<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, 1999
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
----------- ------------
Commission file number 000-24137
GATEWAY BANCSHARES, INC.
----------------------------------------------
(Name of Small Business Issuer in Its Charter)
GEORGIA 58-2202210
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5102 ALABAMA HIGHWAY, P.O. BOX 129, RINGGOLD, GEORGIA 30736
- ----------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(706) - 965-5500
------------------------------------------------
(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: $6,761,125
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: $8,488,100
AS OF FEBRUARY 25, 2000
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 24,
2000
Transitional Small Business Disclosure format (check one):
Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended December
31, 1999 are incorporated by reference into Part II. Portions of the Proxy
Statement for the Annual Meeting of Shareholders, scheduled to be held April 20,
2000, are incorporated by reference into Part III.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I........................................................................................................... 1
ITEM 1. DESCRIPTION OF BUSINESS............................................................................ 1
ITEM 2. DESCRIPTION OF PROPERTIES.......................................................................... 18
ITEM 3. LEGAL PROCEEDINGS.................................................................................. 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 19
PART II.......................................................................................................... 19
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............................. 19
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 20
ITEM 7. FINANCIAL STATEMENTS............................................................................... 20
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............... 20
PART III......................................................................................................... 20
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.................................................. 20
ITEM 10. EXECUTIVE COMPENSATION............................................................................. 21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................... 21
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................... 21
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 10-KSB......................................................... 22
</TABLE>
i
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Gateway Bancshares, Inc. (the "Company") was incorporated as a
Georgia business corporation on October 3, 1995, to serve as a bank holding
company for Gateway Bank & Trust (the "Bank"). The Bank began operations in
April 1997 and is the sole subsidiary of the Company.
The Company's principal business is the ownership and management of
the Bank. 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 capital to the Bank. For example, we may assist the Bank
in maintaining its required capital ratios by borrowing money and contributing
the proceeds of that debt to the Bank as primary capital.
THE BANK
GENERAL
The Bank was chartered as a Georgia bank on December 11, 1995 and
began business on April 21, 1997 as a full-service commercial bank. The Bank's
lending services include consumer loans to individuals, commercial loans to
small- to medium-sized businesses and real estate-related loans. The bank offers
a board array of competitively priced deposit services such as regular checking,
interest checking, savings accounts and various types of certificates of
deposit. To complement its lending and deposit services, the Bank also provides
official bank checks and money orders, MasterCard and Visa credit cards, ATM
cards, safe deposit boxes, traveler's checks, bank-by-mail, bank-by-telephone,
direct deposit of payroll and Social Security checks, U.S. Savings Bonds, wire
transfer of funds and a night depository.
PHILOSOPHY
The Bank's philosophy is to emphasize prompt and responsive personal
service to residents of, and small- to medium-sized businesses located in
Ringgold, Georgia, as well as other communities located in Catoosa County. We
believe this philosophy helps the Bank to attract customers and acquire market
share controlled by other financial institutions in the Bank's market area. We
believe that the Bank offers residents in Catoosa and surrounding counties the
benefits associated with a locally owned and managed bank. The Bank's active
call program allows its officers and directors to promote the Bank by personally
describing the products, services and philosophy of the Bank to both existing
customers and new business prospects. In addition, both the Chief Executive
Officer and Chief Financial Officer of the Bank have substantial banking
experience in Catoosa County, which facilitates the Bank's 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 draws a majority
of its business from its primary market area, Catoosa County, Georgia. The Bank
also focuses its marketing efforts on the
1
<PAGE> 4
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. According to information provided by the
FDIC, as of June 30, 1999, Catoosa County was served by six commercial banks and
two savings associations with a total of 13 offices. The total deposits within
Catoosa County for these institutions were $566 million as of June 30, 1999. The
information provided by the FDIC indicates that the Bank's deposit market share
in Catoosa County was 12.45% as of June 30, 1999. We believe our local ownership
and management as well as our focus on personalized service helps us to compete
with the other institutions in our market area.
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 lending
functions include 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's policy is 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.
COMMERCIAL LOANS. The Bank's commercial lending is directed
principally toward small- to medium-sized 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 including providing funds for working capital,
equipment, property expansion and inventory. 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. During fiscal year 1999, average
investment securities comprised approximately 29.6% of the Bank's total average
assets, with average net loans
2
<PAGE> 5
comprising approximately 64.3% of the Bank's average total 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. To attract
deposits the Bank offers a broad line of competitively priced deposit products
and services. The Bank's deposit-related services include ATM cards, direct
deposit, bank-by-mail, bank-by-telephone, wire transfer of funds and a night
depository.
ASSET AND LIABILITY MANAGEMENT. The objective of the Bank's assets and
liabilities management is 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, 1999, the Company and its subsidiary employed 24
full-time employees and two part-time employees. The Company considers its
relationship with its employees to be excellent.
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 on
these assets or liabilities. The yields were calculated by dividing income or
expense by the average balance of the corresponding assets or liabilities.
3
<PAGE> 6
AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
TAXABLE EQUIVALENT BASIS (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 Year Ended December 31, 1998
---------------------------- ----------------------------
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
BALANCE EXPENSE RATE Balance Expense Rate
-------- ------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSET
Earning assets:
Loans, net of unearned income (1) $ 51,119 $ 4,866 9.52% $ 27,335 $ 3,014 11.03%
Investment Securities:
Taxable 23,373 1,439 6.16% 19,630 1,241 6.32%
Tax-exempt 148 7 4.73% -0- -0- -0-%
-------- ------- ---- -------- -------- -----
Total investment securities 23,521 1,446 6.15% 19,630 1,241 6.32%
Federal funds sold 608 311 5.10% 1,605 99 6.17%
-------- ------- ---- -------- -------- -----
Total interest-earning assets (2) 75,248 6,343 8.43% 48,570 4,354 8.96%
------- ---- -------- -----
Non interest-earning assets:
Cash and due from banks 2,070 1,992
Premises and equipment 1,784 1,707
Accrued interest and other assets 929 621
Allowance for loan losses (536) (268)
-------- --------
TOTAL ASSETS $ 79,495 $ 52,622
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits $ 8,261 283 3.43% $ 7,702 288 3.74%
Savings deposits 15,064 685 4.55% 6,635 332 5.00%
Time deposits 41,688 2,353 5.64% 26,957 1,646 6.11%
-------- ------- ---- -------- -------- -----
65,013 3,321 5.11% 41,294 2,266 5.49%
Other short-term borrowings 1,833 103 5.62% 1,109 61 5.50%
-------- ------- ---- -------- -------- -----
Total interest-bearing liabilities 66,846 3,424 5.12% 42,403 2,327 5.49%
------- ---- -------- -----
Non interest-bearing liabilities:
Demand deposits 5,963 3,506
Accrued interest and other liabilities 494 239
Shareholders' equity 6,192 6,474
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 79,495 $ 52,622
======== ========
NET INTEREST INCOME/ NET INTEREST SPREAD 2,919 3.31% 2,027 3.47%
------- ---- -------- -----
NET YIELD ON EARNING ASSETS 3.88% 4.17%
==== =====
Taxable equivalent adjustment:
Loans -0- -0-
Investment securities 16 -0-
------- -------
Total taxable equivalent adjustment 16 -0-
------- -------
NET INTEREST INCOME $ 2,935 $ 2,027
======= =======
</TABLE>
- ------------------------------
(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,
1999 and 1998, 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.
RATE/ VOLUME VARIANCE ANALYSIS
<TABLE>
<CAPTION>
CHANGE INTEREST VARIANCE (1)
AVERAGE VOLUME IN VOLUME AVERAGE RATE INCOME/EXPENSES VARIANCE ATTRIBUTED TO
---------------- ---------- ------------ --------------- --------- --------------
1999 1998 1999-1998 1999 1998 1999 1998 1999-1998 VOLUME RATE
------- ------- ---------- ---- ----- ------ ------ --------- ------ ------
(in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans, net of unearned
income $51,119 $27,335 $ 23,784 9.52% 11.03% $4,866 $3,014 $ 1,852 $2,264 $ (412)
Investment Securities:
Taxable 23,373 19,630 3,743 6.16% 6.32% 1,439 1,241 198 232 (34)
Tax exempt 148 -0- 148 4.73% -0-% 7 -0- 7 7 -0-
------- ------- ---------- ---- ----- ------ ------ -------- ------ ------
Total investment
securities 23,521 19,630 3,891 6.15% 6.32% 1,446 1,241 205 239 (34)
Federal funds sold 608 1,605 (997) 5.10% 6.17% 31 99 (68) 51 (119)
------- ------- ---------- ---- ----- ------ ------ -------- ------ ------
Total Earning Assets $75,248 $48,570 $ 26,678 8.43% 8.96% 6,343 4,354 1,989 2,554 (565)
======= ======= ========== ==== ===== ------ ------ -------- ------ ------
Interest-bearing liabilities:
Deposits:
Demand $ 8,261 $ 7,702 $ 559 3.43% 3.74% 283 288 (5) 19 (24)
Savings 15,064 6,635 8,429 4.55% 5.00% 685 332 353 384 (31)
Time 41,688 26,957 14,731 5.64% 6.11% 2,353 1,646 707 831 (124)
------- ------- ---------- ---- ----- ------ ------ -------- ------ ------
Total interest-bearing
deposits 65,013 41,294 23,719 5.11% 5.49% 3,321 2,266 1,055 1,234 (179)
Other short-term borrowings 1,833 1,109 724 5.62% 5.50% 103 61 42 41 1
------- ------- ---------- ---- ----- ------ ------ -------- ------ ------
Total Interest-bearing
Liabilities $66,846 $42,403 $ 24,443 5.12% 5.49% 3,424 2,327 1,097 1,275 (178)
======= ======= ========== ---- ----- ------ ------ -------- ------ ------
Net interest income/ net
interest spread 3.31% 3.47% $2,919 $2,027 $ 892 $1,279 $ (387)
==== ===== ====== ====== ======== ====== ======
Net yield on earning assets 3.88% 4.17%
==== =====
Net cost of funds 4.55% 4.79%
==== =====
</TABLE>
- -----------------
(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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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,
--------------------
1999 1998
------- -------
(in Thousands)
<S> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Government agencies $ 5,670 $12,332
Municipal securities 9,865 12,195
Equity securities - Federal Home Loan Bank 711 118
------- -------
$16,246 $24,645
======= =======
SECURITIES HELD TO MATURITY:
U.S. Government agencies $ 4,505 $ 7,513
Mortgage backed securities 225 50
------- -------
$ 4,730 $ 7,563
======= =======
</TABLE>
Average taxable securities were 99 percent of the portfolio in 1999
which reflects management's intent to maximize investment yields until the
Company reaches a level of cumulative profitability.
The maturities and weighted average yields of the investments in the
1999 portfolio of investment securities are presented below. The average
maturity of the investment portfolio is 11.36 with an average yield of 6.17
percent.
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MATURITY SCHEDULE
--------------------------------------------------------------------------------------
MATURING
--------------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
-------------------- ------------------ ------------------ ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in Thousands)
SECURITIES AVAILABLE FOR SALE:
U.S. Government agencies $ -0- 0.00% $ 236 5.21% $ 5,434 6.15% $ -0- 0.00%
Mortgage-backed securities -0- 0.00% 4,153 5.97% 4,117 6.30% 1,595 6.66%
Equity securities - FHLB 711 6.76% -0- 0.00% -0- -0-% -0- 0.00%
-------- ------ -------- ------ -------- ------- ------ ----
$ 711 6.76% $ 4,389 5.89% $ 9,551 6.21% $ 1,595 6.66%
======== ====== ======== ====== ======== ======= ====== ====
SECURITIES HELD TO MATURITY:
U.S. Government agencies $ 1,003 6.00% $ 1,002 5.99% $ 2,500 6.37% $ -0- 0.00
Municipal securities -0- 0.00% -0- 0.00% -0- 0.00% 225 4.75%
-------- ------ -------- ------ -------- ------- ------ ----
$ 1,003 6.00% $ 1,002 5.99% $ 2,500 6.37% $ 225 4.75%
======== ====== ======== ====== ======== ======= ======= ====
</TABLE>
There were no securities held by the Company, whose aggregate value on
December 31, 1999 exceeded ten percent of the Company's shareholders' equity at
that date.
- ------------------------------------
(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.
6
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LOAN PORTFOLIO
The following table shows the classification of loans by major category
at December 31, 1999 and 1998.
TYPES OF LOANS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 December 31, 1998
-------------------- ----------------------
PERCENT Percent
AMOUNT OF TOTAL Amount of Total
-------- -------- -------- --------
(in Thousands) (in Thousands)
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 15,330 24.5% $ 10,600 29.1%
Real estate - construction 7,222 11.5% 4,161 11.4%
Real estate - other 31,372 50.1% 15,136 41.5%
Consumer 8,576 13.8% 6,431 17.6%
Other loans 64 0.1% 136 0.4%
--------- ------ --------- --------
62,564 100.0% 36,464 100.0%
====== ========
Less: allowance for loan losses (701) (366)
--------- ---------
Net loans $ 61,863 $ 36,098
========= =========
</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, 1999 and 1998 and an analysis of these loans maturing in over
one year.
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
RATE STRUCTURE FOR LOANS
MATURITY MATURING OVER ONE YEAR
------------------------------------ ----------------------------
OVER ONE
YEAR PREDETERMINED FLOATING OR
ONE YEAR THROUGH OVER FIVE INTEREST ADJUSTABLE
OR LESS FIVE YEARS YEARS TOTAL RATE RATE
-------- ---------- --------- ------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(in Thousands)
Commercial, financial
and agricultural ....... $ 10,498 $ 4,805 $ 27 $15,330 $ 5,654 $ 9,676
Real estate - construction... 7,206 16 -0- 7,222 2,971 4,251
-------- ---------- --------- ------- ------------- -------
$ 17,704 $ 4,821 $ 27 $22,552 $ 8,625 $13,927
======== ========== ========= ======= ============= =======
</TABLE>
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<PAGE> 10
NONPERFORMING ASSETS
The following table presents information concerning outstanding
balances of nonperforming assets at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
------- ------
(in Thousands)
<S> <C> <C>
Nonaccruing loans $ 145 $ -0-
Loans past due 90 days or more 39 -0-
Restructured loans -0- -0-
------- ------
Total nonperforming loans 184 -0-
Nonaccruing securities -0- -0-
Other real estate 138 -0-
------- ------
Total nonperforming assets $ 322 $ -0-
======= ======
Ratios:
Loan loss allowance to
total nonperforming assets 2.177 24.40
======= ======
Total nonperforming loans to total
loans (net of unearned interest) 0.0029 0.0004
======= ======
Total nonperforming assets
to total assets 0.0036 0.0002
======= ======
</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
$701,234 in the allowance for loan losses at December 31, 1999 (1.12% 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, 1999 and 1998.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
1999 1998
------- -------
(in Thousands)
<S> <C> <C>
Allowance for loan losses at beginning of year $ 366 $ 170
Total loans charged off - consumer loans 114 39
Recoveries on loans previously charged off -0- -0-
Net loans charged off 114 39
Provision for loan losses 449 235
------- -------
Allowance for loan losses at end of period $ 701 $ 366
======= =======
Loans, net of unearned income, at end of period $62,564 $36,464
======= =======
Average loans, net of unearned income,
outstanding for the period $51,119 $27,335
======= =======
Ratios:
Allowance at end of period to loans, net of
unearned income 1.12% 1.00%
Allowance at end of period to average loans,
net of unearned income 1.37% 1.34%
Net charge-offs to average loans, net of
unearned income 0.22% 0.14%
Net charge-offs to allowance at end of period 16.26% 10.66%
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
PROVISION FOR LOAN LOSSES, NET CHARGE-OFFS AND ALLOWANCE FOR LOAN LOSSES--
CONCLUDED
Management allocated the reserve for loan losses to specific loan
classes as follows:
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31, 1999 December 31, 1998
--------------------- --------------------
PERCENT Percent
AMOUNT OF TOTAL Amount Of Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(in Thousands) (in Thousands)
Domestic loans (1):
Commercial, financial and
agricultural ...................... $ 373 53.2% $ 110 30.0%
Real estate - construction and other 220 31.4% 66 18.1%
Consumer............................. 108 15.4% 190 51.9%
-------- -------- -------- --------
$ 701 100.0% $ 366 100.0%
======== ======== ======== ========
</TABLE>
(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, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- -----------------
(in Thousands)
AMOUNT RATE Amount Rate
-------- ---- -------- ----
<S> <C> <C> <C> <C>
Non Interest-bearing demand deposits $ 5,963 -0-% $ 3,506 -0-%
-------- --------
Demand 8,261 3.43% 7,702 3.74%
Savings 15,064 4.55% 6,635 5.00%
Time deposits 41,688 5.64% 26,957 6.11%
-------- --------
Total Interest-bearing deposits 65,013 5.11% 41,294 5.49%
-------- --------
Total Average Deposits $ 70,976 4.68% $ 44,800 5.06%
======== ========
</TABLE>
10
<PAGE> 13
DEPOSITS - CONCLUDED
The two categories of lowest cost deposits comprised the following
percentages of total deposits during 1999: average noninterest-bearing demand
deposits - 8.4 percent; and average interest-bearing demand deposits - 11.6
percent. Of total time deposits, approximately 47.2 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, 1999 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 $ 5,166
Over three through six months 6,307
Over six through twelve months 3,204
Over twelve months 6,118
-----------
Total $ 20,795
===========
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table summarizes certain financial ratios for the
Company for the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Return on average assets 0.64% 0.44%
Return on average equity 8.16% 4.10%
Dividend payout ratio 0.00% 0.00%
Average equity to average assets ratio 7.79% 10.78%
</TABLE>
11
<PAGE> 14
SUPERVISION AND REGULATION
Both the Company and the Bank are subject to extensive state and
federal banking regulations that impose restrictions on and provide for general
regulatory oversight of our operations. These laws are generally intended to
protect depositors and not shareholders. The following discussion describes the
material elements of the regulatory framework that applies to us.
THE COMPANY
Since the Company owns all of the capital stock of the Bank, it is a
bank holding company under the federal Bank Holding Company Act of 1956. As a
result, the Company is primarily subject to the supervision, examination, and
reporting requirements of the Bank Holding Company Act and the regulations of
the Federal Reserve.
ACQUISITIONS OF BANKS. The Bank Holding Company Act requires every bank
holding company to obtain the Federal Reserve's prior approval before:
- Acquiring 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;
- Acquiring all or substantially all of the assets of any bank;
or
- Merging or consolidating with any other bank holding company.
Under the Bank Holding Company Act, an adequately capitalized and
adequately managed bank holding company located in Georgia may purchase a bank
located outside of Georgia. Conversely, an adequately capitalized and adequately
managed bank holding company located outside of Georgia may purchase a bank
located inside Georgia. In each case, however, restrictions may be placed on the
acquisition of a bank which has only been in existence for a limited amount of
time or an acquisition which may result in specified concentrations of deposits.
CHANGE IN BANK CONTROL. Subject to various exceptions, the Bank Holding
Company Act and the Change in Bank Control Act, together with related
regulations, require Federal Reserve approval prior to any person or company
acquiring "control" of a bank holding company. Control is conclusively presumed
to exist if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. Control is rebuttably presumed to exist
if a person or a company acquires 10% or more, but less than 25%, of any class
of voting securities and either the bank holding company has registered
securities under Section 12 of the Securities Act of 1934, or no other person
owns a greater percentage of that class of voting securities immediately after
the transaction.
PERMITTED ACTIVITIES. Under the Bank Holding Company Act, a bank
holding company, which has not qualified or elected to become a financial
holding company is generally prohibited from engaging in or acquiring direct or
indirect control of more than 5% of the voting shares of any company engaged in
nonbanking activities unless prior to the enactment of the Gramm-Leach-Bliley
Act the Federal Reserve found those activities to be so closely related to
banking as to be a proper incident to the business of banking. Activities that
the Federal Reserve has found to be so closely related to banking to be a proper
incident to the business of banking include:
12
<PAGE> 15
- factoring accounts receivable,
- acquiring or servicing loans,
- leasing personal property,
- conducting discount securities brokerage activities,
- performing selected data processing services,
- acting as agent or broker in selling credit life insurance and
other types of insurance in connection with credit
transactions, and
- performing selected insurance underwriting activities.
Despite prior approval, the Federal Reserve may order a bank holding company or
its subsidiaries to terminate any of these activities or to terminate its
ownership or control of any subsidiary when it has reasonable cause to believe
that the bank holding company's continued ownership, activity or control
constitutes a serious risk to the financial safety, soundness, or stability of
any of its bank subsidiaries.
On November 12, 1999 President Clinton signed the Gramm-Leach-Bliley
Act, which amends the Bank Holding Company Act and greatly expand the activities
in which bank holding companies and affiliates of banks are permitted to engage.
The Gramm-Leach-Bliley Act eliminates many federal and state law barriers to
affiliations among banks and securities firms, insurance companies, and other
financial service providers. The provisions of the Gramm-Leach-Bliley Act
relating to permitted activities of bank holding companies and affiliates of
banks became effective on March 11, 2000.
Generally, if the Company qualifies and elects to become a financial
holding company, it may engage in activities that are financial in nature or
incidental or complementary to a financial activity. Activities that the
Gramm-Leach-Bliley Act expressly lists as financial in nature include insurance
activities, providing financial, investment and advisory services, underwriting
securities and limited merchant banking activities.
To qualify to become a financial holding company, the Bank and any
other depository institution subsidiary of the Company must be well capitalized
and well managed and must have a Community Reinvestment Act rating of at least
satisfactory. Additionally, the Company must file an election with the Federal
Reserve to become a financial holding company and must provide the Federal
Reserve with 30 days written notice prior to engaging in a permitted financial
activity. Although we are eligible to elect to become a financial holding
company, we currently have no plans to make such an election.
SUPPORT OF SUBSIDIARY INSTITUTIONS. Under Federal Reserve policy,
bank holding companies are expected to act as a source of financial strength
for, and to commit resources to support, their depository institution
subsidiaries. This support may be required at times when, without this Federal
Reserve policy, the bank holding company might not be inclined to provide it. In
addition, any capital loans by a bank holding company to a bank will be repaid
only after its deposits and 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.
THE BANK
The Bank is a commercial bank chartered under the laws of the State
of Georgia. Accordingly, 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
13
<PAGE> 16
development of unsafe or unsound banking practices or other violations of law.
Additionally, the Bank's deposits are insured by the FDIC to the maximum extent
provided by law. The Bank is also 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.
PROMPT CORRECTIVE ACTION. The Federal Deposit Insurance Corporation
Improvement Act of 1991 establishes a system of prompt corrective action to
resolve the problems of undercapitalized financial institutions. Under this
system, federal banking regulators have established five capital categories,
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, in which all institutions are
placed. The federal banking agencies have also specified by regulation the
relevant capital levels for each of the other categories. At December 31, 1999,
we qualified for the adequately capitalized category.
Federal banking regulators are required to take some mandatory
supervisory actions and are authorized to take other discretionary actions with
respect 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. An institution in any of the undercapitalized categories 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 up 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. The
Federal Reserve regulations also establish procedures for downgrading an
institution to a lower capital category based on supervisory factors other than
capital.
FDIC INSURANCE ASSESSMENTS. The FDIC has adopted a risk-based
assessment system for determining an insured depository institutions' insurance
assessment rate. The system that takes into account the risks attributable to
different categories and concentrations of assets and liabilities. An
institution is placed into 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. The FDIC also assigns an institution to one of three
supervisory subgroups 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. Assessments range from 0 to 27 cents per
$100 of deposits, depending on the institution's capital group and supervisory
subgroup. In addition, the FDIC imposes assessments to help pay off the $780
million in annual interest payments on the $8 billion Financing Corporation
bonds issued in the late 1980s as part of the government rescue of the thrift
industry. This assessment rate is adjusted quarterly and ranged from 1.16 cents
to 1.22 cents per $100 of deposits in 1999.
The FDIC may terminate its insurance of deposits 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.
COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act requires
the appropriate federal regulator, in connection with their examinations of
financial institutions within their jurisdiction,
14
<PAGE> 17
to evaluate the record of each financial institution in meeting the credit needs
of its local community, including low and moderate-income neighborhoods. The
appropriate federal regulator considers these factors in evaluating mergers,
acquisitions, and applications to open a branch or facility. Failure to
adequately meet these criteria could impose additional requirements and
limitations on the Bank. Under the Gramm-Leach-Bliley Act, banks with aggregate
assets of not more than $250 million are subject to a Community Reinvestment Act
examination only once every 60 months if the bank receives an outstanding
rating, once every 48 months if it receives a satisfactory rating and as needed
if the rating is less than satisfactory. Additionally, under the
Gramm-Leach-Bliley Act, banks are required to publicly disclose the terms of
various Community Reinvestment Act-related agreements.
OTHER REGULATIONS. Interest and other charges collected or contracted
for by the Bank are subject to state usury laws and federal laws concerning
interest rates. The Bank's loan operations are also subject to federal laws
applicable to credit transactions, such as:
- The federal Truth-In-Lending Act, governing disclosures of
credit terms to consumer borrowers;
- The Home Mortgage Disclosure Act of 1975, requiring financial
institutions to provide information to enable the public and
public officials to determine whether a financial institution
is fulfilling its obligation to help meet the housing needs of
the community it serves;
- The Equal Credit Opportunity Act, prohibiting discrimination
on the basis of race, creed or other prohibited factors in
extending credit;
- The Fair Credit Reporting Act of 1978, governing the use and
provision of information to credit reporting agencies;
- The Fair Debt Collection Act, governing the manner in which
consumer debts may be collected by collection agencies; and
- The rules and regulations of the various federal agencies
charged with the responsibility of implementing these federal
laws.
The deposit operations of the Bank are subject to:
- The Right to Financial Privacy Act, which imposes a duty to
maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative
subpoenas of financial records; and
- The Electronic Funds Transfer Act and Regulation E issued by
the Federal Reserve to implement that act, which governs
automatic deposits to and withdrawals from deposit accounts
and customers' rights and liabilities arising from the use of
automated teller machines and other electronic banking
services.
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 FDIC and Georgia Department of
15
<PAGE> 18
Banking and Finance, in the case of the Bank. The Federal Reserve has
established a risk-based and a leverage measure of capital adequacy for bank
holding companies that is substantially similar to that adopted by the FDIC for
banks under its jurisdiction.
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, such as letters of credit and unfunded loan commitments, are assigned to
broad risk categories, each with appropriate risk 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%. Total capital consists of two components, Tier 1 Capital and Tier
2 Capital. Tier 1 Capital generally consists of common shareholders' equity,
minority interests in the equity accounts of consolidated subsidiaries,
qualifying noncumulative perpetual preferred stock, and a limited amount of
qualifying cumulative perpetual preferred stock, less goodwill and other
specified intangible assets. Tier 1 Capital must equal at least 4% of
risk-weighted assets. Tier 2 Capital generally consists of subordinated debt,
other preferred stock and hybrid capital and a limited amount of loan loss
reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1
Capital. At December 31, 1999, our consolidated ratio of total capital to
risk-weighted assets was 9.60% and our consolidated ratio of Tier 1 Capital to
risk-weighted assets was 8.64%.
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 other specified
intangible assets, of 3% for bank holding companies that meet certain specified
criteria, including having the highest regulatory rating and implementing the
Federal Reserve's risk-based capital measure for market risk. All other bank
holding companies generally are required to maintain a leverage ratio of at
least 4%. At December 31, 1999, our consolidated leverage ratio was 7.21%. 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. The Federal Reserve considers the leverage ratio and other
indicators of capital strength in evaluating proposals for expansion or new
activities.
Failure to meet capital guidelines could subject a bank or bank holding
company to a variety of enforcement remedies, including issuance of a capital
directive, the termination of deposit insurance by the FDIC, a prohibition on
accepting brokered deposits, and certain other restrictions on its business. As
described above, substantial additional restrictions can be imposed on
FDIC-insured depository institutions that fail to meet applicable capital
requirements. See "--Prompt Corrective Action."
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 it. 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,
16
<PAGE> 19
that it 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" above.
The Georgia Department of Banking and Finance also regulates the Bank's
dividend payments and must approve dividend payments that would exceed 50% of
the Bank's net income for the prior year. Our payment of dividends may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines.
At December 31, 1999, the Bank was able to pay approximately $252,569
in dividends to the Company without prior regulatory approval.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES
The Company and the Bank are subject to the provisions of Section 23A
of the Federal Reserve Act. Section 23A places limits on the amount of:
- loans or extensions of credit to affiliates;
- investment in affiliates;
- the purchase of assets from affiliates, except for real and
personal property exempted by the Federal Reserve;
- loans or extensions of credit to third parties collateralized
by the securities or obligations of affiliates; and
- any guarantee, acceptance or letter of credit issued on behalf
of an affiliate.
The aggregate of all of the above transactions is limited in amount, as
to any one affiliate, to 10% of a bank's capital and surplus and, as to all
affiliates combined, to 20% of a bank's capital and surplus. In addition to the
limitation on the amount of these transactions, each of the above transactions
must also meet specified collateral requirements. The Company must also comply
with certain provisions designed to avoid the taking of low-quality assets.
The Company and the Bank are also subject to the provisions of Section
23B of the Federal Reserve Act which, among other things, prohibits an
institution from engaging in the above transactions with affiliates unless the
transactions are on terms substantially the same, or at least as favorable to
the institution or its subsidiaries, as those prevailing at the time for
comparable transactions with nonaffiliated companies.
The Bank is also subject to restrictions on extensions of credit to its
executive officers, directors, certain principal shareholders and their related
interests. These extensions of credit (1) must be made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for
17
<PAGE> 20
comparable transactions with third parties, and (2) must not involve more than
the normal risk of repayment or present other unfavorable features.
PRIVACY
The Gramm-Leach-Bliley Act also contains provisions regarding consumer
privacy. These provisions require financial institutions to disclose their
policy for collecting and protecting confidential information. Customers
generally may prevent financial institutions from sharing personal financial
information with nonaffiliated third parties except for third parties that
market the institutions' own products and services. Additionally, financial
institutions generally may not disclose consumer account numbers to any
nonaffiliated third party for use in telemarketing, direct mail marketing or
other marketing through electronic mail to the consumer.
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.
EFFECT OF GOVERNMENTAL MONETARY POLICES
Our earnings are affected by domestic economic conditions and the
monetary and fiscal policies of the United States government and its agencies.
The Federal Reserve Bank's monetary policies have had, and are likely to
continue to have, an important impact on the operating results of commercial
banks through its power to implement national monetary policy in order, among
other things, to curb inflation or combat a recession. The monetary policies of
the Federal Reserve Board have major effects upon the levels of bank loans,
investments and deposits through its open market operating in United States
government securities and through its regulation of the discount rate on
borrowings of member banks and the reserve requirements against member bank
deposits. It is not possible to predict the nature or impact of future changes
in monetary and fiscal policies.
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 (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
under specified circumstances. The annual rental for the first three years of
the lease term was $20,480. Annual rent for the fourth and subsequent year was,
and 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.
The annual rent for 1999 was $22,891.
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.
18
<PAGE> 21
The Bank building is a two-story building consisting of 12,000 square
feet. 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.
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,
$5.00 par value, during fiscal years 1999, 1998, or 1997.
On March 18, 1999, the Company granted options to purchase 171,850
shares of its Common Stock, $5.00 par value, to selected officers and directors
of the Company and the Bank as compensation for their services. Each of the
options vests in equal 20% annual increments beginning on March 18, 2000 and has
a maximum term of ten years. The exercise price of each of the options is $12.00
per share. Since the options were only granted to officers and directors, the
option grants did not involve a public offering, and therefore were exempt from
registration under Section 4(2) of the Securities Act of 1933.
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.
19
<PAGE> 22
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 Statements of Financial Condition as of December 31, 1999
and 1998
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of changes in Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 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 20, 2000,
under the following headings, and are incorporated herein by reference.
Proposal One: Election of Directors - Director Nominees," at page 3;
"Executive Officers," at page 4;
"Section 16(a) Beneficial Ownership Reporting Compliance," at page 9.
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 20, 2000,
under the heading, "Compensation," at pages 5 through 6, and are incorporated
herein by reference.
20
<PAGE> 23
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 20, 2000,
under the headings, "Security Ownership of Certain Beneficial Owners," at pages
7 through 8, 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 20, 2000,
under the headings, "Certain Relationships and Related Transactions," at page 9,
and "Compensation," at pages 5 through 6, and are incorporated herein by
reference.
21
<PAGE> 24
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
<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. 1999 Annual Report to
Shareholders. Except with respect to those portions
specifically incorporated by reference into this Report,
the Company's 1999 Annual Report to Shareholders is not
deemed to be filed as part of this Report.
21.1 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>
(b) Reports on Form 8-K filed in the fourth quarter of 1999: None
- -----------------------
(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> 25
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 24, 2000
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 24, 2000
- ----------------------------
Jack Joseph Babb
/s/ William H.H. Clark Director March 24, 2000
- ----------------------------
William H.H. Clark
</TABLE>
23
<PAGE> 26
<TABLE>
<S> <C> <C>
/s/ Patricia Yvonne Cochran Director March 24, 2000
- ----------------------------
Patricia Yvonne Cochran
/s/ Jeannette Wilson Dupree Director March 24, 2000
- ----------------------------
Jeannette Wilson Dupree
/s/ Harle B. Green Director, Chief Financial March 24, 2000
- ---------------------------- Officer (Principal Financial
Harle B. Green And Accounting Officer)
/s/ Walter Lee Jackson Director March 24, 2000
- ----------------------------
Walter Lee Jackson
/s/ Ernest Kresch Director March 24, 2000
- ----------------------------
Ernest Kresch
/s/ Robert G. Peck Director, President March 24, 2000
- ----------------------------
Robert G. Peck Chief Executive Officer
Director
- ----------------------------
James Arthell Gray, Sr.
</TABLE>
24
<PAGE> 27
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. 1999 Annual Report to
Shareholders. Except with respect to those portions
specifically incorporated by reference into this
Report, the Company's 1999 Annual Report to
Shareholders is not deemed to be filed as part of
this Report.
21.1 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 to 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.
<PAGE> 1
EXHIBIT 13.1
TO OUR VALUED SHAREHOLDERS:
Nineteen ninety-nine has been a watershed year for Gateway Bancshares, Inc. and
its subsidiary, Gateway Bank & Trust. The most important event of the year was
when the bank became cumulative profitable. The bank has now covered all of its
start-up and opening expenses and the book value of the stock now exceeds the
$10.00 initial investment excluding the unrealized losses in the securities
portfolio. Secondly, we resolved the issue with Honor Technologies regarding the
dispute over the fraudulent charges with our debit card program. Earnings of the
bank during 1999 were not affected by any expense related to the dispute with
the exception of legal fees that we incurred in the defense of our position.
Thirdly, we have received approval from the Department of Banking & Finance for
the establishment of our first branch office in Fort Oglethorpe. We look forward
to its opening in mid-year and are confident that it will add a significant
contribution to the bank. Fourthly, and something I am extremely proud of is the
fact that the bank was one of four finalist in the QUALITY SERVICE AWARD
presented by Community Bankers Association of Georgia. The plaque is prominently
displayed in our foyer. Lastly, the board of directors established an annual
scholarship to be presented to a deserving high school senior at Ringgold High
School. We named the scholarship for Walter L. Jackson in honor of his
leadership, commitment, dedication, loyalty and promotion of personal welfare of
all citizens of Catoosa County. Mr. Jackson is an outstanding citizen of our
community and we feel that it is only appropriate to recognize his
accomplishments and achievements in this manner.
The century date change over created no problem for the bank or the financial
markets throughout the world. Our entire staff put in a lot of hard work and
preparation especially Jeff Hensley and Don Pinkley whom I would like to take
this opportunity to thank publicly. They were instrumental in reviewing our
existing applications, testing programs and putting in place various contingency
and resumption plans.
Our financial results for the year continue to transcend our original
projections by wide margins. We ended the year with total assets of $89,099,574,
some $12 million or 15% greater that 1998 and 143% or $52 million greater than
1997. Deposits totaled $81,144,347 some $12.5 million or 17% greater than 1998
and 169% or some $51 million greater than 1997. Loan demand was very good during
the year as we increased our loans to $62,564,092 compared to $36,464,131 in
1998 and $17,195,468 in 1997. The percentage increases over 1998 and 1997 were
71% and 264%, respectively.
Earnings for the year were $505,137 as compared to $233,832 in 1998 and a loss
of ($273,739) in 1997. This represents a 116% increase over the previous period.
The return on average assets for the year was .65% as compared to .44% in the
previous year. The return on average equity also increased substantially over
the same period from 4.10% to 8.16%.
<PAGE> 2
We stated in our comments to you in last year's report that one of our
challenges would be to focus on loan quality while growing our loan portfolio.
Our losses this year were higher than I would like at $113,924 which represents
approximately one-quarter of one percent of our average loans. This is, however,
below our peer group and one customer represented 58% of the total loss.
Growth for the bank will continue to be a challenge in the year ahead. Increased
competition continues to put pressure on earnings and I do not see any change
from that standpoint. We believe that one of our strengths lie in our staff and
the quality service they deliver. Our employees are what have made us grow, and
they contribute positively to the bottom line. The Financial Modernization Bill
that was recently passed by the Congress and recently signed into law by the
President allows banks as well as other financial providers the opportunity to
offer a greater variety of products such as insurance, securities and etc. This
will be an area that we will investigate to see the potential for us.
The bank has been managed for growth over the past two and one-half years. We
felt it was important to grow the institution in order to create revenue and get
the bank to a size that could withstand a downturn in the economy. We have begun
the process of managing the bank for profitability versus growth. We still need
to grow the bank but at acceptable levels with profitability being a more
pressing concern.
The economic front continues to look good even with the 75 basis point increase
in rates by the Federal Reserve over the past several months. The economy
continues to grow at a healthy pace fueled largely by the consumer and his
positive sentiment. Unemployment rates remain at historic low levels while
inflation is well contained. We believe that the Federal Reserve will continue
to focus on monthly employment reports. If the pool of available workers
continue to decrease, we anticipate that the Federal Reserve will continue to
worry about wage pressure and its effect on inflation and will move rates higher
to curtail any signs of early inflation.
We believe 2000 will be a good year for the bank especially with the addition of
our Fort Oglethorpe office. We hope you are pleased with the results of your
bank and continue your support of Gateway Bank & Trust. As always we solicit and
appreciate your support in doing business with the bank and encourage you to
recommend us to your friends and colleagues.
We look forward to the challenges of this year and welcome your comments and
suggestions.
/s/ Robert G. Peck
- -----------------------------
Robert G. Peck
President & Chief Executive Officer
<PAGE> 3
GATEWAY BANCSHARES, INC.
& SUBSIDIARY
FINANCIAL HIGHLIGHTS
ASSETS
(MILLIONS)
<TABLE>
<S> <C>
1997 36.6
1998 76.9
1999 89.1
</TABLE>
DEPOSITS
(MILLIONS)
<TABLE>
<S> <C>
1997 30.1
1998 68.8
1999 81.1
</TABLE>
EARNINGS PER SHARE
(CENTS)
<TABLE>
<S> <C>
1997 (0.40)
1998 0.34
1999 0.74
</TABLE>
LOANS
(MILLIONS)
<TABLE>
<S> <C>
1997 17.2
1998 36.5
1999 62.6
</TABLE>
NET INCOME
(THOUSANDS)
<TABLE>
<S> <C>
1997 (273.7)
1998 233.8
1999 505.1
</TABLE>
RETURN ON EQUITY
(PERCENT)
<TABLE>
<S> <C>
1997 -4.22%
1998 4.10%
1999 8.16%
</TABLE>
<PAGE> 4
GATEWAY BANCSHARES, INC.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
DIRECTORS
<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 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
OFFICERS
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
<TABLE>
<CAPTION>
<S> <C> <C>
OFFICERS
ROBERT G. PECK BOYD M. STEELE HARLE B. GREEN
President & CEO Executive Vice President Chairman & CFO
JEFF R. HENSLEY KAY WILSON CHIP GRANT
Senior Vice President Vice President Assistant Vice President
STAFF
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 MASSINGILL JULIE MCDONALD
Loan Operations Administrative Assistant Customer Service
Assistant Representative
SHELLEY NESTER DANIELLE PICKETT GARY PINKLEY
Mortgage Loan Customer Service Computer Systems
Originator Administrator Administrator
BRIDGETT QUEEN LINDA SMITH TRUDY SNIDER
Credit Analyst Executive Assistant Mortgage Loan
Processor
MARCIA TEETERS RENE TINKER LINDA TUCKER
Administrative Loan Customer Service Operations Administrator
Administrator Representative
MISSY VANDERSLICE JANINE WARD
Operations Assistant Customer Service
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
1999
<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, 1999 (the "1999 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 1999 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-averaging 2.5% compared to the average 3.4%
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 $505,137 for 1999 represents an increase of $271,305
over the Company's net income in 1998 of $233,832. The increase in net income
relates to the growth in the Bank's deposit and loan base during 1999. Earnings
per share was $0.74 in 1999 compared with $0.34 in 1998.
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 $2,920,123 in 1999, as
compared to $1,852,289 in 1998, representing an increase of $1,067,834, or
57.6%. This increase was caused primarily by the growth of the Bank's deposit
base and loan portfolio. Interest and fees on loans increased from $2,839,315 in
1998 to $4,866,731 in 1999 (an increase of 71.4%).
Interest earned on investments increased $204,727, (16.5%) from $1,240,761 in
1998 to $1,445,488 in 1999. The increase is due primarily to an increase in the
average value 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 1999 was 3.88 percent compared with a net interest margin of
4.17% in 1998. This decrease was due primarily due to the growth of the Bank
related specifically to 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 1999 was 3.31% from earning assets compared to a net
interest spread of 3.47% in 1998.
The following tabulation presents certain net interest income data without
modification for assumed tax equivalency:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1999 1998 1997
------------------ ---------------------- ----------------------
<S> <C> <C> <C>
Rate earned on earnings assets............ 8.43% 8.96% 8.80%
Rate paid on borrowed funds............... 5.12% 5.49% 5.05%
Interest rate spread...................... 3.31% 3.47% 3.75%
Net yield on earning assets............... 3.88% 4.17% 5.65%
</TABLE>
INTEREST EXPENSES
Total interest expense increased $1,096,556 (47.1%) from $2,326,944 in 1998 to
$3,423,500 in 1999. This increase was the combined effect of an increase in the
average balance of interest bearing deposits from approximately $41,294,000 in
1998 to approximately $65,013,000 in 1999 and a decrease in the average rate
paid on deposits from 5.49% in 1998 to 5.11% in 1999. The effect of these
changes increased the interest expense on interest bearing deposits from
$2,265,832 in 1998 to $3,320,842 in 1999.
Page 2
<PAGE> 9
NONINTEREST INCOME
Noninterest income for 1999 and 1998 totaled $417,502 and $367,304,
respectively. These amounts are primarily from service charges on deposit
accounts, mortgage loan fees and fees on services to customers. Noninterest
income increased primarily due to the effects of growth in the Bank's deposit
base.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997
-------------- ----------------- ---------------
<S> <C> <C> <C>
Service charges on deposits.................. $ 213,572 $ 138,915 $ 41,142
Mortgage loan fees........................... 140,086 175,113 57,258
Insurance commissions........................ 6,821 4,375 1,881
Investment securities gains.................. 9,618 12,170 -0-
Other........................................ 47,405 36,731 11,480
------------ --------------- ---------------
$ 417,502 $ 367,304 $ 111,761
============ =============== ==============
</TABLE>
NONINTEREST EXPENSES
Noninterest expenses totaled $2,089,727 in 1999 and $1,696,470 in 1998. Salaries
and benefits increased $254,192 (33.3%) to $1,018,784, which reflects the Bank's
increased staffing to accommodate the growth in the Bank's loans and deposits.
Furniture and equipment expense increased $42,263 (39.4%) due to increased
depreciation and maintenance costs on equipment. Professional and regulatory
fees increased $134,574 (168.4%) due to increased services provided to the bank
for the settlement of the claim relating to fraudulent use of debit cards, and
quarterly and annual reporting requirements. Data processing fees increased
$51,760 (31.1%) and postage increased $11,309 (25.8%) due to the increased
volume of transactions from the growth of deposits and loans of the Bank.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
-------------- ------------- ------------
<S> <C> <C> <C>
Salaries and employee benefits................. $ 1,018,784 $ 764,592 $ 571,089
Occupancy expenses............................. 107,703 95,620 76,044
Furniture and equipment expense................ 149,506 107,243 107,243
Director and committee fees.................... -0- -0- -0-
Advertising.................................... 55,576 70,785 55,683
Data processing................................ 218,250 166,490 64,852
Insurance...................................... 14,462 14,311 10,343
Postage and express............................ 55,111 43,802 19,408
Printing and supplies.......................... 85,029 61,443 61,902
Professional and regulatory fees............... 214,482 79,908 71,363
Taxes and licenses............................. 9,420 7,500 5,782
Allowance for loss on debit card fraud......... -0- 150,000 -0-
Other.......................................... 161,402 134,776 85,680
------------ ------------ ------------
$ 2,089,727 $ 1,696,470 $ 1,083,789
============ ============ ============
</TABLE>
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 did not begin paying income taxes until first quarter 1999. Net
operating losses of approximately $146,000 were carried forward from 1998 and
applied to 1999 taxable income. A more detailed explanation of income tax
expense is included in the accompanying Notes to Consolidated Financial
Statements.
Page 3
<PAGE> 10
FINANCIAL CONDITION
EARNING ASSETS
Average earning assets in 1999 were approximately $75,248,000 or 94.7% of
average total assets compared to $48,570,000 or 92.3% of average total assets in
1998. The mix of average earning assets comprised the following percentages:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Federal funds sold................... 0.8% 3.3% 9.1%
Investment securities................ 31.3% 40.4% 48.6%
Loans................................ 67.9% 56.3% 42.3%
-------- -------- ---------
100.0% 100.0% 100.0%
======== ======== =========
</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, 1999, the Bank's total loans were $62,564,092 compared to $36,464,131 at the
end of 1998. In 1999 average net loans represented 67.9% of average earning
assets and 64.3% of average total assets, compared to 56.3% of average earning
assets and 51.9% of average total assets in 1998. 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 increased from 53.0% in 1998 to 77.1% in 1999.
NONPERFORMING ASSETS
The following table presents information concerning outstanding balances of
nonperforming assets at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
(in Thousands)
<S> <C> <C>
Nonaccruing loans............................. $ 145 $ -0-
Loans past due 90 days or more................ 39 -0-
Restructured loans............................ -0- -0-
---------- --------
Total nonperforming loans..................... 184 -0-
Nonaccruing securities........................ -0- -0-
Other real estate............................. 138 -0-
---------- --------
Total nonperforming assets.................... $ 322 $ -0-
========== ========
Ratios:
Loan loss allowance to
total nonperforming assets................. 2.177 24.40
========== ========
Total nonperforming loans to total
loans (net of unearned interest)........... 0.0029 0.0004
========== ========
Total nonperforming assets to total assets.... 0.0036 0.0002
========== ========
</TABLE>
Page 4
<PAGE> 11
NONPERFORMING ASSETS - CONCLUDED
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 $701,234 in the
allowance for loan losses at December 31, 1999 (1.12% 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.
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, 1999 and 1998.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
1999 1998
---- ----
(in Thousands)
<S> <C> <C>
Allowance for loan losses at beginning of year ..... $ 366 $ 170
Total loans charged off -- consumer loans .......... 114 39
Recoveries on loans previously charged off ......... -0- -0-
------- -------
Net loans charged off .............................. 114 39
Provision for loan losses .......................... 449 235
------- -------
Allowance for loan losses at end of period ......... $ 701 $ 366
======= =======
Loans, net of unearned income, at end of period .... $62,564 $36,464
======= =======
Average loans, net of unearned income,
outstanding for the period ...................... $51,119 $27,335
======= =======
Ratios:
Allowance at end of period to loans, net of
unearned income ................................. 1.12% 1.00%
Allowance at end of period to average loans,
net of unearned income .......................... 1.37% 1.34%
Net charge-offs to average loans, net of
unearned income ................................. 0.22% 0.14%
Net charge-offs to allowance at end of period ...... 16.26% 10.66%
Recoveries to prior year charge-offs ............... 0.00% 0.00%
</TABLE>
Page 5
<PAGE> 12
PROVISION FOR LOAN LOSSES, NET CHARGE-OFFS, AND ALLOWANCE FOR LOAN LOSSES -
CONCLUDED
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.
Management allocated the reserve for loan losses to specific loan classes as
follows:
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31, 1999 December 31, 1998
------------------------- ---------------------
PERCENT Percent
AMOUNT OF TOTAL Amount Of Total
------ -------- ------ --------
(in Thousands) (in Thousands)
<S> <C> <C> <C> <C>
Domestic loans (1):
Commercial, financial and
agricultural .......................... $373 53.2% $110 30.0%
Real estate - construction and other .... 220 31.4% 66 18.1%
Consumer ................................ 108 15.4% 190 51.9%
---- ----- ---- -----
$701 100.0% $366 100.0%
==== ===== ==== =====
</TABLE>
(1) The Company had no foreign loans.
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, 1999, $16,014,879 of the
Bank's investment securities were classified as available for sale, compared to
$24,526,907 at year end 1998. Securities classified as held to maturity were
$4,729,974 at year end 1999, as compared to $7,562,904 at year end 1998.
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. These investments were $230,800 at year end 1999 and
$118,300 at year end 1998.
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 available-for-sale and held-to-maturity, it is the
intention 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 1999 gross investment securities sales were
approximately $7.9 million and maturities and calls were $6.1 million,
representing 33.6% and 25.9%, respectively, of the average portfolio for the
year. Gains associated with the sales totaled $9,618, accounting for 2.3% of
noninterest income, while losses totaled $(8,466), accounting for 0.4% of
noninterest
Page 6
<PAGE> 13
INVESTMENT SECURITIES AND FEDERAL FUNDS SOLD - CONCLUDED
expenses. Gross unrealized gains in the portfolio amounted to $-0- and
unrealized losses amounted to $1,122,640 at year end 1999. During 1998, gross
investment securities sales were approximately $7.3 million and maturities and
calls were $13.5 million, representing 37.2% and 68.9%, respectively, of the
average portfolio for the year. Gains associated with the sales were $12,170,
accounting for 3.3% of noninterest income, while losses totaled $517, accounting
for .03% of noninterest expense. Gross unrealized gains in the portfolio
amounted to $88,007 and unrealized losses were $9,230 at year end 1998.
Mortgaged-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 1999 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 decreased from $4,700,000 at year end 1998 to $600,000
at year end 1999. Average federal funds sold for 1999 was approximately $608,000
or 0.8% of average earning assets, compared with approximately $1,605,000 or
3.3% of average earning assets for 1998. The decrease of 62.1% in average
federal funds sold from 1998 reflects an emphasis by management on improving
profitability by deploying more funds into higher earning assets.
DEPOSITS
The Bank's primary source of funds is derived from deposits of Bank customers.
Average deposits increased 58.4% from approximately $44,800,000 in 1998 to
approximately $70,976,000 in 1999. At December 31, 1999, total deposits were
$81,144,347, of which $75,104,608 (92.6%) were interest-bearing and $6,039,739
(7.4%) were noninterest-bearing. At year-end 1998, total deposits were
$68,835,372, of which $62,586,245 (91%) were interest-bearing and $6,249,127
(9.0%) 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. The Bank plans to
expand its consumer base in order to continue to fund asset growth.
SHAREHOLDERS' EQUITY
Shareholders' equity decreased $(71,727) from December 31, 1998 to December 31,
1999, due to net earnings of $505,137 and the decrease in unrealized gains on
securities available for sale totaling ($576,864), net of deferred tax
liability.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY MANAGEMENT
Liquidity is defined as the ability of a company to convert assets into cash or
cash equivalents without significant loss. Liquidity management involves
maintaining the Company's ability to meet the day-to-day cash flow requirements
of the Banks' 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 to maintain an appropriate balance between interest-sensitive assets
and
Page 7
<PAGE> 14
LIQUIDITY MANAGEMENT - CONCLUDED
interest-sensitive liabilities so that the Company can also meet the investment
requirements of its shareholders. Daily monitoring of the sources and uses of
funds is necessary to maintain an acceptable cash position that meets both
requirements. In a banking environment, both assets and liabilities are
considered sources of liquidity funding and both are, therefore, monitored on a
daily basis.
The asset portion of the balance sheet provides liquidity primarily through loan
principal repayments or sales of investment and trading account securities. Real
estate-construction and commercial, financial and agricultural loans that mature
in one year or less equaled approximately $17.7 million or 28.3 percent of the
total loan portfolio at December 31, 1999 and investment securities maturing in
one year or less equaled $1.7 million or 8.1 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 an available line of up to $4.5 million. Liquidity management involves the
daily monitoring of the sources and uses of funds to maintain an acceptable
company 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 $3,500,000. The Bank has made
a $1,000,000 draw from the available credit with the Federal Home Loan Bank. See
Note 9 to the Notes to Consolidated Financial Statements herein.
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 1997 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, amounted to
$6.3 million at December 31, 1999. Tier II capital components include
supplemental capital components such as qualifying allowance for loan losses and
qualifying subordinated debt. Tier I capital plus the Tier II capital components
is referred to as Total Risk-based capital and was $7 million at year-end 1999.
The percentage ratios, as calculated under the guidelines were 8.6 percent and
9.6 percent for Tier I and Total Risk-based capital, respectively, at year-end
1999. Both levels currently exceed the minimum ratios of four percent and eight
percent, respectively.
Another important indicator of capital adequacy in the banking industry is the
leverage ratio. The leverage ratio is defined as the ratio the Bank's Tier 1
capital minus specific intangible assets to total average assets minus specific
intangible assets. The Bank's leverage ratios as of December 31, 1999 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,
1999 and 1998 under the year end 1999 requirements.
<TABLE>
<CAPTION>
CAPITAL ADEQUACY RATIOS
-------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998
-------------- -------------
(in thousands)
<S> <C> <C>
Tier 1 Capital....................................... $ 6,252 $ 6,265
Tier 2 Capital....................................... 701 366
-------------- -------------
Total Qualifying Capital............................. $ 6,953 $ 6,631
============== =============
Risk Adjusted Total Assets
(including off-balance sheet exposures).............. $ 72,406 $ 51,983
============== =============
Tier 1 Risk-Based Capital Ratio...................... 8.64% 12.05%
Total Risk-Based Capital Ratio....................... 9.60% 12.76%
Leverage Ratio....................................... 7.21% 9.21%
</TABLE>
DBF Capital Requirement. In addition to the capital standards imposed by federal
banking regulators, the Georgia Department of Banking and Finance (DBF) imposed
a 7.50% primary capital ratio as a condition to the approval to the Bank's
charter. This standard, which exceeds the FDIC capital standard, is calculated
as the ratio of total equity to total assets. This heightened requirement is
imposed during the first three years of the Bank's operation. At December 31,
1999, the capital ratio as calculated under the DBF standard was 7.81%. The
Bank's capital ratio as calculated by the DBF was in compliance as of December
31, 1999 and 1998. Upon the third anniversary of the Bank's operations on April
21, 2000, the Bank's required capital ratio will reduce to 4.50%.
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, 1999.
Page 9
<PAGE> 16
INTEREST RATE SENSITIVITY MANAGEMENT - CONCLUDED
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
0-30 31-90 91-365 1-5 Over 5
Days Days Days Years Years Total
---- ---- ---- ----- ----- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1999
Interest-earning assets (1)
Loans .................................. $ 10,157 $ 20,314 $ 3,081 $ 28,745 $ 267 $62,564
Investment Securities:
Taxable ............................. -0- -0- 1,004 5,381 14,366 20,751
Tax exempt .......................... -0- -0- -0- -0- 225 225
Federal funds sold ..................... 600 -0- -0- -0- -0- 600
-------- ------------ -------- ----------- -------- -------
10,757 20,314 4,085 34,126 14,858 84,140
-------- ------------ -------- ----------- -------- -------
Interest-bearing liabilities (2)
Demand deposits ........................ 2,861 2,861 2,860 -0- -0- 8,582
Savings deposits ....................... 3,640 3,640 3,639 -0- -0- 10,919
Time deposits .......................... 4,811 5,689 24,397 20,707 -0- 55,604
Long-term borrowings ................... -0- -0- -0- 1,000 -0- 1,000
-------- ------------ -------- ----------- -------- -------
11,312 12,190 30,896 21,707 -0- 76,105
-------- ------------ -------- ----------- -------- -------
Interest sensitivity gap ............... $ (555) $ 8,124 $(26,811) $ 12,419 $ 14,858 $ 8,035
======== ============ ======== =========== ======== =======
Cumulative interest sensitivity gap .... $ (555) $ 7,569 $(19,242) $ (6,823) $ 8,035
======== ============ ======== =========== ========
Ratio of interest-earning assets to
interest-bearing liabilities ...... .95 1.67 .13 1.57 --
======== ============ ======== =========== ========
Cumulative ratio ....................... .95 1.32 .65 .91 1.11
======== ============ ======== =========== ========
Ratio of cumulative gap to total
to interest-bearing assets ........ (.01) .09 (.23) (.08) .10
======== ============ ======== =========== ========
</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.
The above 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
interest-bearing liabilities over interest-earnings assets of $555 thousand. For
the first 365 days, interest-bearing liabilities exceed earning assets by $19.2
million. During this one year time frame, 71.5 percent of all interest bearing
liabilities will reprice compared to 41.8 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.
Page 10
<PAGE> 17
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 1999 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 a professional staff of internal auditors who monitor compliance and
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 the 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
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements Page(s)
<S> <C>
Independent Auditors' Report................................................................................ 14
Consolidated Statements of Financial Condition as of December 31, 1999 and 1998............................. 15
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.......................................................................... 16
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997.......................................................................... 17
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................................................................... 18
Notes To Consolidated Financial Statements.................................................................. 19-37
</TABLE>
<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, 1999 and 1998 and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for the years ended December 31, 1999, 1998 and 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated 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 financial position of Gateway Bancshares,
Inc. & Subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years ended December 31, 1999, 1998 and
1997, in conformity with generally accepted accounting principles.
/s/ Land & Associates, P.C., CPAs
Ellijay, Georgia
February 14, 2000
<PAGE> 21
GATEWAY BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash ....................................................... $ 1,354,182 $ 397,459
Due from banks ............................................. 1,024,353 1,015,443
Federal funds sold ......................................... 600,000 4,700,000
Securities available for sale .............................. 16,014,879 24,526,907
Securities held to maturity, estimated fair value
of $4,470,405 for 1999 and $7,630,715 for 1998 ........... 4,729,974 7,562,904
Restricted investments ..................................... 230,800 118,300
Loans ...................................................... 62,564,092 36,464,131
Allowance for loan losses .................................. (701,234) (366,158)
------------ ------------
NET LOANS .......................................... 61,862,858 36,097,973
Premises and equipment, net ................................ 1,956,568 1,694,514
Accrued interest ........................................... 780,543 678,770
Other assets ............................................... 545,417 146,841
------------ ------------
TOTAL ASSETS ....................................... $ 89,099,574 $ 76,939,111
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing ................................... $ 6,039,739 $ 6,249,127
Interest-bearing ...................................... 75,104,608 62,586,245
------------ ------------
TOTAL DEPOSITS ...................................... 81,144,347 68,835,372
Long-term debt ........................................... 1,000,000 1,000,000
Accrued interest ......................................... 363,948 276,995
Other liabilities ........................................ 76,389 240,127
------------ ------------
TOTAL LIABILITIES ................................... 82,584,684 70,352,494
------------ ------------
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 earnings (deficit) ........................... 331,640 (173,497)
Accumulated other comprehensive income ................... (569,627) 7,237
------------ ------------
TOTAL SHAREHOLDERS' EQUITY .......................... 6,514,890 6,586,617
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......... $ 89,099,574 $ 76,939,111
============ ============
</TABLE>
See notes to consolidated financial statements.
Page 15
<PAGE> 22
GATEWAY BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE FROM EARNING ASSETS
Interest and fees on loans ................... $ 4,866,731 $ 2,839,315 $ 686,705
Interest on investment securities:
Taxable securities .......................... 1,438,356 1,240,761 391,393
Tax exempt .................................. 7,132 -0- -0-
Interest on federal funds sold ............... 30,532 99,157 66,444
Interest on deposits in other banks .......... 872 -0- -0-
----------- ----------- -----------
TOTAL REVENUE FROM EARNING ASSETS ..... 6,343,623 4,179,233 1,144,542
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits ......................... 3,320,842 2,265,832 428,696
Interest on borrowed funds ................... 102,658 61,112 927
----------- ----------- -----------
TOTAL INTEREST EXPENSE ................ 3,423,500 2,326,944 429,623
----------- ----------- -----------
NET INTEREST INCOME .............................. 2,920,123 1,852,289 714,919
Provision for loan losses .................... 449,000 235,000 171,075
----------- ----------- -----------
NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES .............. 2,471,123 1,617,289 543,844
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposits .................. 213,572 138,915 41,142
Mortgage loan fees ........................... 140,086 175,113 57,258
Insurance commissions ........................ 6,821 4,375 1,881
Investment securities gains .................. 9,618 12,170 -0-
Other operating income ....................... 47,405 36,731 11,480
----------- ----------- -----------
TOTAL NONINTEREST INCOME ..................... 417,502 367,304 111,761
----------- ----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits ............... 1,018,784 764,592 571,089
Occupancy expense ............................ 107,703 95,620 76,044
Furniture and equipment expense .............. 149,506 107,243 61,643
Investment securities losses ................. 8,466 517 662
Other operating expenses ..................... 805,268 728,498 374,351
----------- ----------- -----------
TOTAL NONINTEREST EXPENSES ................... 2,089,727 1,696,470 1,083,789
----------- ----------- -----------
Cumulative effect of change in accounting
principle, net of income tax effect .......... (24,592) -0- -0-
----------- ----------- -----------
NET INCOME (LOSS) BEFORE INCOME TAXES ............ 774,306 288,123 (428,184)
Income tax (expense) benefit ..................... (269,169) (54,291) 154,445
----------- ----------- -----------
NET INCOME (LOSS) ................................ $ 505,137 $ 233,832 $ (273,739)
=========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE -
BASIC AND DILUTIVE:
Net income (loss) per common share ............... $ 0.74 $ 0.34 $ (0.40)
Basic weighted average shares outstanding ........ 679,048 679,048 679,048
Diluted earnings per common share ................ $ 0.74 $ 0.34 $ (0.40)
Diluted weighted average shares outstanding ...... 680,079 679,048 679,048
</TABLE>
See notes to consolidated financial statements.
Page 16
<PAGE> 23
GATEWAY BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
ACCUMULATED OTHER
COMMON CAPITAL EARNINGS COMPREHENSIVE
STOCK SURPLUS (DEFICIT) INCOME TOTAL
------------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
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 effect ..... -0- -0- -0- 18,812 18,812
------------- ------------- ----------- ----------- -----------
(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 effect ..... -0- -0- -0- (7,628) (7,628)
------------- ------------- ----------- ----------- -----------
226,204
Balance at December 31, 1998 .......... 3,395,240 3,357,637 (173,497) 7,237 6,586,617
COMPREHENSIVE INCOME:
NET INCOME - 1999 ................. -0- -0- 505,137 -0- 505,137
CHANGE IN NET UNREALIZED GAIN
(LOSS) ON SECURITIES AVAILABLE
FOR SALE, NET OF TAX EFFECT ..... -0- -0- -0- (576,864) (576,864)
------------- ------------- ----------- ----------- -----------
(71,727)
BALANCE AT DECEMBER 31, 1999 .......... $ 3,395,240 $ 3,357,637 $ 331,640 $ (569,627) $ 6,514,890
============= ============= =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
Page 17
<PAGE> 24
GATEWAY BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............................................ $ 505,137 $ 233,832 $ (273,739)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision for depreciation and amortization .................. 174,210 133,617 90,100
Amortization of investment security premiums
and accretion of discounts ................................ (1,071) (19,610) (25,239)
Provision for loan losses .................................... 449,000 235,000 171,075
Deferred tax (benefit) ....................................... 11,000 54,291 (155,610)
Realized investment security gains ........................... (858) (11,653) 662
Increase in accrued interest receivable ...................... (101,773) (399,720) (236,206)
Increase in accrued interest payable ......................... 86,953 185,698 91,297
Other ........................................................ (174,900) 221,740 (82,471)
------------ ------------ ------------
NET CASH (USED IN) OPERATING ACTIVITIES ................... 947,698 633,195 (420,131)
------------ ------------ ------------
INVESTING ACTIVITIES:
Proceeds from sales of securities held to maturity ........... 2,500,937 -0- -0-
Proceeds from sale of securities available for sale .......... 5,440,748 7,346,633 693,357
Proceeds from maturities,calls and pay-downs of
securities ................................................ 6,125,128 13,493,225 3,680,783
Purchase of securities available for sale .................... (3,369,356) (30,149,745) (13,414,894)
Purchase of securities held to maturity ...................... (337,106) (7,668,713) (943,852)
Net increase in loans to customers ........................... (26,352,388) (19,307,505) (17,196,543)
Capital expenditures ......................................... (399,003) (90,770) (1,258,125)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ..................... (16,391,040) (36,376,875) (28,439,274)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, NOW,
accounts and savings accounts ............................. (3,695,104) 12,811,816 18,862,014
Net increase in certificates of deposit ...................... 16,004,079 25,912,348 11,249,194
Net proceeds from (repayments on) notes payable .............. -0- 1,000,000 -0-
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................. 12,308,975 39,724,164 30,111,208
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents............ (3,134,367) 3,980,484 1,251,803
Cash and cash equivalents at beginning of year ................. 6,112,902 2,132,418 880,615
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ....................... $ 2,978,535 $ 6,112,902 $ 2,132,418
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ..................................................... $ 3,336,547 $ 2,141,246 $ 338,326
Income taxes ................................................. 256,000 -0- -0-
Schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate during
the year .................................................. 138,503 -0- -0-
Net increase (decrease) in unrealized gains on
securities available for sale ............................. (576,864) (7,628) 18,812
</TABLE>
See notes to consolidated financial statements.
Page 18
<PAGE> 25
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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, Georgia and the 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.
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.
Page 19
<PAGE> 26
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 as a condition of obtaining borrowings. 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 and 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.
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
Page 20
<PAGE> 27
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 bank.
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
determined by the Board of Directors, after operating losses from prior years
have been fully recovered.
Intangibles: Intangibles assets 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 adopted this statement in 1999. The adjustment is accounted for as
the cumulative effect of a change in accounting principle, net of the income
tax effect.
Page 21
<PAGE> 28
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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
$4.5 million.
Other matters: The consolidated financial statements include disclosure items
required by the Federal Deposit Insurance Corporation (the "FDIC"). These
statements has not been reviewed, or confirmed for accuracy or relevance, by
the FDIC.
Certain amounts in the prior year have been reclassified to conform with the
current year presentation.
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 consolidated net income or shareholders' equity.
Segment Information: The Bank adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," effective for its years 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 and financial 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
consolidated net income or stockholders' equity.
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 consolidated net income
or shareholders' equity.
Page 22
<PAGE> 29
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONCLUDED
Other Pronouncements: 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 (c) 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 have an 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. The Bank was in compliance with
these requirements.
(The remainder of this page intentionally left blank.)
Page 23
<PAGE> 30
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 3 - INVESTMENT SECURITIES
At December 31, 1999, the Company's available-for-sale securities reflected net
unrealized losses of $863,071, which resulted in a decrease in other
comprehensive income of $569,627, net of deferred tax benefit. 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.
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, 1999 and 1998 are presented below.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999:
SECURITIES AVAILABLE-FOR-SALE:
U.S. GOVERNMENT AND AGENCY
SECURITIES ................... $ 6,037,984 $ -0- $ 368,815 $ 5,669,169
MORTGAGE-BACKED SECURITIES ...... 10,339,966 -0- 473,631 9,866,335
EQUITY SECURITIES ............... 500,000 -0- 20,625 479,375
------------ --------- ------------ ------------
$ 16,877,950 $ -0- $ 863,071 $ 16,014,879
============ ========= ============ ============
SECURITIES HELD-TO-MATURITY:
U.S. GOVERNMENT AND AGENCY
SECURITIES .................... $ 4,505,225 $ -0- $ 245,070 $ 4,260,155
MUNICIPAL SECURITIES ............ 224,749 -0- 14,499 210,250
------------ --------- ------------ ------------
$ 4,729,974 $ -0- $ 259,569 $ 4,470,405
============ ========= ============ ============
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
============ ========= ============ ============
</TABLE>
<TABLE>
<CAPTION>
BOOK VALUE (AT COST)
--------------------------------
RESTRICTED INVESTMENTS: 1999 1998
- ----------------------- ---------- ----------
<S> <C> <C>
Federal Home Loan Bank stock............................. $ 230,800 $ 118,300
========== ==========
</TABLE>
Page 24
<PAGE> 31
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 3 - INVESTMENT SECURITIES - CONCLUDED
The contractual maturities of securities available for sale at December 31,
1999 are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---------------- ----------------
<S> <C> <C>
AS OF DECEMBER 31, 1999:
Securities Available-for-Sale:
Due in one year or less.................................. $ -0- $ -0-
Due after one year through five years.................... 4,580,264 4,391,051
Due after five years through ten years................... 10,092,415 9,549,358
Due after ten years...................................... 2,205,271 2,074,470
Restricted equity securities............................. 230,800 230,800
---------------- ----------------
$ 17,108,750 $ 16,245,679
================ ================
Securities Held-to-Maturity:
Due in one year or less.................................. $ 1,003,926 $ 960,900
Due after one year through five years.................... 1,002,239 966,540
Due after five years through ten years................... 2,499,060 2,332,715
Due after ten years...................................... 224,749 210,250
---------------- ----------------
$ 4,729,974 $ 4,470,405
================ ================
</TABLE>
Proceeds from sales of available-for-sale securities were $5,440,748,
$7,346,633, and $693,357 for the years ended December 31, 1999, 1998 and 1997,
respectively. Gross realized gains and losses on investments in debt securities
available-for-sale for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Gross realized gains..................................... $ 9,618 $ 12,170 $ -0-
Gross realized losses.................................... 8,466 517 662
</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
$8,868,029 and $11,369,000 at December 31, 1999 and 1998.
(The remainder of this page intentionally left blank.)
Page 25
<PAGE> 32
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 4 - LOANS
The Bank grants loans to customers primarily in the Northwest Georgia area. The
major classifications of loans as of December 31, 1999 and 1998 were as follows
(000's omitted):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Commercial, financial and agricultural ..... $ 15,064 $ 10,421
Real estate - construction ................. 7,222 6,008
Real estate - other ........................ 31,638 13,289
Consumer ................................... 8,576 6,713
Other loans ................................ 64 33
-------- --------
62,564 36,464
Allowance for loan losses .................. (701) (366)
-------- --------
Net loans .................................. $ 61,863 $ 36,098
======== ========
</TABLE>
As of December 31, 1999, the total recorded investment in impaired loans, all
of which had allowances determined in accordance with SFAS No. 114 and No. 118,
amounted to approximately $362,000. As of December 31, 1998, there were loans
which the Bank had specifically classified as impaired. The allowance for loan
losses related to impaired loans amounted to approximately $96,000 and $-0- at
December 31, 1999 and 1998, respectively. Other nonaccrual loans at December
31, 1999 and 1998 amounted to $145,074 and $15,508, respectively. For the year
ended December 31, 1999 and 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, 1999
and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Balance at beginning of year ............... $366,158 $170,000
-------- --------
Charge-offs ................................ (114,017) (38,842)
Recoveries ................................. 93 -0-
-------- --------
Net chargeoffs ....................... (113,924) (38,842)
-------- --------
Provision for loan losses .................. 449,000 235,000
-------- --------
Balance at end of year ..................... $701,234 $366,158
======== ========
</TABLE>
Page 26
<PAGE> 33
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 6 - FORECLOSED REAL ESTATE
At December 31, 1999, the Bank had foreclosed real estate expected to be
disposed of in the near term of $138,503. There were no foreclosure losses in
1999 and 1998, nor were there any losses on subsequent write-downs in 1999 and
1998.
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Buildings and improvements ................. $1,139,784 $1,137,774
Furniture and equipment .................... 741,097 695,691
Vehicles ................................... 68,997 68,997
Construction in progress ................... 351,587 -0-
---------- ----------
2,301,465 1,902,462
Less allowance for depreciation ............ (344,897) (207,948)
---------- ----------
$1,956,568 $1,694,514
========== ==========
</TABLE>
The provision for depreciation charged to occupancy and furniture and equipment
expense for the years ended December 31, 1999, 1998 and 1997, was $136,949,
$121,719, and $81,051, respectively.
NOTE 8 - DEPOSITS
The major classifications of deposits as of December 31, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Noninterest-bearing demand ................. $ 6,039,739 $ 6,249,127
Interest-bearing demand .................... 8,581,674 13,291,271
Savings .................................... 10,919,377 9,694,496
Time ....................................... 34,808,877 25,306,466
Certificates of deposit of $100,000 or more 20,794,680 14,294,012
------------ ------------
$ 81,144,347 $ 68,835,372
============ ============
</TABLE>
The maturities of time certificates of deposit and other time deposits issued
by the Bank at December 31, 1999 are as
follows (000's omitted):
<TABLE>
<S> <C>
2000....................... $ 34,896
2001-2002.................. 19,816
2003-2007.................. 892
--------
$ 55,604
========
</TABLE>
Page 27
<PAGE> 34
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9 - LONG-TERM DEBT
<TABLE>
<CAPTION>
Notes payable consists of: 1999 1998
---------------- ----------------
<S> <C> <C>
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
interest in mortgage loans of the Company..................................... $ 1,000,000 $ 1,000,000
================ ================
Maturities of long-term debt following December 31, 1999 are as follows:
2000............................... $ -0-
2001............................... -0-
2002............................... -0-
2003............................... 1,000,000
----------------
$ 1,000,000
================
</TABLE>
NOTE 10 - OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Advertising and marketing............................ $ 55,576 $ 70,785 $ 55,683
Data processing...................................... 218,250 166,490 64,852
Insurance............................................ 14,462 14,311 10,343
Postage, freight and express......................... 55,111 43,802 19,408
Printing and supplies................................ 85,029 111,477 117,871
Professional and regulatory fees..................... 214,482 79,908 71,363
Taxes and licenses................................... 9,420 7,500 5,782
Other ............................................... 152,938 84,225 29,049
Allowance for losses on debit card transactions...... -0- 150,000 -0-
------------- ------------- -------------
Total other operating expenses..................... $ 805,268 $ 728,498 $ 374,351
============= ============= =============
</TABLE>
(The remainder of this page intentionally left blank.)
Page 28
<PAGE> 35
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 11 - INCOME TAXES
There were current taxes payable of approximately $40,000 as of December 31,
1999.
The consolidated provision for income tax benefit (expense) consists of the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997
---------------- ----------------- ----------------
<S> <C> <C> <C>
Current:
Federal............................................ $ (256,000) $ (-0-) $ -0-
Deferred:
Federal............................................ (13,169) (54,291) 154,445
------------ ------------ -------------
$ (269,169) $ (54,291) $ 154,445
============ ============ =============
</TABLE>
The provision for federal income taxes differs from that computed by applying
federal statutory rates to income before federal income tax expense, as
indicated in the following analysis:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
---------- -------- ---------
<S> <C> <C> <C>
Federal statutory rate of 34% ................... $ 263,264 $ 97,962 $(145,582)
Deduct tax effect of:
Tax-exempt interest ........................... (4,675) (992) 900
Other adjustments ............................. 10,580 (3,342) (9,763)
Valuation allowance ........................... -0- (46,021) -0-
--------- -------- ---------
Income tax expense (benefit) .................... $ 269,169 $ 54,291 $(154,445)
========= ======== =========
</TABLE>
A cumulative net deferred tax asset is included in other assets. The components
of the asset as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax asset: .................................................. $ 512,968 $ 143,184
Deferred tax liability ............................................... (108,296) (46,758)
--------- ---------
$ 404,672 $ 96,426
========= =========
Net operating loss carryover ......................................... $ -0- $ 12,449
Net unrealized losses (gains) on securities available for sale ....... 293,444 (3,728)
Depreciation ......................................................... (108,296) (43,030)
Provision for loan losses ............................................ 210,069 105,889
Other ................................................................ 9,455 24,846
--------- ---------
$ 404,672 $ 96,426
========= =========
</TABLE>
Page 29
<PAGE> 36
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 12 - LEASES
As Lessee: The Company has entered into a lease arrangement for real estate for
which rental expenses amounted to $23,426, $20,480 and $20,480 in 1999, 1998 and
1997, respectively. This lease has been classified as an operating lease, and
relates to a ground lease of 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>
2000................................. $ 23,426
2001................................. 23,426
2002................................. 23,426
2003................................. 23,426
2004................................. 23,426
Thereafter............................ 257,686
-----------
$ 374,816
===========
</TABLE>
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Financial instruments whose contract amount represents credit risk were as
follows:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Commitments to extend credit........................................... $ 7,791,000 $ 6,227,000
Standby letters of credit.............................................. 232,960 48,287
</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 credit
worthiness on a case-by-cash 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.
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 1999
or 1998.
Page 30
<PAGE> 37
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Litigation: The Bank may become 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.
NOTE 15 - 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 $95,196 and $635,767 at December 31, 1999
and 1998, respectively.
NOTE 16 - EMPLOYEE BENEFIT PLAN
The Company 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. Contributions in the amount of $24,000 were made by the Bank in
1999. No contributions were made by the Bank in 1998 and 1997.
NOTE 17 - STOCK OPTION PLAN
In 1999, the Company adopted plans under which options for 164,350 common shares
were issued to its directors and executive officers at an exercise price of $12
per share, the market value of the shares at the time of issuance. Stock option
transactions as of December 31, are as follows:
<TABLE>
<CAPTION>
1999
------------
<S> <C>
Shares outstanding at beginning of year (plan)....... -0-
Granted.............................................. 171,850
Exercised............................................
-0-
Canceled.............................................
-0-
------------
Shares outstanding at end of year.................... 171,850
============
Exercisable at end of year........................... -0-
============
</TABLE>
Under the plan, options to purchase common stock shares vest beginning one year
from the grant date in 1999 on an equal incremental basis over a period of five
years. Options not exercised by the tenth anniversary date or upon leaving
employment are canceled.
Page 31
<PAGE> 38
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 17 - STOCK OPTION PLAN - CONCLUDED
The Company applies APB Opinion 25, Accounting for Stock Issued to Employees,
and related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans. No
compensation cost has been charged against income for its stock option plan. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, Accounting for
Stock-Based Compensation, the Company's net income would have been reduced to
the pro-forma amounts indicated below:
<TABLE>
<CAPTION>
1999
------------
<S> <C>
Net income
As reported........................................ $ 505,137
Pro forma.......................................... $ 496,631
</TABLE>
NOTE 18- SHAREHOLDERS' EQUITY
The Company raised $6,790,480 in capital as part of its initial offering of
which $3,395,240 was allocated to common stock and $3,395,240 was allocated to
capital surplus. Legal, printing and other costs of issuance of stock amounting
to $37,603, were applied against capital surplus.
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, 1999 and 1998, the Bank could not declare dividends without
regulatory consent.
NOTE 19 - 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 following
table) of total risk-based capital and Tier 1 capital (as defined in the
regulations) to risk weighted assets (as defined), and of Tier I capital (as
defined) to adjusted total assets (as defined). Management believes,
Page 32
<PAGE> 39
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 19 - REGULATORY CAPITAL - CONCLUDED
as of December 31, 1999 and 1998, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1999 the Bank had not received notification from the
regulatory authorities categorizing the Bank's capitalization status. To be
categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I 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.
The Company's actual capital amounts (000's omitted) and ratios are also
presented in this table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECT
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999:
TOTAL CAPITAL
(TO RISK-WEIGHTED ASSETS) $6,953 9.60% >$5,792 >8.0% >$7,241 >10.0%
- - - -
TIER 1 CAPITAL
(TO RISK-WEIGHTED ASSETS) $6,252 8.64% >$2,896 >4.0% >$4,344 > 6.0%
- - - -
TIER 1 CAPITAL
(TO AVERAGE ASSETS) $6,252 7.21% >$3,471 >4.0% >$4,338 > 5.0%
- - - -
As of December 31, 1998:
Total Capital
(to Risk-Weighted Assets) $6,631 12.76% >$4,159 >8.0% >$5,198 >10.0%
- - - -
Tier 1 Capital
(to Risk-Weighted Assets) $6,265 12.05% >$2,079 >4.0% >$3,119 > 6.0%
- - - -
Tier 1 Capital
(to Average Assets) $6,265 9.21% >$2,719 >4.0% >$3,399 > 5.0%
- - - -
</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, 1999, the Company could not declare
dividends without regulatory consent.
NOTE 20 - RELATED PARTY TRANSACTIONS
Loans: Certain directors, executive officers and principal shareholders,
including their immediate families and associates were loan customers of the
Bank during 1999 and 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. An analysis of related
party activity during 1999 and 1998 is presented below.
Page 33
<PAGE> 40
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 20 - RELATED PARTY TRANSACTIONS - CONCLUDED
<TABLE>
<CAPTION>
1999 1998
-------------- ---------------
<S> <C> <C>
Beginning of Year.......................................................... $ 965,322 $ 527,404
New Loans.................................................................. 50,000 823,004
Reductions................................................................. (72,768) (385,086)
-------------- ---------------
End of Year................................................................ $ 1,088,090 $ 965,322
============== ===============
</TABLE>
Deposits: Deposits held for related parties were $2,976,740 and $3,440,945 at
December 31, 1999 and 1998, respectively.
Lease: The Bank leases the property on which the Bank's building is located. The
lessor is an affiliate of one of the directors of the Bank. Rents paid under the
lease agreements were comparable to those that would have been paid to unrelated
parties.
NOTE 21 - CONDENSED PARENT INFORMATION
<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL CONDITION DECEMBER 31,
- -------------------------------- ------------------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents .............................. $ 255,760 $ 275,845
Investment in Subsidiary (equity method) eliminated upon
consolidation .................................... 6,252,369 6,290,635
Other assets ........................................... 15,314 23,310
---------- ----------
TOTAL ASSETS .................................. $6,523,443 $6,589,790
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities ................................ $ 8,553 $ 3,173
TOTAL LIABILITIES ............................. 8,553 3,173
TOTAL SHAREHOLDERS' EQUITY .................... 6,514,890 6,586,617
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .... $6,523,443 $6,589,790
========== ==========
</TABLE>
Page 34
<PAGE> 41
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 21 - CONDENSED PARENT INFORMATION - CONTINUED
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
STATEMENT OF INCOME 1999 1998 1997
------------------- ---------------- ----------------- --------------
<S> <C> <C> <C>
INCOME
Interest income................................................. $ 10,868 $ 36,033 $ 38,077
EXPENSES
Other expenses.................................................. 42,755 35,511 27,962
------------- --------------- -------------
Income before equity in undistributed earnings (loss) of
subsidiary........................................................ (31,887) 522 10,115
Equity in undistributed earnings (loss) of subsidiary............. 526,524 221,236 (288,668)
Income tax benefit................................................ 10,500 12,074 4,814
------------- --------------- -------------
NET INCOME (LOSS)................................................. $ 505,137 $ 233,832 $ (273,739)
============= =============== =============
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
STATEMENT OF CASH FLOWS 1999 1998 1997
----------------------- ---------------- ----------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................. $ 505,137 $ 233,832 $ (273,739)
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for amortization....................................... 6,422 2,569 2,569
Equity in undistributed (income) loss of
subsidiary................................................ (526,524) (221,236) 288,668
Other (5,120) (10,400) (3,314)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................................. (20,085) 4,765 14,184
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Contribution of capital to subsidiary.............................. -0- (500,000) -0-
Maturity of investment securities.................................. -0- -0- 498,931
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES............................................. -0- (500,000) 498,931
----------- ----------- -----------
</TABLE>
(continued)
Page 35
<PAGE> 42
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 21 - CONDENSED PARENT INFORMATION - CONCLUDED
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
STATEMENT OF CASH FLOWS - CONCLUDED 1999 1998 1997
- ----------------------------------- ---------------- ----------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES -0- -0- -0-
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (20,085) (495,235) 513,115
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 275,845 771,080 257,965
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 255,760 $ 275,845 $ 771,080
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest........................................................ $ -0- $ -0- $ -0-
Income taxes.................................................... -0- -0- -0-
Non-cash investing and financing activities..................... -0- -0- -0-
</TABLE>
Page 36
<PAGE> 43
GATEWAY BANCSHARES, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
CORPORATE INFORMATION
There is no established trading market for Bank Shares, which have 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
-----------------------------------------------------------------------
1999 1998
------------------------------------ --------------------------------
HIGH LOW High Low
---------------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
First Quarter...................................... $ 18.00 $ 12.00 $ 11.00 $ 11.00
Second Quarter..................................... 18.00 12.50 11.00 11.00
Third Quarter...................................... 12.50 12.50 12.50 11.00
Fourth Quarter..................................... 12.50 12.00 12.50 11.00
</TABLE>
The Company's Common Stock was held by approximately 662 shareholders of record
at December 31, 1999.
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 1999 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
Land & Associates, P.C.
Ellijay, Georgia
Page 37
<TABLE> <S> <C>
<ARTICLE> 9
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,378,535
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,014,879
<INVESTMENTS-CARRYING> 4,960,774
<INVESTMENTS-MARKET> 4,470,405
<LOANS> 62,564,092
<ALLOWANCE> (701,234)
<TOTAL-ASSETS> 89,099,574
<DEPOSITS> 81,144,347
<SHORT-TERM> 0
<LIABILITIES-OTHER> 440,337
<LONG-TERM> 1,000,000
0
0
<COMMON> 3,395,240
<OTHER-SE> 3,119,650
<TOTAL-LIABILITIES-AND-EQUITY> 89,099,574
<INTEREST-LOAN> 4,866,731
<INTEREST-INVEST> 1,438,356
<INTEREST-OTHER> 38,536
<INTEREST-TOTAL> 6,343,623
<INTEREST-DEPOSIT> 3,320,842
<INTEREST-EXPENSE> 3,423,500
<INTEREST-INCOME-NET> 2,920,123
<LOAN-LOSSES> 449,000
<SECURITIES-GAINS> 1,152
<EXPENSE-OTHER> 2,089,727
<INCOME-PRETAX> 798,898
<INCOME-PRE-EXTRAORDINARY> 798,898
<EXTRAORDINARY> 0
<CHANGES> (24,592)
<NET-INCOME> 505,137
<EPS-BASIC> .74
<EPS-DILUTED> .74
<YIELD-ACTUAL> 3.88
<LOANS-NON> 145,074
<LOANS-PAST> 39,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 366,158
<CHARGE-OFFS> 114,017
<RECOVERIES> 93
<ALLOWANCE-CLOSE> 701,234
<ALLOWANCE-DOMESTIC> 701,234
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
