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 SEPTEMBER 30, 1996
----------------------------
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
--------------------
GATEWAY BANCORP, INC.
- ---------------------------------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
KENTUCKY 61-1269067
------------------- --------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2717 LOUISA STREET, CATLETTSBURG, KENTUCKY 41129
- ---------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(606) 739-4126
-------------------------------------------------
(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
---- ----
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON EQUITY, AS OF THE LATEST PRACTICABLE DATE:
AS OF NOVEMBER 1, 1996, THERE WERE ISSUED AND OUTSTANDING 1,113,872
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
---- ----
GATEWAY BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (as of September 30,
1996 (unaudited) and December 31, 1995) 3
Consolidated Statements of Income (for the three
months ended September 30, 1996 and 1995 (unaudited)) 4
Consolidated Statements of Income (for the
nine months ended September 30, 1996 and 1995
(unaudited)) 5
Consolidated Statements of Changes in
Stockholders' Equity (for the nine months
ended September 30, 1996 (unaudited) and the year
ended December 31, 1995) 6
Consolidated Statements of Cash Flows (for the nine
months ended September 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 15
Signatures 16
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
------------ ------------
(UNAUDITED)
CASH AND CASH EQUIVALENTS $ 2,887,510 $ 6,542,257
INVESTMENT SECURITIES HELD TO MATURITY 18,511,339 21,443,489
LOANS RECEIVABLE, net 18,141,443 16,920,304
MORTGAGE-BACKED SECURITIES
HELD TO MATURITY 29,065,308 27,618,404
ACCRUED INTEREST RECEIVABLE 340,585 493,502
OFFICE PROPERTIES AND EQUIPMENT 363,036 366,995
INCOME TAXES REFUNDABLE 117,812 --
OTHER ASSETS 69,135 23,725
----------- -----------
$69,496,168 $73,408,676
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $51,490,403 $53,287,904
INCOME TAXES PAYABLE:
Current -- 66,730
Deferred 93,385 96,872
DIVIDENDS PAYABLE -- 1,366,717
ACCRUED INTEREST PAYABLE 49,288 35,155
ACCRUED SAIF SPECIAL ASSESSMENT 338,631 --
OTHER LIABILITIES 99,785 77,035
----------- -----------
Total liabilities 52,071,492 54,930,413
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock 11,139 11,970
Employee benefit plans (981,923) (1,098,907)
Additional paid-in capital 10,088,573 10,849,388
Retained earnings-
substantially restricted 8,306,887 8,715,812
----------- -----------
Total stockholders' equity 17,424,676 18,478,263
----------- -----------
$69,496,168 $73,408,676
----------- -----------
----------- -----------
-3-
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
--------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------ -------------
(UNAUDITED) (UNAUDITED)
INTEREST INCOME:
Loans receivable-
Mortgage loans $ 333,774 $ 292,381
Other loans 10,203 12,408
Investment securities 344,506 309,917
Mortgage-backed and related securities 494,780 505,912
Other interest-earning assets 13,259 60,302
----------- -----------
Total interest income 1,196,522 1,180,920
----------- -----------
INTEREST EXPENSE:
Passbook savings 38,506 36,120
Certificates of deposit 610,590 657,892
----------- -----------
Total interest expense 649,096 694,012
----------- -----------
Net interest income 547,426 486,908
PROVISION FOR LOAN LOSSES -- 5,000
----------- -----------
Net interest income after provision
for loan losses 547,426 481,908
----------- -----------
NON-INTEREST INCOME:
Gain on foreclosed real estate -- --
Gain on investments -- --
Loan fees -- 50
Other 3,036 1,222
----------- -----------
Total non-interest income 3,036 1,272
----------- -----------
NON-INTEREST EXPENSE:
Compensation and benefits 90,821 111,479
Occupancy and equipment 9,110 8,236
SAIF deposit insurance premium 369,655 15,272
Professional services 15,851 32,114
Other taxes 13,620 11,700
Other 49,951 50,469
----------- -----------
Total non-interest expense 549,008 229,270
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,454 253,910
PROVISION FOR INCOME TAXES (2,033) 82,546
----------- -----------
NET INCOME $ 3,487 $ 171,364
----------- -----------
----------- -----------
NET INCOME PER SHARE $.00 $.14
----------- -----------
----------- -----------
-4-
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------ -------------
(UNAUDITED) (UNAUDITED)
INTEREST INCOME:
Loans receivable-
Mortgage loans $ 972,795 $ 783,286
Other loans 33,367 35,800
Investment securities 992,480 1,008,782
Mortgage-backed and related securities 1,450,110 1,531,559
Other interest-earning assets 113,001 181,611
----------- -----------
Total interest income 3,561,753 3,541,038
----------- -----------
INTEREST EXPENSE:
Passbook savings 137,989 129,644
Certificates of deposit 1,893,396 1,838,120
----------- -----------
Total interest expense 2,031,385 1,967,764
----------- -----------
Net interest income 1,530,368 1,573,274
PROVISION FOR LOAN LOSSES -- 15,000
----------- -----------
Net interest income after provision
for loan losses 1,530,368 1,558,274
----------- -----------
NON-INTEREST INCOME:
Gain on foreclosed real estate 14,181 --
Gain on investments 2,000 --
Loan fees -- 975
Other 7,580 4,781
----------- -----------
Total non-interest income 23,761 5,756
----------- -----------
NON-INTEREST EXPENSE:
Compensation and benefits 281,537 306,597
Occupancy and equipment 28,042 27,927
SAIF deposit insurance premium 430,467 107,923
Professional services 108,956 104,979
Other taxes 45,327 35,100
Other 167,169 146,703
----------- -----------
Total non-interest expense 1,061,498 729,229
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 492,631 834,801
PROVISION FOR INCOME TAXES 150,285 278,292
----------- -----------
NET INCOME $ 342,346 $ 556,509
----------- -----------
----------- -----------
NET INCOME PER SHARE $.30 $.46
----------- -----------
----------- -----------
-5-
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, nine months ended
September 30, 1996 (unaudited) -- -- -- 342,346 342,346
DIVIDENDS DECLARED, $.30 per share
(unaudited) -- -- -- (332,051) (332,051)
ESOP SHARES RELEASED, 4,882 shares
(unaudited) -- 48,820 20,306 (14,126) 55,000
RRP STOCK AMORTIZED, 4,701 shares
(unaudited) -- 68,164 -- -- 68,164
------- ----------- ----------- ----------- -----------
PURCHASE OF 83,098 TREASURY SHARES
(unaudited) (831) -- (781,121) (405,094) (1,187,046)
BALANCES, September 30, 1996
(unaudited) $11,139 $ (981,923) $10,088,573 $ 8,306,887 $17,424,676
------- ----------- ----------- ----------- -----------
------- ----------- ----------- ----------- -----------
-6-
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
---------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------ -------------
OPERATING ACTIVITIES: (Unaudited) (Unaudited)
Net income $ 342,346 $ 556,509
Adjustments to reconcile net income to net
cash provided by operating activities--
Gain on sale of investments 2,000 --
Provision for depreciation 15,428 14,361
Amortization and accretion (55,167) (58,449)
Provision for deferred income taxes (3,487) 9,430
Provision for loan losses -- 15,000
ESOP compensation 9,000 53,650
RRP compensation 68,164 22,736
FHLB stock dividends (39,400) (35,500)
Net change in --
Accrued interest receivable 152,917 133,171
Other assets (41,415) (44,800)
Income taxes refundable (184,542) (3,573)
Accrued interest payable 14,133 21,095
Other liabilities 13,750 (88,839)
Accrued SAIF special assessment 338,631 --
------------ -------------
Net cash provided by
operating activities 632,358 594,791
------------ -------------
INVESTING ACTIVITIES:
Net increase in loans (1,221,139) (4,953,732)
Purchases of investment securities (13,280,499) (8,573,117)
Maturities of investment securities 15,920,030 7,956,442
Sales and calls of investment securities 350,000 --
Purchases of mortgage-backed securities (5,837,034) (1,895,510)
Principal collected on mortgage-backed
securities 4,425,316 2,774,565
Purchases of office properties and
equipment (11,469) (20,860)
------------ -------------
Net cash provided by (used for)
investing activities 345,205 (4,712,212)
------------ -------------
FINANCING ACTIVITIES:
Net decrease in savings accounts (389,142) (4,225,036)
Net decrease in certificates of deposit (1,408,359) (2,815,520)
Decrease in prepaid stock conversion costs -- 278,054
Net proceeds from sale of stock -- 11,217,907
Purchase of RRP stock -- (721,839)
Dividends paid (1,647,763) (358,371)
Purchase of common stock (1,187,046) --
------------ -------------
Net cash provided by (used for)
financing activities (4,632,310) 3,375,195
------------ -------------
DECREASE IN CASH AND CASH EQUIVALENTS (3,654,747) (742,226)
CASH AND CASH EQUIVALENTS, beginning of period 6,542,257 7,394,270
------------ -------------
CASH AND CASH EQUIVALENTS, end of period $2,887,510 $ 6,652,044
------------ -------------
------------ -------------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Income taxes paid $309,000 $ 292,000
------------ -------------
------------ -------------
Interest paid $2,017,252 $ 1,946,669
------------ -------------
------------ -------------
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
ASSETS. Total assets decreased by $3.9 million, or 5.3%, from $73.4
million at December 31, 1995 to $69.5 million at September 30, 1996. The
decrease consisted primarily of decreases in cash and cash equivalents and
investment securities of $3.7 million and $2.9 million, respectively, offset
by increases in loans receivable, net, and mortgage-backed securities held to
maturity of $1.2 million and $1.5 million, respectively.
CASH AND CASH EQUIVALENTS. The $3.7 million decrease in cash and
cash equivalents, or 56.9%, is primarily attributable to cash utilized during
the period of approximately $1.6 million to pay dividends, and $1.2 million
to purchase treasury stock. The remaining decrease in cash resulted from
purchases of mortgage-backed securities. The $1.6 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
$2.9 million, or 13.5%, from $21.4 million at December 31, 1995, to $18.5
million at September 30, 1996. The decline was attributable to lower levels
of purchases during the period in order to use cash generated from scheduled
maturities for other financing activities.
LOANS RECEIVABLE. Loans receivable increased $1.2 million, or 7.1%,
from $16.9 million at December 31, 1995, to $18.1 million at September 30,
1996. Mortgage loan demand increased during the third quarter of 1996,
primarily in single family dwelling loans made at variable interest rates.
MORTGAGE-BACKED SECURITIES. The Company continues to invest heavily
in mortgage-backed securities. The portfolio increased $1.5 million, or
5.4%, from $27.6 million at December 31, 1995, to $29.1 million at September
30, 1996. The increase reflects a normal replenishment of the portfolio
during the period.
DEPOSITS. Deposits decreased by $1.8 million, or 3.3%, from $53.3
million at December 31, 1995, to $51.5 million at September 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 $1.1 million,
or 5.9%, from $18.5 million at December 31, 1995, to $17.4 million at
September 30, 1996. The decrease was largely due to the purchase of treasury
stock during the period for $1.2 million.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1995
NET INCOME. Net income decreased $167,877, or 98.0%, from $171,364
for the 1995 quarter to $3,487 for the 1996 quarter. The primary reason for
the decline was a $338,631 pretax charge in the third quarter of 1996,
reflecting the consequences of the one-time assessment by the FDIC to restore
the SAIF insurance fund to the statutorily prescribed level of 1.25% of
insured deposits. If not for this one-time assessment, net income for the
1996 quarter would have been $226,983, or a 32.5% increase, over the 1995
quarter. See note (10) to the consolidated financial statements.
-11-
NET INTEREST INCOME. For the 1996 three month period, net interest
income increased $60,518, or 12.4%, from $486,908 for the 1995 period to
$547,426 for 1996. The increase resulted from an increase in interest income
of $15,602 and a decrease in interest expense of $44,916.
INTEREST INCOME. The $15,602, or 1.3%, increase in interest income
for the third quarter resulted from increases in interest income on mortgage
loans and investment securities of $41,393 and $34,589, which was partially
offset by decreases in interest income on mortgage-backed and related
securities and other interest-earning assets of $11,132 and $47,043,
respectively. The increase in mortgage loan interest is largely due to
upward rate adjustments on the Bank's variable rate portfolio during 1996,
and to a lesser extent, from increased volume. The increase in interest on
investment securities is due to a higher yielding portfolio in 1996 as
compared to 1995, offset by a modest decline in volume. Mortgage-backed and
related securities interest declined due to a temporary 1996 third quarter
decrease in the average volume of the portfolio as compared to the 1995
comparable quarter. Interest from other-interest earning assets declined due
to the significant decline during the 1996 quarter in the average balances of
other interest-earning assets.
INTEREST EXPENSES. The $44,916, or 6.5%, decrease in interest
expense for the three months ended September 30, 1996 as compared to 1995, is
reflective of the decline during 1996 in the average balances of
interest-bearing liabilities as compared to the 1995 quarter. Due to ample
levels of liquidity, management has found it unnecessary in 1996 to solicit
new funding sources in the form of deposits.
NON-INTEREST INCOME. For the three months ended September 30, 1996,
as compared to 1995, non-interest income increased $1,764, to $3,036. The
Bank does not generate significant levels of non-interest income.
NON-INTEREST EXPENSE. For the first three months of 1996,
non-interest expense increased $319,738, or 139.5%. Without the $338,631
charge for the special one-time SAIF assessment as described above,
non-interest expense would have decreased by $18,893, or 8.2%. Of the
$319,738 total increase, $354,383 was due to increases in the SAIF deposit
insurance premiums, which was partially offset by reductions in compensation
and benefits expense of $20,658, or 18.5%, and professional services of
$16,263, or 50.6%.
The decrease in compensation and benefits included a reduction in
ESOP compensation expense of $19,919 due to the Company electing to utilize
dividends on unallocated ESOP shares to pay the quarterly debt service
requirements during the period. Professional services declined due to the
timing of expenditures associated with the Company operating as a public
company.
PROVISION FOR INCOME TAXES. The provision for income taxes declined
for the three months ending September 30, 1996 as compared to 1995 due to
lower pretax income.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1995
NET INCOME. Net income decreased $214,163, or 38.5%, from $556,509
for the 1995 nine month period to $342,346 for the first three quarters of
1996. If not for the consequences of the one-time SAIF special assessment as
described above, the 1996 nine month period net income would have been
$565,842, or a 1.7% increase, over 1995.
-12-
NET INTEREST INCOME. For the 1996 nine month period, net interest
income decreased $42,906, or 2.7%, to $1,530,368 for the 1996 period from
$1,573,274 for 1995. The decrease resulted from an increase in interest
income of $20,715, which was more than offset by the $63,621 increase in
interest expense.
INTEREST INCOME. The $20,715, or 0.6%, increase in interest income
for the nine months ended September 30, 1996 as compared to 1995, resulted
primarily from increases in interest income on mortgage loans of $189,509,
offset by decreases in interest income on investment securities,
mortgage-backed and related securities and other interest-earning assets of
$16,302, $81,449 and $68,610, respectively. The increase in mortgage loan
interest reflects the upward rate adjustments on the Bank's variable rate
loan portfolio during 1996, most of these loans being originated during 1995.
The decrease in interest on investment securities is due to lower volumes
during 1996 as compared to 1995, offset by a modest increase in yields.
Mortgage-backed and related securities interest declined due to lower 1996
average volumes of the portfolio as compared to the 1995. Interest from
other-interest earning assets declined due to the significant decline during
the nine months ended September 30, 1996 in the average balances of other
interest-earning assets as compared to the 1995 comparable period.
INTEREST EXPENSE. The $63,621, or 3.2%, increase in interest
expense for the nine months ended September 30, 1996 as compared to 1995,
reflects the increase in market rates of interest in 1996 as compared to
1995, offset in 1996 by a decline in the average balances of interest-bearing
liabilities.
NON-INTEREST INCOME. For the nine months ended September 30, 1996
as compared to 1995, non-interest income increased $18,005, from $5,756 to
$23,761. The largest factor contributing to the increase was the $14,181 in
gains on foreclosed real estate during 1996, such gains representing
recoveries of losses on sales of foreclosed real estate in prior years.
NON-INTEREST EXPENSE. For the nine months ended September 30, 1996,
non-interest expense increased $332,269, or 45.6%. Without the $338,631
charge for the one-time SAIF special assessment as described above,
non-interest expense would have decreased by $6,362, or 0.87%. Of the
$332,269 total increase, $322,544 was due to increases in the SAIF deposit
insurance premiums, while taxes other than income taxes and other
non-interest expenses increased by $10,277 and $20,466, respectively.
Compensation and benefits expense declined by $25,060 for the nine months
ended September 30, 1996 as compared to 1995.
The decrease in compensation and benefits included a reduction in
ESOP compensation expense of $51,292 due to the Company electing to utilize
dividends on unallocated ESOP shares to pay the first three quarterly debt
service payments during the period, which was partially offset by an increase
in RRP compensation expense of $45,428. The remaining portion of the
decrease resulted from the Company capitalizing more salaries and wages
during 1996 as compared to 1995, as loan origination costs. Taxes other than
income taxes increased due to a higher taxable base for purposes of
calculating the Kentucky building and loan tax.
PROVISION FOR INCOME TAXES. The provision for income taxes declined
for the nine months ended September 30, 1996 as compared to 1995 due to lower
pretax income.
-13-
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
September 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
September 30, 1996, the total approved loan commitments outstanding amounted
to $602,640. 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 September 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 September 30, 1996, the Bank had a
liquidity ratio of 9.51%, which exceeded the required minimum liquid asset
ratio of 5.0%.
At September 30, 1996, the Bank had regulatory capital which was
well in excess of applicable limits. At September 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 September 30, 1996, the Bank's tangible
capital was $16.6 million or 24.2% of adjusted total assets, core capital was
$16.6 million or 24.2% of adjusted total assets and risk-based capital was
$16.7 million or 83.3% of adjusted risk-weighted assets, exceeding the
requirements by $15.6 million, $14.5 million and $15.1 million, respectively.
-14-
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 nine
months ended September 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 nine months ended
September 30, 1996 and 1995 was computed using the weighted average
(1,124,875 and 1,196,423, 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 12,628 and 7,746 shares released to the ESOP at September 30, 1996
and December 31, 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 nine months ended September 30, 1996 and the year ended
December 31, 1995, respectively, the Company purchased 83,098 and 47,600
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, the Company reports compensation expense
-9-
equal to the average market price of the shares during the period. ESOP
compensation expense recorded during the three months and nine months ended
September 30, 1996 and 1995 was $3,000 and $22,920, and $9,000 and $60,293,
respectively. The Company used $66,234 in dividends on unallocated ESOP
shares to pay the quarterly debt service through September 30, 1996.
(8) RECOGNITION AND RETENTION PLAN AND TRUST
At the Company's 1995 Annual Meeting of Stockholders, 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 September 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 September 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 September 30, 1996, the deferred cost of unearned RRP shares
totaled $608,203 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 $22,721 and $68,164 for the three months and
nine months ended September 30, 1996, respectively, and $22,736 during the
three months ended September 30, 1995.
(9) STOCK OPTION PLAN
At the Company's 1995 Annual Meeting of Stockholders, the 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 September 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
nine months ended September 30, 1996. No options have been exercised as of
September 30, 1996.
(10) SAIF SPECIAL ASSESSMENT
On September 30, 1996, Bank Insurance Fund ("BIF")-SAIF reform was
enacted as part of the 1997 omnibus appropriations bill. As part of this
legislation, thrifts, including the Bank, will pay a special one-time
assessment to restore the SAIF insurance fund to the statutorily prescribed
level of 1.25% of insured deposits. The assessment rate will be 65.7 basis
points on SAIF-insured deposits as of March 31, 1995. Payments for the
one-time charge are due November 27, 1996. In accordance with generally
accepted accounting principles, the Bank has accrued $338,631 at September
30, 1996, to record this assessment.
Future quarterly SAIF assessments will be reduced beginning January
1, 1997, to $.064 for every $100 of insured deposits, from the present level
of $.23 per $100 of insured deposits. Based upon the $51.5 million of
assessable deposits at September 30, 1996, the Bank would expect to pay
$21,372 less in insurance premiums per quarter during 1997.
-10-
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
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
NO. DESCRIPTION PAGE
27 Financial Data Schedule E-1
b) No Form 8-K reports were filed during the quarter.
-15-
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: NOVEMBER 7, 1996 By: /S/ REBECCA R. JACKSON
- ---------------------- ----------------------------------
Rebecca R. Jackson, President and
Chief Executive Officer
Date: NOVEMBER 7, 1996 By: /S/ PAMELA HOWARD
- ---------------------- -----------------------------------
Pamela Howard, Assistant Secretary/
Treasurer (chief accounting officer)
-16-