UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission File Number 0-25204
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GATEWAY BANCORP, INC.
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(Exact name of small business issuer as specified in its charter)
KENTUCKY 61-1269067
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2717 LOUISA STREET, CATLETTSBURG, KENTUCKY 41129
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(Address of principal executive offices) (Zip Code)
(606) 739-4126
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
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State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
As of August 9, 1996, there were issued and outstanding 1,132,372
shares of the Registrant's Common Stock. As of December 31, 1994,
Catlettsburg Federal Savings and Loan Association, the
Registrant's wholly-owned subsidiary, had not yet completed its
mutual-to-stock conversion and reorganization into a holding
company format. The financial information presented herein for
December 31, 1994 is for Catlettsburg Federal Savings and Loan
Association only.
Transitional Small Business Disclosure Format (check one):
Yes No X
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GATEWAY BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (as of June 30,
1996 (unaudited) and December 31, 1995) ....................... 3
Consolidated Statements of Income (for the three
months ended June 30, 1996 and 1995 (unaudited)) .............. 4
Consolidated Statements of Income (for the
six months ended June 30, 1996 and 1995
(unaudited)) .................................................. 5
Consolidated Statements of Changes in
Stockholders' Equity (for the six months
ended June 30, 1996 (unaudited) and the year
ended December 31, 1995) ...................................... 6
Consolidated Statements of Cash Flows (for the six
months ended June 30, 1996 and 1995 (unaudited)) .............. 7
Notes to Consolidated Financial Statements .................... 8-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 11-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 15
Item 2. Changes in Securities ......................................... 15
Item 3. Defaults Upon Senior Securities ............................... 15
Item 4. Submission of Matters to a Vote of Security Holders ........... 15
Item 5. Other Information ............................................. 15
Item 6. Exhibits and Reports on Form 8-K .............................. 16
Signatures ............................................................. 17
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
ASSETS 1996 1995
----------- ------------
(UNAUDITED)
CASH AND CASH EQUIVALENTS $ 2,407,456 $ 6,542,257
INVESTMENT SECURITIES HELD TO MATURITY 21,245,930 21,443,489
LOANS RECEIVABLE, net 17,222,487 16,920,304
MORTGAGE-BACKED SECURITIES
HELD TO MATURITY 29,550,289 27,618,404
ACCRUED INTEREST RECEIVABLE 460,553 493,502
OFFICE PROPERTIES AND EQUIPMENT 368,179 366,995
PREPAID INCOME TAXES 44,825 -
OTHER ASSETS 49,017 23,725
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$71,348,736 $73,408,676
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $53,376,268 $53,287,904
FEDERAL INCOME TAXES PAYABLE:
Current - 66,730
Deferred 121,745 96,872
DIVIDENDS PAYABLE - 1,366,717
ACCRUED INTEREST PAYABLE 39,574 35,155
OTHER LIABILITIES 54,719 77,035
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Total liabilities 53,592,306 54,930,413
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[caad 214]STOCKHOLDERS' EQUITY:
Common stock 11,324 11,970
Employee benefit plans (1,020,784) (1,098,907)
Additional paid-in capital 10,256,856 10,849,388
Retained earnings-substantially restricted 8,509,034 8,715,812
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Total stockholders' equity 17,756,430 18,478,263
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$71,348,736 $73,408,676
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GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
1996 1995
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(UNAUDITED) (UNAUDITED)
INTEREST INCOME:
Loans receivable-
Mortgage loans $ 319,689 $ 254,701
Other loans 11,405 12,129
Investment securities 348,021 387,983
Mortgage-backed and related securities 489,027 522,099
Other interest-earning assets 12,976 51,527
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Total interest income 1,181,118 1,228,439
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INTEREST EXPENSE:
Passbook savings 28,853 38,775
Certificates of deposit 658,759 628,843
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Total interest expense 687,612 667,618
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Net interest income 493,506 560,821
PROVISION FOR LOAN LOSSES - 5,000
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Net interest income after provision
for loan losses 493,506 555,821
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NON-INTEREST INCOME:
Gain on foreclosed real estate 10,094 -
Gain on investments 2,000 -
Loan fees - 275
Other 2,454 1,471
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Total non-interest income 14,548 1,746
---------- ----------
NON-INTEREST EXPENSE:
Compensation and benefits 94,930 111,196
Occupancy and equipment 8,659 8,537
SAIF deposit insurance premium 30,357 61,008
Other 136,785 116,886
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Total non-interest expense 270,731 297,627
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INCOME BEFORE PROVISION FOR INCOME TAXES 237,323 259,940
PROVISION FOR INCOME TAXES 68,663 88,816
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NET INCOME $ 168,660 $ 171,124
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NET INCOME PER SHARE $ .15 $ .14
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GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
1996 1995
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(UNAUDITED) (UNAUDITED)
INTEREST INCOME:
Loans receivable-
Mortgage loans $ 639,021 $ 490,905
Other loans 23,164 23,392
Investment securities 647,974 698,865
Mortgage-backed and related securities 955,330 1,025,647
Other interest-earning assets 99,742 121,309
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Total interest income 2,365,231 2,360,118
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INTEREST EXPENSE:
Passbook savings 99,483 93,524
Certificates of deposit 1,282,806 1,180,228
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Total interest expense 1,382,289 1,273,752
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Net interest income 982,942 1,086,366
PROVISION FOR LOAN LOSSES - 10,000
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Net interest income after provision
for loan losses 982,942 1,076,366
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NON-INTEREST INCOME:
Gain on foreclosed real estate 14,181 -
Gain on investments 2,000 -
Loan fees - 925
Other 4,544 3,559
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Total non-interest income 20,725 4,484
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NON-INTEREST EXPENSE:
Compensation and benefits 190,716 186,276
Occupancy and equipment 18,932 19,691
SAIF deposit insurance premium 60,812 92,651
Other 242,030 201,341
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Total non-interest expense 512,490 499,959
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INCOME BEFORE PROVISION FOR INCOME TAXES 491,177 580,891
PROVISION FOR INCOME TAXES 152,318 195,746
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NET INCOME $ 338,859 $ 385,145
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NET INCOME PER SHARE $ .30 $ .32
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GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
RETAINED
EMPLOYEE ADDITIONAL EARNINGS- TOTAL
COMMON BENEFIT PAID-IN SUBSTANTIALLY STOCKHOLDERS'
STOCK PLANS CAPITAL RESTRICTED EQUITY
----- ----- ------- ---------- ------
BALANCES, December 31, 1994 $ - $ - $ - $ 9,593,390 $ 9,593,390
NET INCOME, year ended December 31, 1995 - - - 820,661 820,661
COMMON STOCK ISSUED, $.01 par value 12,446 (500,000) 11,698,818 - 11,211,264
DIVIDENDS DECLARED, $1.50 per share - - (387,445) (1,456,890) (1,844,335)
ESOP SHARES RELEASED, 7,746 shares - 77,460 (14,545) - 62,915
RRP STOCK PURCHASED, 49,782 shares - (721,839) - - (721,839)
RRP STOCK AMORTIZED, 3,136 shares - 45,472 - - 45,472
PURCHASE OF 47,600 TREASURY SHARES (476) - (447,440) (241,349) (689,265)
------- ----------- ----------- ----------- -----------
BALANCES, December 31, 1995 11,970 (1,098,907) 10,849,388 8,715,812 18,478,263
NET INCOME, six months ended
June 30, 1996 (unaudited) - - - 338,859 338,859
DIVIDENDS DECLARED, $.20
per share (unaudited) - - - (223,839) (223,839)
ESOP SHARES RELEASED, 3,268 shares
(unaudited) - 32,680 14,689 7,631 55,000
RRP STOCK AMORTIZED, 3,136
shares (unaudited) - 45,443 - - 45,443
PURCHASE OF 64,598 TREASURY
SHARES (unaudited) (646) - (607,221) (329,429) (937,296)
------- ----------- ----------- ----------- -----------
BALANCES, June 30, 1996 (unaudited) $11,324 $(1,020,784) $10,256,856 $ 8,509,034 $17,756,430
======= =========== =========== =========== ===========
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GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
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JUNE 30, JUNE 30,
1996 1995
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(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
Net income $ 338,859 $ 385,145
Adjustments to reconcile net income to net
cash provided by operating activities-
Gain on investments 2,000 -
Provision for depreciation 10,285 9,853
Amortization and accretion (45,230) (40,222)
Provision for deferred income taxes 24,873 12,876
Provision for loan losses - 10,000
ESOP compensation 6,000 33,386
RRP compensation 45,443 -
FHLB stock dividends (26,000) (22,900)
(Increase) decrease in accrued interest receivable 32,949 (70,182)
Increase in other assets (25,292) (209)
Decrease (increase) in prepaid income taxes (111,555) 2,135
Increase in accrued interest payable 4,419 14,887
Decrease in other liabilities (28,316) (98,218)
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Net cash provided by operating activities 228,435 236,551
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INVESTING ACTIVITIES:
Net increase in loans (302,183) (3,133,357)
Purchases of investment securities (13,030,499) (5,073,117)
Maturities of investment securities 12,920,030 2,109,827
Sales and calls of investment securities 350,000 -
Purchases of mortgage-backed securities (4,933,375) (1,879,244)
Principal collected on mortgage-backed securities 3,028,748 1,756,535
Purchases of office properties and equipment (11,469) (20,859)
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Net cash used for investing activities (1,978,748) (6,240,215)
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FINANCING ACTIVITIES:
Net decrease in savings accounts (203,005) (3,955,869)
Net increase (decrease) in certificates of
deposit 291,369 (2,919,349)
Decrease in prepaid stock conversion costs - 278,054
Net proceeds from sale of stock - 11,208,525
Dividends paid (1,535,556) (238,914)
Purchase of common stock (937,296) -
----------- -----------
Net cash provided by (used for)
financing activities (2,384,488) 4,372,447
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DECREASE IN CASH AND CASH EQUIVALENTS (4,134,801) (1,631,217)
CASH AND CASH EQUIVALENTS, beginning of period 6,542,257 7,394,270
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CASH AND CASH EQUIVALENTS, end of period $ 2,407,456 $ 5,763,053
=========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Federal income taxes paid $ 239,000 $ 200,300
=========== ===========
Interest paid on deposit accounts $ 1,377,870 $ 1,258,865
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GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
Gateway Bancorp, Inc. (the "Company") was incorporated under
Kentucky law in October 1994 by Catlettsburg Federal Savings and Loan
Association in connection with its conversion (the "Conversion") to a
federally-chartered stock savings bank known as "Catlettsburg Federal Savings
Bank" (the "Bank"). The Conversion was completed on January 18, 1995. See
Note 2 herein.
The accompanying consolidated financial statements were prepared
in accordance with instructions to Form 10-QSB, and therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. However, all normal, recurring adjustments
which, in the opinion of management, are necessary for a fair presentation of
the financial statements, have been included. These financial statements
should be read in conjunction with the audited financial statements and the
notes thereto for the year ended December 31, 1995. The results for the six
months ended June 30, 1996 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1996.
BUSINESS
The Company's principal business is conducted through the Bank
which conducts business from its main office located in Catlettsburg,
Kentucky, and one full-service branch located in Grayson, Kentucky. The
Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF") to the maximum extent permitted by law. The Bank is subject to
examination and comprehensive regulation by the Office of Thrift Supervision
("OTS"), which is the Bank's chartering authority and primary regulator. The
Bank is also subject to regulation by the Federal Deposit Insurance
Corporation ("FDIC"), as the administrator of the SAIF, and to certain
reserve requirements established by the Federal Reserve Board ("FRB"). The
Bank is a member of the Federal Home Loan Bank of Cincinnati ("FHLB").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company, the Bank, and the Bank's one wholly-owned subsidiary. All
significant intercompany transactions have been eliminated in consolidation.
Additionally, certain reclassifications may have been made in order to
conform with the current period's presentation. The accompanying consolidated
financial statements have been prepared on the accrual basis.
-8-
(2) CONVERSION TRANSACTION
On January 18, 1995, (i) the Bank converted from a
federally-chartered mutual savings and loan association to a
federally-chartered stock savings bank and (ii) the Company acquired all of
the common stock of the Bank in the Conversion. As part of the Conversion,
the Company issued 1,244,570 shares of its Common Stock. Total proceeds of
$12,445,700 were reduced by $500,000 for shares to be purchased by the
Employee Stock Ownership Plan ("ESOP") and by approximately $737,200 for
conversion expenses. As a result of the Conversion, the Company contributed
approximately $5,900,000 of additional capital to the Bank and retained the
balance of the proceeds.
(3) NET INCOME PER SHARE
Net income per share for the three months and six months ended
June 30, 1996 and 1995 was computed using the weighted average (1,140,618 and
1,195,900, respectively) number of shares outstanding. Shares which have not
been committed to be released to the ESOP are not considered to be
outstanding for purposes of calculating net income per share.
(4) DIVIDENDS PER SHARE
For purposes of recording dividends, dividends paid on
unallocated ESOP shares are not considered dividends for financial reporting
purposes. There were 11,014 and 3,073 shares released to the ESOP at June 30,
1996 and 1995, respectively.
(5) CHANGE IN FISCAL YEAR
On March 29, 1995, the Company established December 31 as its
fiscal year end, effective as of December 31, 1994. The Company took this
action in order to report its results as a public company in a manner which
is consistent with the way the Bank has traditionally conducted its business.
(6) PURCHASE OF COMMON STOCK
During the six months ended June 30, 1996, the Company purchased
64,598 shares of its outstanding common stock on the open market. In
accordance with the 1988 amendment to the Kentucky Business Corporation Act,
the purchase of these shares has been recorded as a purchase of common stock
shares, which are authorized but unissued. The shares are available for
reissuance.
(7) EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established the ESOP for employees of the
Company and the Bank effective upon the Conversion. Full-time employees of
the Company and the Bank who have been credited with at least 1,000 hours of
service during a twelve month period and who have attained age 21 are
eligible to participate in the ESOP. The Company loaned the ESOP $500,000 for
the initial purchase of the ESOP shares. The loan is due and payable in forty
(40) equal quarterly installments of $12,500 beginning March 31, 1995, plus
interest at the rate of 8.75% per annum. The Company will make scheduled
discretionary cash contributions to the ESOP sufficient to amortize the
principal and interest on the loan. The Company accounts for its ESOP in
accordance with Statement of Position 93-6, "Employer's Accounting For
Employee Stock Ownership Plans." As shares are committed to be released to
participants,
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the Company reports compensation expense equal to the average market price of
the shares during the period. ESOP compensation expense recorded during the
three months and six months ended June 30, 1996 and 1995 was $3,000 and
$16,626, and $6,000 and $33,386, respectively. The Company used $44,361 in
dividends on unallocated ESOP shares to pay the quarterly debt service due on
March 31, 1996 and June 30, 1996.
(8) RECOGNITION AND RETENTION PLAN AND TRUST
At the Company's Annual Meeting of Stockholders held on June 29,
1995, the Recognition and Retention Plan and Trust (the "RRP") was approved
by the Company's stockholders. The Office of Thrift Supervision indicated its
non-objection to the RRP plan provisions on June 7, 1995. As of December 31,
1995, the Company had purchased 49,782 shares in the open market to fund the
RRP at an aggregate cost of $721,839. As of June 30, 1996, 41,938 of the
shares available under the RRP have been awarded to the Company's Board of
Directors and the Bank's executive officers and other key employees, subject
to vesting and other provisions of the RRP.
At June 30, 1996, the deferred cost of unearned RRP shares
totaled $630,924 and is recorded as a charge against stockholders' equity.
Compensation expense will be recognized ratably over the five year vesting
period only for those shares awarded. The Company recorded compensation
expense related to the RRP of $22,707 and $45,443 for the three months and
six months ended June 30, 1996, respectively.
(9) STOCK OPTION PLAN
At the Company's Annual Meeting of Stockholders held on June 29,
1995, the 1995 Stock Option Plan (the "Plan") was approved by the Company's
stockholders. A total of 124,457 shares may be issued pursuant to the Plan.
Through June 30, 1996 an aggregate of 73,423 stock options have been granted
to the Company's Board of Directors, and the Bank's executive officers and
other key employees. These options are subject to vesting provisions as well
as other provisions of the Plan. Such options were not dilutive during the
three and six months ended June 30, 1996. No options have been exercised as
of June 30, 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Assets. Total assets decreased by $2.1 million, or 2.9%, from
$73.4 million at December 31, 1995 to $71.3 million at June 30, 1996. The
decrease consisted primarily of decreases in cash and cash equivalents and
investment securities of a $4.1 million and $.2 million, offset by increases
in loans receivable, net and mortgage-backed securities held to maturity of
$.3 million and $1.9 million, respectively.
Cash and Cash Equivalents. The $4.1 million decrease in cash and
cash equivalents, or 63.1%, is attributable to cash utilized during the
period of approximately $1.5 million to pay dividends, and $.9 million to
purchase treasury stock. The remaining decrease in cash resulted primarily
from purchases of mortgage-backed securities. The $1.5 million decrease in
cash resulting from the payment of dividends included $1.4 million in
dividends declared in 1995, but not paid until 1996.
Investment Securities. The Company's investment portfolio
declined $.2 million, or .9%, from $21.4 million at December 31, 1995 to
$21.2 million at June 30, 1996. The modest decline was not attributable to
any significant factor.
Loans Receivable. Loans receivable increased $.3 million, or
1.8%, from $16.9 million at December 31, 1995 to $17.2 million at June 30,
1996. Mortgage loan demand has been slow during the first six months of 1996.
Mortgage-Backed Securities. The Company continues to invest
heavily in mortgage-backed securities. The securities increased $1.9 million,
or 6.9%, from $27.6 million at December 31, 1995 to $29.5 million at June 30,
1996. The increase is attributable to purchases of these mortgage-related
products during the period to offset the lower mortgage loan demand.
Deposits. Deposits increased by $88,000 from December 31, 1995
to June 30, 1996. The Company continues to offer competitive interest rates
on deposits, but due to adequate liquidity levels, has found it unnecessary
at this time to actively solicit new deposit accounts.
Stockholders' Equity. Stockholders' equity decreased $.7 million,
or 3.8%, from $18.5 million at December 31, 1995 to $17.8 million at June 30,
1996. The decrease was largely due to the purchase of treasury stock during
the period for $.9 million, offset by the addition of net income for the six
month period. See page six of Consolidated Financial Statements.
RESULTS OF OPERATIONS
Net income decreased $2,464, or 1.4%, from $171,124 for the three
months ended June 30, 1995, to $168,660 for the three months ended June 30,
1996. For the comparable six month periods, net income decreased $46,286, or
12.0%, from $385,145 to $338,859. The three month decrease resulted from a
decrease in net interest income of $67,315, partially offset by an increase
in non-interest income of $12,802 and decreases in non-interest expenses, the
provision for loan losses and the provision for income taxes of $26,896,
$5,000 and $20,153, respectively. The six month decrease resulted from a
decrease in net interest income of
-11-
$103,424 and an increase in non-interest expenses of $12,531, partially
offset by reductions in the provisions for loan losses and income taxes of
$10,000 and $43,428, respectively, and an increase in non-interest income of
$16,241.
Total interest income decreased $47,321, or 3.9%, for the three
months ended June 30, 1996 as compared to 1995. For the six month period,
total interest income increased a modest $5,113. The decrease for the three
month period is reflective of the decline in the Company's interest earning
assets due to cash requirements for dividends and stock repurchases.
Total interest expense increased $19,994, or 3.0%, and $108,537,
or 8.5%, for the three and six months ended June 30, 1996 and 1995,
respectively. The increases were largely due to increases in market rates of
interest during 1996 as compared to 1995.
No provision for loan losses was made for the three months or six
months ended June 30, 1996, as compared to a $5,000 per quarter provision for
each comparable period of 1995. The Company was significantly increasing the
volume of its mortgage loan portfolio during the first part of 1995, and
therefore, was increasing the estimate of the required level of the allowance
for loan losses. For the first six months of 1996, management deemed the
allowance for loan losses to be adequate, therefore, no provision for loan
losses was considered necessary.
Non-interest income increased $12,802 during the June, 1996
quarter as compared to 1995. For the six month period, non-interest income
increased $16,241, such increases being primarily the result of $10,094 for
the three months, and $14,181 for the six months, in partial recoveries on
foreclosed real estate losses incurred in prior years.
Non-interest expenses were $270,731 for the quarter ending June
30, 1996, as compared to $297,627 for the quarter ending June 30, 1995, a
decrease of $26,896, or 9.0%. This resulted primarily from decreases in
compensation and benefits of $16,266 and SAIF deposit insurance premiums of
$30,651, offset by an increase in other expenses of $19,899. The decline in
compensation and benefits was due to the Company using dividends in 1996 to
pay debt service on the Employee Stock Ownership Plan, which was partially
offset by contributions in 1996 to the Company's Recognition and Retention
Plan and Trust. SAIF deposit insurance premiums decreased due to a change by
the SAIF in 1995, from a semi-annual to a quarterly billing period. Other
expenses increased due to increased costs associated with operating as a
public company.
For the 1996 and 1995 six month periods, non-interest expenses
were $512,490 and $499,959, respectively. The slight increase consisted of
increases in compensation and benefits and other expenses of $4,440 and
$40,689, respectively, which was partially offset by a decrease in SAIF
deposit insurance premiums of $31,839. Compensation and benefits increased
due to six months funding of the Company's Recognition and Retention Plan and
Trust, which was adopted on June 29, 1995, partially offset by the reduction
in contributions to the ESOP. Other expenses increased, and SAIF deposit
insurance premiums decreased, due to the reasons as described above.
The provision for income taxes decreased $20,153 for the quarter,
and $43,428 for the six month period ended June 30, 1996, due to lower pretax
income.
-12-
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, represented by cash and cash equivalents,
is a product of its operating, investing and financing activities. The
Company's primary sources of funds are deposits, amortization, prepayments
and maturities of outstanding loans and mortgage-backed securities,
maturities of investment securities and other short-term investments and
funds provided from operations. While scheduled payments from the
amortization of loans and mortgage-backed securities and maturing investment
securities and short-term investments are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition. In addition, the Bank
invests excess funds in overnight deposits and other short-term
interest-earning assets which provide liquidity to meet lending requirements.
The Bank has been able to generate sufficient cash through its deposits. At
June 30, 1996, the Bank had no outstanding advances from the Federal Home
Loan Bank of Cincinnati or other borrowings.
Liquidity management is both a daily and long-term function of
business management. Excess liquidity is generally invested in short-term
investments such as overnight deposits. On a longer-term basis, the Bank
maintains a strategy of investing in various investment and mortgage-backed
securities and residential mortgage loans. The Bank uses its sources of funds
primarily to meet its ongoing commitments, to pay maturing savings
certificates and savings withdrawals, to fund loan commitments and to
maintain a portfolio of mortgage-backed and investment securities. At June
30, 1996, the total approved loan commitments outstanding amounted to
$387,675. At the same date, there were no commitments under unused lines of
credit. Certificates of deposit scheduled to mature in one year or less at
June 30, 1996, totaled $34.4 million. Management believes that a significant
portion of maturing deposits will remain with the Bank. The Bank anticipates
that with interest rates at higher levels than have been experienced in
recent months, it will continue to have sufficient funds to meet its current
commitments. At June 30, 1996, the Bank had a liquidity ratio of 13.5%, which
exceeded the required minimum liquid asset ratio of 5.0%.
At June 30, 1996, the Bank had regulatory capital which was well
in excess of applicable limits. At June 30, 1996, the Bank was required to
maintain tangible capital of 1.5% of adjusted total assets, core capital of
3.0% of adjusted total assets and risk-based capital of 8.0% of adjusted
risk-weighted assets. At June 30, 1996, the Bank's tangible capital was $16.6
million or 23.6% of adjusted total assets, core capital was $16.6 million or
23.6% of adjusted total assets and risk-based capital was $16.7 million or
81.2% of adjusted risk-weighted assets, exceeding the requirements by $15.5
million, $14.4 million and $15.0 million, respectively.
RECAPITALIZATION OF SAIF AND RELATED LEGISLATIVE PROPOSALS
The deposits of the Bank are currently insured by the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). Both the SAIF and the Bank Insurance Fund ("BIF"), the
federal deposit insurance fund that covers commercial bank deposits, are
required by law to attain and thereafter maintain a reserve ratio of 1.25% of
insured deposits. The BIF has achieved a fully funded status in contrast to
the SAIF and, therefore, as discussed below, the FDIC recently substantially
reduced the average deposit insurance premium paid by BIF-insured commercial
banks to a level substantially below the average premium paid by SAIF-insured
institutions.
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In late 1995, the FDIC approved a final rule regarding deposit
insurance premiums which, effective with respect to the semiannual premium
assessment beginning January 1, 1996, reduced deposit insurance premiums for
BIF member institutions to zero basis points for institutions in the lowest
risk category. Accordingly, in the absence of further legislative action,
SAIF members such as the Bank will be competitively disadvantaged as compared
to commercial banks by the resulting premium differential. It is anticipated
that, under present conditions, it will be at least several years before the
SAIF reaches a reserve ratio of 1.25% of insured deposits.
The U.S. House of Representatives and Senate have actively
considered legislation which would have eliminated the premium differential
between SAIF-insured institutions and BIF-insured institutions by
recapitalizing the SAIF's reserves to the required ratio. The proposed
legislation would have provided that all SAIF member institutions pay a
special one-time assessment to recapitalize the SAIF, which in the aggregate
would have been sufficient to bring the reserve ratio in the SAIF to 1.25% of
the insured deposits. Based on the current level of reserves maintained by
the SAIF, it was anticipated that the amount of the special assessment
required to recapitalize the SAIF would have been approximately 80 to 85
basis points of the SAIF-assessable deposits. It was anticipated that after
the recapitalization of the SAIF, premiums paid by SAIF-insured institutions
would be reduced to match those currently being assessed BIF-insured
commercial banks. The legislation also provided for the merger of the BIF and
the SAIF, with such merger being conditioned upon the prior elimination of
the thrift charter.
The legislation discussed above had been, for some time, included
as part of a fiscal 1996 federal budget bill, but was eliminated prior to the
bill being enacted on April 26, 1996. In light of the legislation's
elimination and the uncertainty of the legislative process generally,
management cannot predict whether legislation reducing SAIF premiums and/or
imposing a special one-time assessment will be adopted, or, if adopted, the
amount of the assessment, if any, that would be imposed on the Bank.
If legislation were to be enacted in the future which would
assess a one-time special assessment of 85 basis points, the Bank would
(based upon the Bank's SAIF deposits as of June 30, 1996) pay approximately
$300,000, net of related tax benefits. In addition, the enactment of such
legislation might have the effect of immediately reducing the Bank's capital
by such an amount. Nevertheless, management does not believe, based upon the
foregoing assumptions, that a one-time assessment of this nature would have a
material adverse effect on the Company's consolidated financial condition.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Registrant or
any of its subsidiaries is a part, or to which any of their
property is subject.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) An annual meeting of stockholders ("Annual Meeting") was held
on May 9, 1996.
b) Not applicable.
c) Three matters were voted upon at the Annual Meeting. The
stockholders approved matters brought before the Annual
Meeting. The matters voted upon together with the applicable
voting results were as follows:
1) Proposal to elect a) two directors for a one year term
expiring in 1997 - John H. Fugeman and Harold Freedman
each received votes for 1,065,210; not voted 110,460; b)
two directors for a two year term expiring in 1998 -
Hunter E. Clark and Thomas C. Ewing, III each received
votes for 1,065,210; not voted 110,460; and c) two
directors for a three year term expiring in 1999 -
Rebecca R. Jackson and Charles M. Hedrick each received
votes for 1,065,210; not voted 110,460.
2) Proposal to con sider and approve the amendment of
Article VII.A. of the Company's Articles of Incorporation
to classify the Board of Directors into three classes -
votes for 819,384; against 100,740; abstain 36,820; not
voted 218,726.
3) Proposal to ratify the appointment by the Board of
Directors of Kelley, Galloway & Company, PSC as the
Company's independent auditors for the fiscal year ending
December 31, 1996 - votes for 1,060,635; against 1,575;
abstain 3,000; not voted 110,460.
(d) Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
NO. DESCRIPTION PAGE
3.3 Articles of Correction of Gateway Bancorp, Inc.
dated April 11, 1995 E-1
3.4 Articles of Amendment of Gateway Bancorp, Inc.
dated June 18, 1996 E-2
27 Financial Data Schedule E-4
b) No Form 8-K reports were filed during the quarter.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GATEWAY BANCORP, INC.
Date: AUGUST 9, 1996 By: /s/ REBECCA R. JACKSON
----------------- -----------------------------------------
Rebecca R. Jackson, President and
Chief Executive Officer
Date: AUGUST 9, 1996 By: /s/ PAMELA HOWARD
----------------- -----------------------------------------
Pamela Howard, Assistant Secretary/
Treasurer (chief accounting officer)
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