRODUCTS AND SERVICES SO AS TO CREATE VALUE
FOR OUR SHAREHOLDERS.
<PAGE> 4
GATEWAY BANCSHARES, INC.
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
DIRECTORS
<TABLE>
<S> <C> <C>
JACK J. BABB WILLIAM H.H. CLARK YVONNE G. COCHRAN
Vice President State Representative President
Babb Lumber Company Gingerbread House
Daycare Center, Inc.
JEANETTE W. DUPREE JAMES A. GRAY, SR. HARLE B. GREEN
Manager President Chairman & CFO
State Farm Insurance Agency Carco Motor, Inc. Gateway Bancshares, Inc.
and Gateway Bank & Trust
WALTER LEE JACKSON DR. ERNEST KRESCH ROBERT G. PECK
President Podiatrist President & CEO
Walter Jackson Chevrolet, Inc. Advance Foot Care Gateway Bancshares, Inc.
and Gateway Bank & Trust
</TABLE>
OFFICERS
<TABLE>
<S> <C>
BOYD M. STEELE JEFF R. HENSLEY
Executive Vice President Senior Vice President
and Secretary and Assistant Secretary
</TABLE>
<PAGE> 5
GATEWAY BANK & TRUST
- --------------------------------------------------------------------------------
OFFICERS AND STAFF
- --------------------------------------------------------------------------------
OFFICERS
<TABLE>
<S> <C> <C>
ROBERT G. PECK BOYD M. STEELE HARLE B. GREEN
President & CEO Executive Vice President Chairman & CFO
JEFF R. HENSLEY BRENDA K. WILSON CHIP GRANT
Senior Vice President Vice President Assistant Vice
President
JULIA COPPAGE
Mortgage Loan
Officer
</TABLE>
STAFF
<TABLE>
<S> <C> <C>
DONNA BRITTON MARY CARPENTER DONNA CORDELL
Customer Service Financial Service Loan Operations
Representative Representative Assistant
CHARLOTTE DICKSON DELIA DUNAGAN DIANE FULTON
Customer Service Financial Service Customer Service
Representative Representative Representative
LEEANN LEWIS SUE MASSINGIL DANIELLE PICKETT
Loan Operations Administrative Assistant Customer Service
Assistant Administrator
LINDA SMITH TRUDY SNIDER MARCIA TEETERS
Executive Assistant Mortgage Loan Loan Administrator
Processor
LINDA TUCKER JULIE WARD MISSY VANDERSLICE
Operations Administrator Customer Service Operations Assistant
Representative
</TABLE>
- --------------------------------------------------------------------------------
THIS REPORT SERVES AS OUR ANNUAL DISCLOSURE STATEMENT AS REQUIRED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION. THIS STATEMENT HAS NOT BEEN REVIEWED, OR
CONFIRMED FOR ACCURACY OR RELEVANCE, BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION.
- --------------------------------------------------------------------------------
<PAGE> 6
GATEWAY BANCSHARES, INC.
FINANCIAL REVIEW
1998
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Annual Report, including the Management's Discussion and Analysis which
follows, contains forward-looking statements in addition to historical
information, including, but not limited to statements regarding Management's
beliefs, current expectations, estimates and projections about the financial
services industry, the economy, and about the Company and the Bank in general.
Such forward-looking statements are subject to certain factors that could cause
actual results to differ materially from historical results or anticipated
events, trends or results. These factors include, but are not limited to (i)
increased competition with other financial institutions, (ii) lack of sustained
growth in the economy in Catoosa County, (iii) rapid fluctuations in interest
rates, (iv) the inability of the Bank to maintain regulatory capital standards,
and (v) changes in the legislative and regulatory environment. These and other
factors affecting the Company's future performance are further detailed in
publicly available reports filed from time to time by the Company with the
Securities and Exchange Commission, such as the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998 (the "1998 10-KSB").
The purpose of the following discussion is to address information relating to
the financial condition and results of operations of the Company that may not be
readily apparent from a review of the consolidated financial statements and
notes thereto, which are included in this Annual Report. This discussion should
be read in conjunction with information provided in the Company's consolidated
financial statements and accompanying footnotes; and with the statistical
information appearing in the 1998 10-KSB under the caption "Selected Statistical
Information." Unless otherwise noted, the discussion of net interest income in
this financial review is presented on a taxable equivalent basis to facilitate
performance comparisons among various taxable and tax-exempt assets.
SUMMARY
Substantially all of the operations of the Company are conducted by its
wholly-owned subsidiary, Gateway Bank & Trust (the "Bank"). Accordingly, the
following discussion relates primarily to the Bank. The Company's principal
market areas are located in the Catoosa County, Georgia and surrounding areas.
Management believes that the economy of the area in which the Company serves is
healthy and expanding, but not at a pace that threatens stability.
Jobs are created in significant proportion in the manufacture of tufted and
durable goods, as well as in retail and service sectors. Counties served by the
Company had an unemployment rate averaging 4.1% compared to the average 4.0%
experienced in the entire state of Georgia. Catoosa County is centrally located
for employment opportunities being situated on the I-75 corridor between
Chattanooga, TN and Dalton, GA. The majority of the area's residents work in
Tennessee while a smaller number are employed in adjacent counties. In the
Company's markets, population growth over the last five years has surpassed the
rate for the state. The current economic prospects in the Company's markets are
good, and the Company attempts to assist those prospects by returning the
deposits of its customers to the communities from which they come in the form of
loans.
EARNINGS
The Company's net income of $233,832 for 1998, the first full year of
operations, represents an increase of $507,571 over the Company's net loss in
1997 of $(273,739). The increase in net income relates to the growth in the
Bank's deposit and loan base from the opening date of April 21, 1997. Earnings
per share was $0.34 in 1998 compared with a loss of ($0.40) in 1997.
Page 1
<PAGE> 8
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the principal source of a financial institution's
earnings stream and represents the difference or spread between interest and fee
income generated from earning assets and the interest expense paid on deposits
and borrowed funds. Fluctuations in interest rates as well as volume and mix
changes in earning assets and interest-bearing liabilities materially impact net
interest income. (All discussions in this section assume a taxable equivalent
basis unless otherwise noted.) Net interest income was $2,027,402 in 1998, as
compared to $772,177 in 1997, representing an increase of $1,255,225, or 162.6%.
This increase was caused primarily by the growth of the Bank's deposit base and
loan portfolio. Interest and fees on loans increased from $743,963 in 1997 to
$3,014,428 in 1998 (an increase of 305.2%).
Interest earned on investments increased $849,368, (217.0%) from $391,393 in
1997 to $1,240,761 in 1998. The increase is due primarily to an increase in the
average volume of investments from funds made available due to the growth in
deposits.
The trend in net interest income is also evaluated in terms of average rates
using the net interest margin and the interest rate spread. The net interest
margin, or the net yield on earning assets, is computed by dividing fully
taxable equivalent net interest income by average earning assets. This ratio
represents the difference between the average yield returned on average earning
assets and the average rate paid for funds used to support those earning assets,
including both interest-bearing and noninterest-bearing sources. The net
interest margin for 1998 was 4.17 percent compared with a net interest margin of
5.65% in 1997. This decrease was due primarily to the growth of the Bank which
resulted in a decrease in interest earning assets as a percentage of interest
bearing liabilities.
The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest-bearing sources of funds.
The interest rate spread eliminates the impact of noninterest-bearing funds and
gives a more direct perspective to the effect of market interest rate movements.
The net interest spread for 1998 was 3.47% compared to 3.75% in 1997.
The following tabulation presents certain net interest income data without
modification for assumed tax equivalency:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Rate earned on earning assets................................. 8.96% 8.80% 5.32%
Rate paid on borrowed funds................................... 5.49% 5.05% 8.51%
Interest rate spread.......................................... 3.47% 3.75% (3.19)%
Net yield on earning assets................................... 4.17% 5.65% 5.22%
</TABLE>
INTEREST EXPENSES
Total interest expense increased $1,897,321 (441.6%) from $429,623 in 1997 to
$2,326,944 in 1998. This increase was the combined effect of an increase in the
average balance of interest bearing deposits from approximately $8,492,000 in
1997 to approximately $41,294,000 in 1998 and an increase in the average rate
paid on deposits from 5.05% in 1997 to 5.49% in 1998. The effect of these
changes increased the interest expense on interest bearing deposits from
$428,696 in 1997 to $2,265,832 in 1998.
Page 2
<PAGE> 9
NONINTEREST INCOME
Noninterest income for 1998 and 1997 totaled $192,191 and $54,503, respectively.
These amounts are primarily from service charges on deposit accounts, insurance
commissions and fees on services to customers. Noninterest income increased
primarily due to the effects of growth in the Bank's deposit base.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Service charges on deposits............... $ 138,915 $ 41,142 $ -0-
Insurance commissions..................... 4,375 1,881 -0-
Investment securities gains............... 12,170 -0- -0-
Other..................................... 36,731 11,480 -0-
---------------- ---------------- ---------------
$ 192,191 $ 54,503 $ -0-
================ ================ ===============
</TABLE>
NONINTEREST EXPENSES
Noninterest expenses totaled $1,696,470 in 1998 and $1,083,789 in 1997. Salaries
and benefits increased $193,503 (33.9%) to $764,592, which reflects the Bank's
increased staffing to accommodate the growth in the Bank's loans and deposits.
Furniture and equipment expense increased $45,600 (74.0%) due to increased
depreciation and maintenance costs on equipment for the first full year of
operation of the Bank. Data processing fees increased $101,638 (156.7%) and
postage increased $24,394 (125.7%) due to the increased volume of transactions
from the growth of deposits and loans of the Bank. Noninterest expense also
includes an allowance for losses on the Bank's debit card program of $150,000.
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 December 31, 1998, a $150,000 loss has been accrued,
pending the outcome of arbitration or settlement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Salaries and employee benefits $ 764,592 $ 571,089 $ 229,277
Occupancy expense 95,620 76,044 23,277
Furniture and equipment expense 107,243 61,643 6,837
Director and committee fees -0- -0- -0-
Advertising 70,785 55,683 7,058
Data processing 166,490 64,852 -0-
Insurance 14,311 10,343 7,893
Postage and express 43,802 19,408 2,968
Printing 61,443 61,902 -0-
Professional and regulatory fees 79,908 71,363 50,653
Supplies 50,034 55,969 4,818
Taxes and licenses 7,500 5,782 -0-
Allowance for loss on
debit card transactions 150,000 -0- -0-
Other 84,742 29,711 15,704
----------- ----------- -----------
$ 1,696,470 $ 1,083,789 $ 348,485
=========== =========== ===========
</TABLE>
Page 3
<PAGE> 10
INCOME TAXES
The Company attempts to maximize its net income through active tax planning. Due
to net operating losses sustained by the Company since incorporation, the
Company has not paid income taxes. Net operating losses of approximately $36,000
will be carried forward from 1998 and applied to future years taxable income.
Management will continue to invest available funds primarily in fully taxable
securities until the net operating loss is fully utilized. The net operating
losses begin to expire in 2010. The 1998 tax rate is lower than the statutory
federal tax rate primarily due to the elimination of the deferred tax asset
valuation allowance in 1998, which reflects the expected future realization of
the deferred tax asset. A more detailed explanation of income tax expense is
included in the accompanying Notes to Consolidated Financial Statements.
FINANCIAL CONDITION
EARNING ASSETS
Average earning assets in 1998 were approximately $48,570,000 or 92.3% of
average total assets compared to approximately $13,659,000 or 84.5% of average
total assets in 1997. The mix of average earning assets comprised the following
percentages:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Federal funds sold....................... 3.3% 9.1%
Investment securities.................... 40.4% 48.6%
Loans.................................... 56.3% 42.3%
</TABLE>
The mix of average earning assets reflects management's attempt to maximize
interest income while maintaining acceptable levels of risk.
The Bank has intentionally avoided the growing national market in loans to
finance leveraged buy-outs participating in no leveraged buy-out loans.
Concurrently, it has avoided exposure to lesser developed country ("LDC") debt,
having no LDC loans in its portfolio.
LOANS
Loans made up the largest component of the Bank's earning assets. At December
31, 1998, the Bank's total loans were $36,464,131 compared to $17,195,468 at the
end of 1997. In 1998 average net loans represented 56.3% of average earning
assets and 51.9% of average total assets, compared to 42.3% of average earning
assets and 35.8% of average total assets in 1997. This was the result of an
increase in loan demand in the Bank's market area, combined with an increase in
the Bank's market share of loans in such area. The ratio of total loans to total
deposits decreased from 57.1% in 1997 to 53.0% in 1998.
INVESTMENT SECURITIES AND FEDERAL FUNDS SOLD
The Bank has classified its investment securities as either available for sale
or held to maturity, depending on whether the Bank has the intent and ability to
hold such securities to maturity. At December 31, 1998, $24,526,907 of the
Bank's investment securities were classified as available for sale, compared to
$14,247,419 at year end 1997. Securities classified as held to maturity were
$7,562,904 at year end 1998, as compared to $944,986 at year end 1997.
Restricted investments consisted of stock in the Federal Home Loan Bank, the
purchase of which was required in order to become a member and participate in
available lines of credit. Restricted investments were $118,300 at year end 1998
and $17,400 at year end 1997.
Page 4
<PAGE> 11
INVESTMENT SECURITIES AND FEDERAL FUNDS SOLD - CONCLUDED
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
investment securities, it is the Company's intent to hold such securities for
the foreseeable future. Management of the maturity of the portfolio is necessary
to provide liquidity and to control interest rate risk. During 1998, gross
investment securities sales were approximately $7.3 million and maturities and
calls were $13.5 million, representing 37.2 percent and 68.9 percent,
respectively, of the average portfolio for the year. Gains associated with the
sales totaled $29,174, accounting for 6 percent of noninterest income. Gross
unrealized gains in the portfolio amounted to $88,007 at year end 1998 and
unrealized losses amounted to $9,230. During 1997, gross investment securities
sales were approximately $693 thousand and maturities and calls were $3.7
million, respectively representing 10.51 percent and 56.1 percent, respectively,
of the average portfolio for the year. Losses associated with the sales were
$662, accounting for 0.1% of noninterest expenses. Gross unrealized gains in the
portfolio amounted to $22,683 at year end 1997 and unrealized losses were
$1,161.
Mortgage-backed securities have varying degrees of risk of impairment of
principal, as opposed to U.S. Treasury and U.S. government agency obligations,
which are considered to contain virtually no default or prepayment risks.
Impairment risk is primarily associated with accelerated prepayments,
particularly with respect to longer maturities purchased at a premium and
interest-only strip securities. The Bank's purchase of mortgage-backed
securities during 1998 did not include securities with these characteristics.
The recoverability of the Bank's investment in mortgage-backed securities is
reviewed periodically, and if necessary, appropriate adjustments would be made
to income for impaired values.
Management maintains federal funds sold as a tool in managing its daily cash
needs. Federal funds sold increased from $750,000 for 1997 to $4,700,000 for
1998. Average federal funds sold for 1998 was approximately $1,605,000 or 3.3%
of average earning assets, compared with approximately $1,238,000 or 9.1% of
average earning assets for 1997. The increase of 29.6% in average federal funds
sold from 1997 reflects an emphasis by management on profitability while
maintaining an acceptable level of liquidity.
There has been no significant impact on the Company's financial statements as a
result of the provisions of Statement of Financial Accounting Standards No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments."
DEPOSITS
The Bank's primary source of funds is derived from deposits of Bank customers.
Average deposits increased 358.0% from approximately $9,782,000 in 1997 to
approximately $44,800,000 in 1998. At December 31, 1998, total deposits were
$68,835,372, of which $62,586,245 (91%) were interest-bearing and $6,249,127
(9%) were noninterest-bearing. At year-end 1997, total deposits were
$30,111,208, of which $26,804,361 (89%) were interest-bearing and $3,306,847
(11%) were noninterest-bearing. Continued enhancement of existing products and
emphasis upon better customer service fuels the growth in the deposit base.
Emphasis has been placed upon attracting consumer deposits. It is the Bank's
intent to expand its consumer base in order to continue to fund asset growth.
SHAREHOLDERS' EQUITY
Shareholders' equity increased $226,204 from December 31, 1997 to December 31,
1998, due to net earnings of $233,832 and the decrease in net unrealized gains
on securities available for sale totaling ($7,628), net of deferred tax
liability.
Page 5
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
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 Company's State of Readiness. 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 has been
completed, and the Company expects to have mission critical hardware
modification or replacement completed during the first quarter of 1999. The
Company has completed its inventory of mission critical software and is
contacting software vendors for certification of Year 2000 compliance. The
Company plans to complete any programming changes to critical systems and will
complete testing of the new programming in the first quarter of 1999. Testing of
internal mission critical systems is scheduled to take place 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 its 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
completing 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 a third party
processor, and the Company is actively communicating with and monitoring the
progress of such processor to assess the impact of Year 2000 issues on such
processor 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.
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.
Page 6
<PAGE> 13
YEAR 2000 - CONCLUDED
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 completing 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 first quarter 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 to be
approximately $25,000 in 1998 and $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 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 Company's ability to meet the day-to-day cash flow requirements
of the Bank's customers, whether they are depositors wishing to withdraw funds
or borrowers requiring funds to meet their credit needs. Without proper
liquidity management, the Company would not be able to perform the primary
function of a financial intermediary and would, therefore, 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 Company 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 Company can 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 a banking environment, both assets and liabilities are
considered sources of liquidity funding and both are, therefore, monitored on a
daily basis.
Page 7
<PAGE> 14
LIQUIDITY MANAGEMENT - CONCLUDED
The asset portion of the balance sheet provides liquidity primarily through loan
principal repayments or sales of investment and trading account securities. Real
estate-construction and commercial, financial and agricultural loans that mature
in one year or less equaled approximately $12.6 million or 34.5 percent of the
total loan portfolio at December 31, 1998 and investment securities maturing in
one year or less equaled $5.4 million or 16.8 percent of the portfolio. Other
sources of liquidity include short-term investments such as Federal funds sold.
The liability portion of the balance sheet provides liquidity through various
customers' interest-bearing and noninterest-bearing deposit accounts. Funds are
also available through the purchase of federal funds from other commercial banks
from available lines of up to $3.1 million. Liquidity management involves the
daily monitoring of the sources and uses of funds to maintain an acceptable cash
position.
In an effort to maintain and improve the liquidity position of the Bank,
management made application for membership with the Federal Home Loan Bank of
Atlanta in 1998. As a member of the Federal Home Loan Bank, the Bank is able to
improve its ability to manage liquidity and reduce interest rate risk by having
a funding source to match longer term loans. The application was approved in
1998, and the Bank received a credit line of up to $1,000,000. The Bank has made
a $1,000,000 draw from the available credit with the Federal Home Loan Bank.
(See Note 8 in the Notes to Consolidated Financial Statements.)
CAPITAL RESOURCES
A strong capital position is vital to the continued 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 the
majority of its capital requirements through the proceeds of its initial stock
offering in 1996 and the retention of earnings.
Bank regulatory authorities are placing increased emphasis on the maintenance of
adequate capital. In 1990, new risk-based capital requirements became effective.
The 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. The Bank's Tier 1 capital, which consists of common equity, paid-in
capital and retained earnings (less intangible assets), amounted to $6.3 million
at December 31, 1998. Tier 2 capital components include supplemental capital
components such as qualifying allowance for loan losses and qualifying
subordinated debt. Tier 1 capital plus the Tier 2 capital components is referred
to as Total Risk-based capital and was $6.6 million at year-end 1998. The
percentage ratios, as calculated under the guidelines were 12.05 percent and
12.76 percent for Tier 1 and Total Risk-based capital, respectively, at year-end
1998. Both levels currently exceed the minimum ratios of four percent and eight
percent, respectively.
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 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 December 31, 1998 exceeded the
regulatory minimum requirements which are generally 3% plus an additional
cushion of at least 100-200 basis points depending on risk profiles and other
factors.
Page 8
<PAGE> 15
CAPITAL RESOURCES - CONCLUDED
The table below illustrates the Bank's regulatory capital ratios at December 31,
1998 and 1997 under the year end 1998 requirements.
CAPITAL ADEQUACY RATIOS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
(in thousands)
1998 1997
---- ----
<S> <C> <C>
Tier 1 Capital $ 6,265 $ 5,537
Tier 2 Capital 366 170
---------- ----------
TOTAL QUALIFYING CAPITAL $ 6,631 $ 5,707
========== ==========
Risk Adjusted Total Assets
(including off-balance-sheet exposures) $ 51,983 $ 26,332
========== ==========
Tier 1 Risk-Based Capital Ratio 12.05% 21.02%
========== ==========
Total Risk-Based Capital Ratio 12.76% 21.67%
========== ==========
Leverage Ratio 8.14% 15.12%
========== ==========
Tangible Leverage Ratio 8.11% 15.03%
========== ==========
</TABLE>
DBF Capital Requirement. In addition to the capital standards imposed by federal
banking regulators, the Georgia Department of Banking and Finance (DBF) imposed
an 8% primary capital ratio as a condition to the approval of the Bank's
charter, This standard, which exceeds the FDIC capital standards, 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 is imposed during the first three years of the Bank's operation. At
December 31, 1998, the capital ratio as calculated under the DBF standard was
8.61%. The Bank's capital ratio as calculated by the DBF was in compliance for
1998 and 1997.
Page 9
<PAGE> 16
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity is a function of the repricing characteristics of the
Company's portfolio of assets and liabilities. These repricing characteristics
are the time frames within which the interest-bearing assets and liabilities are
subject to change in interest rates either at replacement or maturity during the
life of the instruments. Sensitivity is measured as the difference between the
volume of assets and liabilities in the Company's current portfolio that are
subject to repricing in future time periods. The differences are known as
interest sensitivity gaps and are usually calculated separately for segments of
time ranging from zero to thirty days, thirty-one to ninety days, ninety-one
days to one year, one to five year, over five year and on a cumulative basis.
The following tables show interest sensitivity gaps for these different
intervals as of December 31, 1998.
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
0-30 31-90 91-365 1-5 Over 5
Days Days Days Year Year Total
------- ------- -------- -------- ------- -------
(in Thousands)
<S> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1998
Interest-earning assets (1)
Loans ............................ $ 6,629 $13,258 $ 2,805 $ 13,214 $ 558 $36,464
Investment Securities:
Taxable ........................ 3,609 500 1,304 8,553 18,242 32,208
Tax-exempt ..................... -0- -0- -0- -0- -0- -0-
Federal funds sold ............. 4,700 -0- -0- -0- -0- 4,700
------- ------- -------- -------- ------- -------
14,938 13,758 4,109 21,767 18,800 73,372
------- ------- -------- -------- ------- -------
Interest-bearing liabilities (2)
Demand deposits (3) .............. 4,431 4,430 4,430 -0- -0- 13,291
Savings deposits (3) ............. 3,232 3,231 3,231 -0- -0- 9,694
Time deposits .................... 4,331 5,770 21,012 8,488 -0- 39,601
Long-term debt ................... -0- -0- -0- 1,000 -0- 1,000
------- ------- -------- -------- ------- -------
11,994 13,431 28,673 9,488 -0- 63,586
------- ------- -------- -------- ------- -------
Interest sensitivity gap ........... $ 2,944 $ 327 $(24,564) $ 12,279 $18,800 $ 9,786
======= ======= ======== ======== ======= =======
Cumulative interest
sensitivity gap .................. $ 2,944 $ 3,271 $(21,293) $ (9,014) $ 9,786
======= ======= ======== ======== =======
Ratio of interest-earning assets
to interest-bearing liabilities... 1.24 1.02 .14 2.29 --
======= ======= ======== ======== =======
Cumulative ratio ................... 1.24 1.12 .60 .85 1.15
======= ======= ======== ======== =======
Ratio of cumulative gap to
total interest-bearing assets .... .04 .04 (.29) (.12) .13
======= ======= ======== ======== =======
</TABLE>
- --------------------
(1) Excludes nonaccrual loans and securities.
(2) Excludes matured certificates which have not been redeemed by the customer
and on which no interest is accruing.
(3) Demand and savings deposits and other short term borrowings are assumed to
be subject to movement into other deposit instruments in equal amounts
during the 0-30 day period, the 31-90 day period, and the 91-365 day period.
Page 10
<PAGE> 17
The preceding table indicates that in a rising interest rate environment, the
Company's earnings may be adversely affected in the 0-365 day periods where
liabilities will reprice faster than assets. As seen in the preceding table, for
the first 30 days of repricing opportunity there is an excess of earning assets
over interest bearing liabilities of $2.9 million. For the first 365 days,
interest-bearing liabilities exceed earning assets by $21.3 million. During this
one year time frame, 85.1 percent of all interest bearing liabilities will
reprice compared to 44.7 percent of all interest-earning assets. Changes in the
mix of earning assets or supporting liabilities can either increase or decrease
the net interest margin without affecting interest rate sensitivity. In
addition, the interest rate spread between an asset and its supporting liability
can vary significantly while the timing of repricing for both the asset and the
liability remain the same, thus impacting net interest income. It should be
noted, therefore, that a matched interest-sensitive position by itself will not
ensure maximum net interest income. Management continually evaluates the
condition of the economy, the pattern of market interest rates and other
economic data to determine the types of investments that should be made and at
what maturities. Using this analysis, management from time to time assumes
calculated interest sensitivity gap positions to maximize net interest income
based upon anticipated movements in the general level of interest rates.
INFLATION AND CHANGING PRICES
A bank's asset and liability structure is significantly different from that of
an industrial company in that substantially all assets and liabilities of a bank
are monetary in nature. Management believes the impact of inflation on financial
results depends upon the Bank's ability to react to changes in interest rates
and by such reaction to reduce the inflationary impact on performance. Interest
rates do not necessarily move in the same direction, or at the same magnitude,
as the prices of other goods and services. As discussed previously, management
seeks to manage the relationship between interest-sensitive assets and
liabilities in order to protect against wide interest rate fluctuations,
including those resulting from inflation.
Various information shown elsewhere in this Report will assist in the
understanding of how well the Bank is positioned to react to changing interest
rates and inflationary trends, In particular, the summary of net interest
income, the maturity distribution, the composition of the loan and security
portfolios and the data on the interest sensitivity of loans and deposits should
be considered.
CONCLUSION
The Bank has experienced continued growth since its opening in 1997. It has
enjoyed continued increase in its customer base, as shown by the rapid increase
in deposits and loans for the 1998 fiscal year. While management remains
optimistic about the prospects for continued growth and profitability,
management does not anticipate that growth will be at the level experienced
during the Bank's initial two years of operation. No assurance can be given that
the Bank will continue to grow and be profitable.
The foregoing is a forward-looking statement which reflects significant
assumptions and subjective judgments believed by management to be reasonable as
of the date of this Report. It does not constitute a forecast or prediction of
actual results, and actual performance and financial results may differ
materially from those anticipated due to a variety of factors.
Page 11
<PAGE> 18
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
FOR FINANCIAL INFORMATION
Gateway Bancshares, Inc. & Subsidiary
The management of Gateway Bancshares, Inc. & Subsidiary is responsible for the
preparation, integrity, and objectivity of the financial statements, related
financial data, and other information in this annual report. The financial
statements are prepared in accordance with generally accepted accounting
principles and include amounts based on management's best estimates and judgment
where appropriate. Financial information appearing throughout this annual report
is consistent with the financial statements.
In meeting its responsibility both for the integrity and fairness of these
statements and information, management depends on the accounting systems and
related internal accounting controls that are designed to provide reasonable
assurances that (i) transactions are authorized and recorded in accordance with
established procedures, (ii) assets are safeguarded, and (iii) proper and
reliable records are maintained.
The concept of reasonable assurance is based on the recognition that the cost of
internal control systems should not exceed the related benefits. As an integral
part of internal control systems, the Company, through its audit committee,
utilizes the services of a professional staff of internal auditors who monitor
compliance, assess the effectiveness of internal control systems and coordinate
audit coverage with independent certified public accountants.
The responsibility of the Company's independent certified public accountants is
limited to an expression of their opinion as to the fairness of the financial
statements presented. Their opinion is based on an audit conducted in accordance
with generally accepted auditing standards as described in their report.
The Board of Directors is responsible for insuring that both management and the
independent certified public accountants fulfill their respective
responsibilities with regard to the financial statements. The Audit Committee
meets periodically with both management and the independent certified public
accountants to assure that each is carrying out its responsibilities. The
independent certified public accountants have full and free access to the Audit
Committee and Board of Directors and may meet with them, with and without
management being present, to discuss auditing and financial reporting matters.
Page 12
<PAGE> 19
GATEWAY BANCSHARES, INC. & SUBSIDIARY
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page (s)
--------
<S> <C>
Independent Auditors' Report................................................................................ 14
Consolidated Statement of Financial Condition as of December 31, 1998 and 1997.............................. 15
Consolidated Statement of Income for the years ended
December 31, 1998, 1997 and 1996.......................................................................... 16
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996.......................................................................... 17
Consolidated Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................................................................... 18
Notes To Consolidated Financial Statements.................................................................. 19-36
</TABLE>
Page 13
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Gateway Bancshares, Inc. & Subsidiary
We have audited the accompanying consolidated statements of financial condition
of Gateway Bancshares, Inc. & Subsidiary as of December 31, 1998 and 1997 and
the related consolidated statements of income, shareholders' equity and cash
flows for the years ended December 31, 1998, 1997, and 1996. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Gateway
Bancshares, Inc. & Subsidiary as of December 31, 1998 and 1997, and the results
of its consolidated operations and its cash flows for the years ended December
31, 1998, 1997 and 1996, in conformity with generally accepted accounting
principles.
Ellijay, Georgia
January 29, 1999
HENSLEY, LAND & ASSOCIATES, P.C.
Page 14
<PAGE> 21
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
GATEWAY BANCSHARES, INC. & SUBSIDIARY
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash .................................................................................. $ 397,459 $ 229,994
Due from banks ........................................................................ 1,015,443 1,152,424
Federal funds sold .................................................................... 4,700,000 750,000
Securities available for sale ......................................................... 24,526,907 14,247,419
Securities held to maturity, estimated
fair value of $7,630,715 for 1998 and $948,052 for 1997 ............................. 7,562,904 944,986
Restricted investments ................................................................ 118,300 17,400
Loans ................................................................................. 36,464,131 17,195,468
Allowance for loan losses ............................................................. (366,158) (170,000)
------------ ------------
NET LOANS ............................................................. 36,097,973 17,025,468
Premises and equipment, net ........................................................... 1,694,514 1,725,463
Accrued interest ...................................................................... 678,770 279,050
Other assets .......................................................................... 146,841 239,181
------------ ------------
TOTAL ASSETS .......................................................... $ 76,939,111 $ 36,611,385
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing ............................................................. $ 6,249,127 $ 3,306,847
Interest-bearing ................................................................ 62,586,245 26,804,361
------------ ------------
TOTAL DEPOSITS ........................................................ 68,835,372 30,111,208
Long-term debt ..................................................................... 1,000,000 -0-
Accrued interest ................................................................... 276,995 91,297
Other liabilities .................................................................. 240,127 48,467
------------ ------------
TOTAL LIABILITIES ..................................................... 70,352,494 30,250,972
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, par value $5 per share,
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................................................................. (173,497) (407,329)
Accumulated other comprehensive income .......................................... 7,237 14,865
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ............................................ 6,586,617 6,360,413
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................ $ 76,939,111 $ 36,611,385
============ ============
</TABLE>
See accountants' notes to consolidated financial statements.
Page 15
<PAGE> 22
CONSOLIDATED STATEMENT OF INCOME
GATEWAY BANCSHARES, INC. & SUBSIDIARY
<TABLE>
<CAPTION>
FOR THE YEAR For the Year For the Year
ENDING Ending Ending
DEC. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
------------- ------------- -------------
<S> <C> <C> <C>
REVENUE FROM EARNING ASSETS
Interest and fees on loans .................... $ 3,014,428 $ 743,963 $ -0-
Interest on investment securities:
Taxable securities .......................... 1,240,761 391,393 157,273
Interest on federal funds sold ................ 99,157 66,444 28,142
Interest on deposits in other banks ........... -0- -0- 35,809
----------- ----------- ---------
TOTAL REVENUE FROM EARNING ASSETS ........ 4,354,346 1,201,800 221,224
----------- ----------- ---------
INTEREST EXPENSE
Interest on deposits .......................... 2,265,832 428,696 -0-
Interest on notes payable and borrowed funds... 61,112 927 4,572
----------- ----------- ---------
TOTAL INTEREST EXPENSE ................... 2,326,944 429,623 4,572
----------- ----------- ---------
NET INTEREST INCOME ............................. 2,027,402 772,177 216,652
Provision for loan losses ..................... 235,000 171,075 -0-
----------- ----------- ---------
NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES ............... 1,792,402 601,102 216,652
----------- ----------- ---------
NONINTEREST INCOME
Service charges on deposits ................... 138,915 41,142 -0-
Insurance commissions ......................... 4,375 1,881 -0-
Other operating income ........................ 36,731 11,480 -0-
Investment securities gains ................... 12,170 -0- -0-
----------- ----------- ---------
TOTAL NONINTEREST INCOME ................. 192,191 54,503 -0-
----------- ----------- ---------
NONINTEREST EXPENSES
Salaries and employee benefits ................ 764,592 571,089 229,277
Occupancy expense ............................. 95,620 76,044 23,277
Furniture and equipment expense ............... 107,243 61,643 6,837
Other operating expenses ...................... 728,498 374,351 89,094
Investment securities losses .................. 517 662 -0-
----------- ----------- ---------
TOTAL NONINTEREST EXPENSES ............... 1,696,470 1,083,789 348,485
----------- ----------- ---------
Net Income (Loss) before income taxes ......... 288,123 (428,184) (131,833)
Income tax benefit (expense) .................. (54,291) 154,445 -0-
----------- ----------- ---------
NET INCOME (LOSS) ............................... $ 233,832 $ (273,739) $(131,833)
=========== =========== =========
EARNINGS (LOSS) PER COMMON SHARE - BASIC
AND DILUTIVE
Net loss per common share ..................... $ 0.34 $ (0.40) $ (0.19)
Weighted average common shares outstanding .... 679,048 679,048 679,048
</TABLE>
See accountants' report and notes to consolidated financial statements.
Page 16
<PAGE> 23
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
GATEWAY BANCSHARES, INC. & SUBSIDIARY
For the Years Ending December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Accumulated
Other
Common Capital Accumulated Comprehensive
Stock Surplus Deficit Income Total
----------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 .................. $ 5 $ 5 $ (1,757) $ -0- $ (1,747)
-----------
Comprehensive Income:
Net Loss - 1996 ...................... -0- -0- (131,833) -0- (131,833)
Change in net unrealized gain
(loss) on securities available
for sale, net of tax effects .... -0- -0- -0- (3,947) (3,947)
-----------
Total Comprehensive Income .... (135,780)
-----------
Issuance of Common Stock ............. 3,395,240 3,395,240 -0- -0- 6,790,480
Stock Offering Costs ................. -0- (37,603) -0- -0- (37,603)
Retirement of Stock .................. (5) (5) -0- -0- (10)
----------- ----------- --------- --------- -----------
Balance at
December 31, 1996 .................. 3,395,240 3,357,637 (133,590) (3,947) 6,615,340
-----------
Comprehensive Income:
Net Loss - 1997 ...................... -0- -0- (273,739) -0- (273,739)
Change in net unrealized gain
(loss) on securities available
for sale, net of tax effects .... -0- -0- -0- 18,812 18,812
----------- ----------- --------- --------- -----------
Total Comprehensive Income ... (254,927)
-----------
Balance at
December 31, 1997 .................. 3,395,240 3,357,637 (407,329) 14,865 6,360,413
-----------
COMPREHENSIVE INCOME:
NET INCOME - 1998 .................... -0- -0- 233,832 -0- 233,832
CHANGE IN NET UNREALIZED GAIN
(LOSS) ON SECURITIES AVAILABLE
FOR SALE, NET OF TAX EFFECTS ... -0- -0- -0- (7,628) (7,628)
----------- ----------- --------- --------- -----------
TOTAL COMPREHENSIVE INCOME ..... 226,204
-----------
BALANCE AT
DECEMBER 31, 1998 ................. $ 3,395,240 $ 3,357,637 $(173,497) $ 7,237 $ 6,586,617
=========== =========== ========= ========= ===========
</TABLE>
See accountants' report and notes to consolidated financial statements.
Page 17
<PAGE> 24
CONSOLIDATED STATEMENT OF CASH FLOWS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
<TABLE>
<CAPTION>
FOR THE YEAR For the Year For the Year
ENDING Ending Ending
DEC 31, 1998 Dec 31, 1997 Dec 31, 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .............................................. $ 233,832 $ (273,739) $ (131,833)
Adjustments to reconcile net loss to net
cash used in operating activities:
Provision for loan losses ................................... 235,000 171,075 -0-
Provision for depreciation and amortization .................. 133,617 90,100 6,462
Amortization of investment security
premiums and accretion of discounts ....................... (19,610) (25,239) (115,539)
Deferred tax (benefit) ....................................... 54,291 (155,610) -0-
Realized investment security gains ........................... (11,653) 662 -0-
Increase in accrued interest receivable ...................... (399,720) (236,206) (42,844)
Increase in accrued interest payable ......................... 185,698 91,297 (255)
Other ........................................................ 221,740 (82,471) 100,690
------------ ------------ -----------
NET CASH USED PROVIDED OPERATING ACTIVITIES ............. 633,195 (420,131) (183,319)
------------ ------------ -----------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale ........... 7,346,633 693,357 1,000,000
Proceeds from maturities and calls of securities
available for sale ........................................... 13,493,225 3,680,783 3,949,173
Purchase of securities available for sale ...................... (30,149,745) (13,414,894) (2,495,347)
Purchase of securities held to maturity and restricted assets... (7,668,713) (943,852) (7,516,387)
Net increase in loans to customers ............................. (19,307,505) (17,196,543) -0-
Capital expenditures ........................................... (90,770) (1,258,125) (548,568)
------------ ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES ................... (36,376,875) (28,439,274) (5,611,129)
------------ ------------ -----------
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and savings accounts ......................................... 12,811,816 18,862,014 -0-
Net increase in certificates of deposit ........................ 25,912,348 11,249,194 -0-
Proceeds from notes payable .................................... 1,000,000 -0- 189,000
Repayment of notes payable ..................................... -0- -0- (267,000)
Issuance of common stock ....................................... -0- -0- 6,790,480
Stock issue costs .............................................. -0- -0- (37,603)
Retirement of Common Stock ..................................... -0- -0- (10)
------------ ------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............... 39,724,164 30,111,208 6,674,867
------------ ------------ -----------
Net increase in cash and cash equivalents ........................ 3,980,484 1,251,803 880,419
Cash and cash equivalents at beginning of year ................... 2,132,418 880,615 196
------------ ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ......................... $ 6,112,902 $ 2,132,418 $ 880,615
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ..................................................... $ 2,141,246 $ 338,326 $ 4,572
Income taxes ................................................. -0- -0- -0-
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
None.
</TABLE>
See accountants' report and notes to consolidated financial statements
Page 18
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Gateway Bancshares, Inc. (the "Company") is a bank holding
company whose principal activity is the ownership and management of its
wholly-owned subsidiary, Gateway Bank & Trust (the "Bank"). The Bank generates
commercial (including agricultural), mortgage and consumer loans and receives
deposits from customers located primarily in Catoosa County, Georgia and the
surrounding areas. The Bank operates under a state bank charter and provides
full banking services. As a state bank, the Bank is subject to regulation by the
Georgia Department of Banking and Finance and the Federal Deposit Insurance
Corporation.
Business: The Company began organizational activities on July 11, 1995 and was
incorporated on October 3, 1995 in the State of Georgia. On December 11, 1995,
The Bank's charter was approved by the Georgia Department of Banking and
Finance. On December 13, 1995, the Bank was incorporated under the laws of the
State of Georgia. The Company completed its stock offering on June 15, 1996. The
Bank opened for business on April 21, 1997. The Bank operated as a development
stage company in the period prior to its opening for business. The Bank provides
a full range of banking services to individual and corporate customers in
Catoosa County and surrounding areas.
Basis of Consolidation: The consolidated financial statements include the
accounts of Gateway Bancshares, Inc. and its wholly-owned subsidiary, Gateway
Bank & Trust. All significant intercompany balances and transactions have been
eliminated.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, and the
valuation of foreclosed real estate, deferred tax assets and trading activities.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the determination
of the estimated losses on loans, management obtains independent appraisals for
significant collateral.
The Bank's loans are generally secured by specific items of collateral including
real property, consumer assets, and business assets. Although the Bank has a
diversified loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent on local economic conditions.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Bank to recognize additional
losses based on their judgments about information available to them at the time
of their examination. Because of these factors, it is reasonably possible that
the estimated losses on loans may change materially in the near term. However,
the amount of the change that is reasonably possible cannot be estimated.
Page 19
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Cash and Cash Equivalents: For purposes of the consolidated statements of cash
flows, cash and cash equivalents include cash, balances due from banks, and
federal funds sold.
Investments in Securities: Debt securities that management has the positive
intent and ability to hold to maturity are classified as "held-to-maturity" and
reflected at amortized cost. Debt securities not classified as
"held-to-maturity", including equity securities with readily determinable fair
value, are classified as "available-for-sale" and reflected at fair value, with
unrealized gains and losses excluded from earnings and reported in other
comprehensive income.
Purchase premiums and discounts are recognized in interest income using methods
approximating the interest method over the period to maturity. Declines in the
value of held-to-maturity and available-for-sale securities below their cost
that are deemed to be other than temporary are reflected in earnings as realized
losses. Gains and losses on the sale of securities are recorded on the trade
date and are determined using the specific identification method.
Trading securities are bought and held principally for the purpose of selling
them in the near term. The Company has no trading securities.
Restricted investment securities consists of equity stock in which the purchase
of such security was required. These investments are recorded at cost. Fair
value is determined by the ultimate recoverability of par value.
Loans: The Bank grants mortgage, commercial and consumer loans to customers in
the Northwest Georgia area. The ability of the Bank's debtors to honor their
contracts is dependent upon the real estate and general economic sectors in this
area. The Bank's loans are generally secured by specific items of collateral
including real property, consumer assets, and business assets.
Loans are stated at unpaid principal balances, less the allowance for loan
losses, net deferred loan fees and unearned discounts.
Unearned discounts on installment loans are recognized as income over the term
of the loans using a method that approximates the interest method.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred, if material, and amortized as a yield adjustment over the
lives of the related loans using the interest method. Amortization of deferred
loan fees is discontinued when a loan is placed on nonaccrual status.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
previously accrued on such loans is reversed against current period interest
income.
Page 20
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Allowance for Loan Losses: The allowance for loan losses is maintained at a
level which, in management's judgment, is adequate to absorb losses inherent in
the loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the nature of
the portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, economic conditions, and other risks inherent in the
portfolio. Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows. Although
management uses available information to recognize losses on loans, because of
uncertainties associated with local economic conditions, collateral values, and
future cash flows on impaired loans, it is reasonably possible that a material
change could occur in the allowance for loan losses in the near term. However,
the amount of the change that is reasonably possible cannot be estimated. The
allowance is increased by a provision for loan losses, which is charged to
expense and reduced by charge-offs, net of recoveries. Changes in the allowance
relating to impaired loans are charged or credited to the provision for loan
losses.
Premises and Equipment: Other premises and equipment are carried at cost less
accumulated depreciation computed on the straight-line method over the estimated
useful lives of the assets. Expenditures for repairs and maintenance are charged
to expense as incurred, and major additions and improvements are capitalized.
Foreclosed Assets: Assets acquired through, or in lieu of, foreclosure are held
for sale and initially recorded at fair value at the date of foreclosure,
establishing a cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of
carrying amount or fair value less cost to sell. Costs of significant property
improvements are capitalized, whereas costs relating to holding property are
expensed. The portion of interest costs relating to development of real estate
is capitalized. Valuations are periodically performed by management, and any
subsequent write-downs are recorded as a charge to operations, if necessary, to
reduce the carrying value of a property to the lower of its cost or fair value
less cost to sell.
Earnings Per Common Share: Earnings per common share are calculated on the basis
of the weighted average number of common shares outstanding.
Income Taxes: Income taxes are provided for the tax effects of the transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of the
allowance for loan losses and accumulated depreciation. The deferred tax assets
and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred tax assets and liabilities are
reflected at income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes. The Company files consolidated income
tax returns with its subsidiary.
Employee Benefit Plan: The Bank has a 401-K profit-sharing plan covering
substantially all of its employees. Eligible participating employees may elect
to contribute tax deferred contributions. Bank contributions to the plan are to
be determined by the Board of Directors, after operating losses from prior years
have been fully recovered.
Page 21
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Off Balance Sheet Financial Instruments: In the ordinary course of business the
Bank has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit, commitments under credit card arrangements,
commercial letters of credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they become payable.
The Bank also has available as a source of short-term financing the purchase of
federal funds from other correspondent banks from an available line of up to
$3.1 million.
Other matters: The consolidated financial statements include disclosure items
required by the federal Deposit Insurance Corporation (the "FDIC"). This
statements has not been reviewed, or confirmed for accuracy or relevance, by the
FDIC.
Intangibles: Intangibles consist primarily of legal, consulting and regulatory
fees charged to organizational costs. Organizational costs are generally
amortized over 5 years using the straight-line method. In April 1998, the
American Institute of Certified Public Accountants Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" was issued, which requires the
costs of organizational and start-up activities to be expensed as they are
incurred. Costs that entities previously capitalized as start-up costs should
now be expensed, effective for years beginning after December 15, 1998. The
Company will adopt this statement in 1999 and does not expect the adoption to
have a material effect on the Company's consolidated financial statements.
Comprehensive Income: The Company adopted the Financial Accounting Standards
Board's statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," as of January 1, 1998. Accounting principles generally
require that recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as unrealized
gains and losses on available-for-sale securities, are reported as a separate
component of the equity section of the balance sheet, such items along with net
income, are components of comprehensive income. The adoption of SFAS No. 130 had
no effect on the Company's net income or shareholders' equity.
Segment Information: The Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" effective for its year ending
December 31, 1998 and 1997. 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 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.
Page 22
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONCLUDED
Pensions and Other Post-retirement Benefits: The Company adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Post-retirement Benefits" as of
January 1, 1998. This statement, which standardizes the disclosure requirements
for pensions and other post-retirement 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. The adoption of SFAS No. 132 had
no effect on the Company's net income or shareholders' equity.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125
was amended by SFAS No. 127, which deferred the effective date of certain
provisions of SFAS No. 125 until January 1, 1998. SFAS No. 125 is to be applied
prospectively to transfers and servicing of financial assets and extinguishments
of liabilities after December 31, 1996. This statement utilizes the financial
components approach that focuses on control. Under that approach, after a
transfer of financial assets, an entity recognized the financial and servicing
assets it controls and the liabilities when extinguished. Adoption of SFAS No.
125 did not have an impact on the Company's consolidated financial statements.
In December 1996, the FASB issued SFAS No. 126, "Exemption from Certain Required
Disclosures about Financial Instruments for Certain Nonpublic Entities" which
amends FASB No. 107, "Disclosures about Fair Value of Financial Instruments."
This statement allows an entity to be exempt from SFAS No. 107 disclosures if
the following criteria are met: a) the entity is a nonpublic entity, b) the
entity's total assets are less than $100 million on the date of the financial
statements, and the entity has not held or issued any derivative financial
instruments, as defined in FASB No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments," other than loan
commitments, during the reporting period. This statement did not impact the
Company's consolidated financial statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which
simplifies previous standards for reporting earnings per share. Under SFAS No.
128, earnings per share is stated on the income statement based on two separate
measurements: basic and diluted. Basic earnings per share excludes dilution and
is computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that shared in the earnings of the
entity. The adoption of this statement did not have a material effect on the
Company's consolidated financial statements.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Bank is required to maintain average reserve balances either in vault cash
or on deposit with the Federal Reserve Bank. At December 31, 1998 and 1997, the
average amount of required reserves was $108,000 and $25,000, respectively.
Page 23
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
NOTE 3 - INVESTMENT SECURITIES
At December 31, 1998, the Company's available-for-sale securities reflected net
unrealized gains of $10,966, which resulted in an increase in other
comprehensive income of $7,237, net of deferred tax liability. At December 31,
1997, the Company's available-for-sale securities reflected net unrealized gains
of $22,522, which resulted in an increase in other comprehensive income of
$14,865, net of deferred tax liability.
The carrying amounts of investment securities as shown in the statement of
financial condition of the Bank and their approximate fair values at December
31, 1998 and 1997 are presented below.
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
SECURITIES AVAILABLE FOR SALE:
U. S. GOVERNMENT AND AGENCY SECURITIES... $12,312,094 $ 19,886 $ -0- $12,331,980
MORTGAGE BACKED SECURITIES .............. 12,203,847 310 9,230 12,194,927
----------- ----------- ----------- -----------
$24,515,941 $ 20,196 $ 9,230 $24,526,907
=========== =========== =========== ===========
SECURITIES HELD TO MATURITY:
U. S. GOVERNMENT AND AGENCY SECURITIES... $ 7,512,918 $ 67,811 $ -0- $ 7,580,729
MUNICIPAL SECURITIES ................. 49,986 -0- -0- 49,986
----------- ----------- ----------- -----------
$ 7,562,904 $ 67,811 $ -0- $ 7,630,715
=========== =========== =========== ===========
As of December 31, 1997:
Securities Available for Sale:
U. S. government and agency securities... $13,709,535 $ 23,683 $ -0- $13,733,218
Mortgage backed securities .............. 515,362 -0- 1,161 514,201
----------- ----------- ----------- -----------
$14,224,897 $ 23,683 $ 1,161 $14,247,419
=========== =========== =========== ===========
Securities Held to Maturity:
U. S. government and agency securities... $ 944,986 $ 3,066 $ -0- $ 948,052
=========== =========== =========== ===========
<CAPTION>
Restricted Investments: Book Value (at cost)
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Federal Home Loan Bank stock............. $ 118,300 $ 17,400
=========== ===========
</TABLE>
The contractual maturities of securities available for sale at December 31, 1998
are shown below. Expected maturities will differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without
call or prepayment penalties.
Page 24
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
NOTE 3 - INVESTMENT SECURITIES - CONCLUDED
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
As of December 31, 1998: ----------- -----------
- ------------------------
<S> <C> <C>
Securities Available for Sale:
Due in one year or less ..................................................... $ 4,750,578 $ 4,751,298
Due after one year through five years ....................................... 6,290,737 6,334,045
Due after five years through ten years ...................................... 8,918,865 8,896,113
Due after ten years ......................................................... 4,555,761 4,545,451
----------- -----------
$24,515,941 $24,526,907
=========== ===========
Securities Held to Maturity:
Due in one year or less...................................................... $ 550,615 $ 552,665
Due after one year through five years ....................................... 2,262,375 2,299,825
Due after five years through ten years ...................................... 4,749,914 4,778,225
----------- -----------
$ 7,562,904 $ 7,630,715
=========== ===========
</TABLE>
Proceeds from sales of available for sale securities were $7,346,633 and
$693,357 for the years ended December 31, 1998 and 1997, respectively. There
were no sales of investment securities in 1996. Gross realized gains and losses
on investments in debt securities available for sale for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Gross realized gains............. 12,170 $ -0- $ -0-
Gross realized losses............ 517 662 -0-
</TABLE>
The carrying value of investment securities pledged to secure public funds on
deposit and for other purposes as required by law amounted to approximately
$11,369,000 and $9,825,000 at December 31, 1998 and 1997, respectively.
NOTE 4 - LOANS
The Bank grants loans to customers primarily in the North Georgia area. The
major classifications of loans as of December 31, 1998 and 1997 were as follows
(000's omitted):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commercial, financial and agricultural... $ 10,421 $ 6,993
Real Estate - construction .............. 6,008 2,992
Real Estate - other ..................... 13,289 3,482
Consumer ................................ 6,713 3,696
Other loans ............................. 33 32
-------- --------
36,464 17,195
Allowance for loan losses ............... (366) (170)
-------- --------
Net loans ............................... $ 36,098 $ 17,025
======== ========
</TABLE>
Page 25
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
NOTE 4 - LOANS - CONCLUDED
As of December 31, 1998, there were no loans which the Bank had specifically
classified as impaired. Other nonaccrual loans at December 31, 1998 and 1997
amounted to $15,508 and $-0-, respectively. For the year ended December 31, 1998
the difference between gross interest income that would have been recorded in
such period if nonaccruing loans had been current in accordance with their
original terms and the amount of interest income on those loans that was
included in such period's net income was negligible.
The Bank has no commitments to loan additional funds to the borrowers of
nonaccrual loans.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the year ended December 31, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Balance at beginning of year..... $170,000 $ -0-
Charge-offs ..................... 38,842 1,075
Recoveries .................... -0- -0-
-------- --------
Net charge-offs ............... 38,842 1,075
Provision for loan losses ....... 235,000 171,075
-------- --------
Balance at end of year .......... $366,158 $170,000
======== ========
</TABLE>
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment were as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Buildings and improvements ....... $1,137,774 $1,134,182
Furniture and equipment .......... 695,691 634,738
Vehicles ......................... 68,997 42,772
---------- ----------
1,902,462 1,811,692
Less allowance for depreciation... 207,948 86,229
---------- ----------
$1,694,514 $1,725,463
========== ==========
</TABLE>
The provision for depreciation charged to occupancy and furniture and equipment
expense for the years ended December 31, 1998, 1997, and 1996 was $121,719,
$81,051, and $5,178, respectively.
Page 26
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
NOTE 7 - DEPOSITS
The major classifications of deposits as of December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Noninterest-bearing demand ..................... $ 6,249,127 $ 3,306,847
Interest-bearing demand ........................ 13,291,271 12,293,606
Savings ........................................ 9,694,496 3,261,561
Time ........................................... 25,306,466 6,884,995
Certificates of deposit of $100,000 or more..... 14,294,012 4,364,199
----------- -----------
$68,835,372 $30,111,208
=========== ===========
</TABLE>
The maturities of time certificates of deposit and other time deposits of
$100,000 or more issued by the Bank at December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
TIME
CERTIFICATES
OF DEPOSIT
-----------
<S> <C>
Three months or less ........................... $ 4,373
Over three through six months................... 6,861
Over six through twelve months.................. 2,405
Over twelve months ............................. 655
-----------
$ 14,294
===========
</TABLE>
NOTE 8 - LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Loans payable consists of the following at December 31:
Note payable on a $1 million line of credit at Federal Home Loan Bank, with a
maturity date of January 13, 2003; interest rate of 5.72 per cent; secured by
blanket interest in mortgage loans of the Company................................. $ 1,000,000 $ -0-
=========== ==========
</TABLE>
Maturities of long-term debt following December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ -0-
2000 -0-
2001 -0-
2002 -0-
2003 1,000,000
----------
$1,000,000
==========
</TABLE>
Page 27
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
NOTE 9 - OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
-----------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Advertising .......................... $ 70,785 $ 55,683 $ 7,058
Data processing ...................... 166,490 64,852 -0-
Insurance ............................ 14,311 10,343 7,893
Postage and express .................. 43,802 19,408 2,968
Printing ............................. 61,443 61,902 -0-
Professional and regulatory fees ..... 79,908 71,363 50,653
Supplies ............................. 50,034 55,969 4,818
Taxes and licenses ................... 7,500 5,782 -0-
Allowance for losses on debit card
transactions ...................... 150,000 -0- -0-
Other ................................ 84,742 29,711 15,704
-------- -------- -------
$729,015 $375,013 $89,094
======== ======== =======
</TABLE>
NOTE 10 - INCOME TAXES
There were no current taxes receivable or payable as of December 31, 1998 and
1997.
The components of the net deferred income tax asset included in other assets are
as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax asset:
Federal ............................. $ 143,184 $ 209,314
Deferred tax liability:
Federal ............................. (46,758) (16,505)
Less valuation allowance ............. -0- (6,021)
--------- ---------
Net deferred income tax asset......... $ 96,426 $ 146,788
========= =========
</TABLE>
The tax effects of each type of income and expense item that gave rise to
deferred taxes are:
<TABLE>
<S> <C> <C>
Net operating loss carryover ......... $ 12,449 $ 166,708
Net unrealized gains on securities
available for sale ................. (3,728) (7,657)
Depreciation ......................... (43,030) (8,848)
Provision for loan losses ............ 105,889 42,606
Other ................................ 24,846 -0-
Less: Valuation allowance ............ -0- (46,021)
--------- ---------
$ 96,426 $ 146,788
========= =========
</TABLE>
The net change in the valuation allowance for the year ended December 31, 1998
was a decrease of $46,021.
Page 28
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
NOTE 10 - INCOME TAXES - CONTINUED
The components of income tax benefit (expense) for the years 1998, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Deferred Federal $ 54,291 $154,445 $ -0-
======== ======== ========
</TABLE>
The principal sources of temporary differences resulting in deferred income
taxes included in the accompanying statement of income and the tax effect of
each are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Federal annualized rate of 34% of income (loss)
before income tax ........................... $ 97,962 $(145,582) $(44,823)
Deduct tax effect of:
Permanent differences ....................... (4,488) 900 -0-
Other adjustments ........................... 6,838 (9,763) (1,198)
Valuation allowance ......................... (46,021) -0- 46,021
-------- --------- --------
Income Tax Benefit .......................... $ 54,291 $(154,445) $ -0-
======== ========= ========
</TABLE>
Tax effects of securities transactions resulted in an increase in income tax
benefit for 1998 of $3,962. The effective tax rate of 19 percent is the lower
than the federal statutory rate primarily due to the elimination of the deferred
tax asset valuation allowance in 1998. The carryforward period of net operating
losses for tax purposes will expire beginning the year 2010.
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Financial instruments whose contract amount represents credit risk were as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Commitments to extend credit..................... $6,227,000 $5,192,000
Standby letters of credit ....................... 48,287 29,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Standby letters of
credit generally have fixed expiration dates or other termination clauses and
may require payment of a fee. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. The Bank's policy for obtaining collateral, and the nature of such
collateral, is essentially the same as that involved in making commitments to
extend credit.
Page 29
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK - CONCLUDED
The Bank has not been required to perform on any financial guarantees during the
past two years. The Bank has not incurred any losses on its commitments in 1998.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Litigation: The Bank is party to litigation and claims arising in the normal
course of business. Management, after consultation with legal counsel, believes
that the liabilities, if any, arising from such litigation and claims are not
material to the financial statements except as follows.
Contingencies: 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 December 31, 1998, a $150,000 loss
has been accrued, pending the outcome of arbitration or settlement.
NOTE 13 - CONCENTRATIONS OF CREDIT
All of the Bank's loans, commitments and standby letters of credit have been
granted to customers in the Bank's market area. Substantially all such customers
are depositors of the Bank. The concentrations of credit by type of loan are set
forth in Note 4. The commitments to extend credit relate primarily to unused
real estate draw lines.
The Bank maintains its cash accounts at various commercial banks. The total cash
balances are insured by the FDIC up to $100,000. Total uninsured balances held
at other commercial banks amount to $635,767 and $60,000 at December 31, 1998
and 1997, respectively.
Page 30
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
NOTE 14 - LEASES
The Company has entered into a lease arrangement for real estate for which
rental expense amounted to $20,480 and $20,480 for 1998 and 1997, respectively.
This lease has been classified as an operating lease, and relates to a ground
lease for the Company's main office. Under the lease agreement, the Company is
required to pay annual rent of $20,480 for the first three years. Subsequent to
the third year, the Company will pay annual rent as adjusted by the Consumer
Price Index through the end of its 20 year term. The Company has three options
to renew the lease for 10 years for each option. Future minimum rentals
(assuming no change in the Consumer Price Index) under the lease agreement are:
<TABLE>
<S> <C>
1999 $ 20,480
2000 20,480
2001 20,480
2002 20,480
2003 20,480
Thereafter 245,760
-----------
$ 348,160
===========
</TABLE>
NOTE 15 - REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possible additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework from prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total risk-based capital and Tier 1 capital (as defined in the
regulations) to risk weighted assets (as defined), and of Tier 1 capital (as
defined) to adjusted total assets (as defined). Management believes, as of
December 31, 1998, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1998 the Bank had not received notification from the
regulatory authorities categorizing the Company's capitalization status. To be
categorized as well capitalized, the Company must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table. There are no conditions or events since notification that management
believes have changed the Bank's category.
Page 31
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
The Bank's actual capital amounts (000's omitted) and ratios are also presented
in this table.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL: ADEQUACY PURPOSES: ACTION PROVISIONS:
------- ------------------ -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
TOTAL CAPITAL
(TO RISK-WEIGHTED ASSETS) $ 6,631 12.76% >$4,159 >8% >$ 5,198 >10%
TIER 1 CAPITAL
(TO RISK-WEIGHTED ASSETS) $ 6,265 12.05% >$2,079 >4% >$ 3,119 > 6%
TIER 1 CAPITAL
(TO AVERAGE ASSETS) $ 6,265 9.21% >$2,719 >4% >$ 3,399 > 5%
As of December 31, 1997
Total Capital
(to Risk-Weighted Assets) $ 5,707 21.7% >$2,107 >8% >$ 2,633 >10%
Tier 1 Capital
(to Risk-Weighted Assets) $ 5,537 21.0% >$1,054 >4% >$ 1,580 > 6%
Tier 1 Capital
(to Average Assets) $ 5,537 20.7% >$1,069 >4% >$ 1,336 > 5%
</TABLE>
Bank regulatory authorities also impose restrictions on the amounts of dividends
that may be declared by the subsidiary bank. The primary source of funds
available to the Company to pay shareholder dividends and other expenses is from
its subsidiary bank. As of December 31, 1998, the Bank could not declare
dividends without regulatory consent.
NOTE 16 - SHAREHOLDERS' EQUITY
The Company raised $6,790,480 in capital as part its initial stock offering of
which $3,395,240 was allocated to common stock and $3,395,240 was allocated to
additional paid in capital. Legal, printing, regulatory and other costs of
issuance of stock amounting to $37,603, were applied against additional paid in
capital.
The Board of Directors of any state-chartered bank in Georgia may declare and
pay cash dividends on its outstanding capital stock without any request for
approval of the Company's regulatory agency if the following conditions are met:
1. Total classified assets at the most recent examination of the Bank do
not exceed 80% of equity capital.
2. The aggregate amount of dividends declared in the calendar year does
not exceed 50% of the prior year's net income.
3. The ratio of equity capital to adjusted assets shall not be less than
6%, (8% during the first 3 years of the Bank's operation). In addition,
the Bank must recover net operating losses incurred to date prior to
declaring dividends. As of December 31, 1998, the Bank could not
declare dividends without regulatory consent.
Page 32
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
NOTE 17 - EMPLOYEE BENEFIT PLAN
The Bank adopted a defined contribution plan covering substantially all
employees; the plan is qualified under Section 401(k) of the Internal Revenue
Code. Under the provisions of the plan, eligible participating employees may
elect to contribute up to the maximum amount of tax deferred contribution
allowed by the Internal Revenue Code. The Bank's contribution to the plan is
determined by the Board of Directors and is currently subject to regulatory
restriction. No contributions were made by the Bank in 1998, 1997 and 1996.
NOTE 18 - RELATED PARTY TRANSACTIONS
Loans: Certain directors, executive officers and principal shareholders,
including their immediate families and associates were loan customers of the
Bank during 1998. Such loans are made in the ordinary course of business at
normal credit terms, including interest rates and collateral and do not
represent more than a normal risk of collection.
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Beginning of Year......................................... $ 527,404 $ -0-
New Loans................................................. 823,004 570,609
Less: Payments.......................................... (385,086) (43,205)
--------- --------
End of Year............................................... $ 965,322 $527,404
========= ========
</TABLE>
Deposits: Deposits held for related parties were $3,440,945 at December 31, 1998
and $2,574,000 at December 31, 1997.
Lease: The Bank leases the property on which the Bank's building is located. The
lessor is co-owned by a director of the Company. Rents paid under the lease
agreements are based on independent appraisals and other terms of the agreement
were made in the ordinary course of business.
NOTE 19 - 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.
Page 33
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
NOTE 19 - YEAR 2000 - CONCLUDED
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.
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 to be approximately $25,000 in 1998
and $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.
The foregoing statements reflects 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.
Page 34
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
NOTE 20 - CONDENSED PARENT INFORMATION
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents .............................. $ 275,845 $ 771,080
Investment in Subsidiary (equity method)
eliminated upon consolidation ....................... 6,290,635 5,577,028
Other assets ........................................... 23,310 13,805
---------- ----------
TOTAL ASSETS ................................ $6,589,790 $6,361,913
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other Liabilities .................................. $ 3,173 $ 1,500
---------- ----------
TOTAL LIABILITIES ........................... 3,173 1,500
TOTAL SHAREHOLDERS' EQUITY .................. 6,586,617 6,360,413
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY... $6,589,790 $6,361,913
========== ==========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
STATEMENTS OF INCOME
INCOME
Interest income ........................................ $ 36,033 $ 38,077 $ 19,488
-------- --------- ---------
EXPENSES
Other expenses ......................................... 35,511 27,962 2,152
-------- --------- ---------
Income before equity in undistributed earnings (loss)
of subsidiary ..................................... 522 10,115 17,336
Equity in undistributed earnings (loss) of subsidiary... 221,236 (288,668) (149,169)
Income tax benefit ..................................... 12,074 4,814 -0-
-------- --------- ---------
NET INCOME (LOSS) .......................... $233,832 $(273,739) $(131,833)
======== ========= =========
</TABLE>
Page 35
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. & SUBSIDIARY
DECEMBER 31, 1998 AND 1997
NOTE 20 - CONDENSED PARENT INFORMATION - CONTINUED
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS FOR THE YEARS ENDING DECEMBER 31,
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ............................................. $ 233,832 $ (273,739) $ (131,833)
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and amortization .... 2,569 2,569 1,284
Amortization of investment security premium
and accretion of discounts .................. -0- -0- (12,657)
Other .......................................... (10,400) (3,314) 64,970
Equity in undistributed (income) loss of
subsidiary .................................. (221,236) 288,668 147,412
----------- ------------ -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ............. 4,765 14,184 69,176
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities held to maturity ................ -0- -0- (486,274)
Acquisition of bank subsidiary ......................... -0- -0- (6,000,000)
Contribution of capital to subsidiary .................. (500,000) -0- -0-
Maturity of investment securities ...................... -0- 498,931 -0-
Payments for preopening expenditures ................... -0- -0- (222,603)
----------- ------------ -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES .............. (500,000) 498,931 (6,708,877)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reimbursement by the Bank for
payments for preopening expenditures ................ -0- -0- 222,603
Proceeds from issuance of common stock ................. -0- -0- 6,790,470
Payments on short term borrowing ....................... -0- -0- (78,000)
Payments of stock issue costs .......................... -0- -0- (37,603)
----------- ------------ -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ............. -0- -0- 6,897,470
----------- ------------ -----------
Net increase (decrease) in cash and cash equivalents.... (495,235) 513,115 257,759
----------- ------------ -----------
Cash and cash equivalents at beginning of year ......... 771,080 257,965 196
----------- ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............... $ 275,845 $ 771,080 $ 257,965
=========== ============ ===========
Cash paid during the year for:
Interest ............................................... $ -0- $ -0- $ -0-
Income Taxes ........................................... -0- -0- -0-
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCIAL ACTIVITIES:
None
</TABLE>
Page 36
<PAGE> 43
CORPORATE INFORMATION
There is no established trading market for the Company's Common Stock, which has
been traded, inactively in private transactions. Therefore, no reliable
information is available as to trades of shares of the Company's common stock,
or as to the prices at which such shares have traded. Management has reviewed
the limited information available as to the ranges at which shares of the
Company's common stock have sold. The following data regarding shares is
provided for information purposes only, and should not be viewed as indicative
of the actual or market value of shares of the Company's common stock.
<TABLE>
<CAPTION>
ESTIMATED PRICE RANGE PER SHARE
---------------------------------------
1998 1997
----------------- -----------------
HIGH LOW High Low
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998:
FIRST QUARTER..................................................... $ 11.00 $ 11.00 $ 12.00 $ 10.00
SECOND QUARTER.................................................... 11.00 11.00 12.00 10.00
THIRD QUARTER..................................................... 12.50 11.00 12.00 10.00
FOURTH QUARTER.................................................... 12.50 11.00 12.00 10.00
</TABLE>
The Company's Common Stock was held by approximately 681 shareholders of record
at December 31, 1998.
DIVIDENDS
The Bank is subject to restrictions on the payment of dividends under Georgia
law and the regulations of the Department of Banking and Finance. The Company is
also subject to limits on payment of dividends by the rules, regulations and
policies of federal banking authorities. No assurance can be given that any
dividends will be declared by the Company in the future, or if declared, what
the amount should be or whether such dividends would continue. Future dividend
policy will depend on the Bank's earnings, capital position, financial condition
and other factors. The Company has not paid any dividends to date.
FORM 10-KSB
A copy of the Company's 1998 Annual Report on Form 10-KSB, filed with the
Securities and Exchange Commission, is available at no charge to each
shareholder upon written request to:
Jeff Hensley
Gateway Bancshares, Inc.
P.O. Box 129
Ringgold, Georgia 30736
General Counsel
Powell, Goldstein, Frazer & Murphy, LLP
Atlanta, Georgia
Independent Auditors
Hensley, Land & Associates, P.C.
Ellijay, Georgia
Page 37
<TABLE> <S> <C>
<ARTICLE> 9
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,412,902
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,700,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,562,907
<INVESTMENTS-CARRYING> 7,681,204
<INVESTMENTS-MARKET> 7,749,015
<LOANS> 36,464,131
<ALLOWANCE> 366,158
<TOTAL-ASSETS> 76,939,111
<DEPOSITS> 68,835,372
<SHORT-TERM> 0
<LIABILITIES-OTHER> 517,122
<LONG-TERM> 1,000,000
0
0
<COMMON> 3,395,240
<OTHER-SE> 3,191,377
<TOTAL-LIABILITIES-AND-EQUITY> 6,586,617
<INTEREST-LOAN> 3,014,428
<INTEREST-INVEST> 1,240,761
<INTEREST-OTHER> 99,157
<INTEREST-TOTAL> 4,354,346
<INTEREST-DEPOSIT> 2,265,832
<INTEREST-EXPENSE> 2,326,944
<INTEREST-INCOME-NET> 2,027,402
<LOAN-LOSSES> 235,000
<SECURITIES-GAINS> 11,653
<EXPENSE-OTHER> 1,695,953
<INCOME-PRETAX> 288,123
<INCOME-PRE-EXTRAORDINARY> 288,123
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 233,832
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
<YIELD-ACTUAL> 8.96
<LOANS-NON> 15,508
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 170,000
<CHARGE-OFFS> 38,842
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 366,158
<ALLOWANCE-DOMESTIC> 366,158
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
