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, 1997
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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 8, 1997, there were issued and outstanding 1,075,754 shares
of the Registrant's Common Stock.
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, 1997
(unaudited) and December 31, 1996). . . . . . . . . . . 3
Consolidated Statements of Income (for the three
months ended June 30, 1997 and 1996 (unaudited)). . . . 4
Consolidated Statements of Income (for the six
months ended June 30, 1997 and 1996 (unaudited)). . . . 5
Consolidated Statements of Changes in
Stockholders' Equity (for the six months
ended June 30, 1997 (unaudited) and the year
ended December 31, 1996). . . . . . . . . . . . . . . . 6
Consolidated Statements of Cash Flows (for the six
months ended June 30, 1997 and 1996 (unaudited)). . . . 7
Notes to Consolidated Financial Statements. . . . . . . 8-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 11-16
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . 17
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders . . 17
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30,
1997 DECEMBER 31,
ASSETS (UNAUDITED) 1996
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CASH AND CASH EQUIVALENTS.......................................................... $ 2,361,532 $ 1,348,415
INVESTMENT SECURITIES HELD TO MATURITY............................................. 14,355,165 17,523,931
LOANS RECEIVABLE, net.............................................................. 21,005,191 19,075,792
MORTGAGE-BACKED SECURITIES HELD TO MATURITY........................................ 25,202,763 27,663,022
ACCRUED INTEREST RECEIVABLE........................................................ 371,848 430,055
FORECLOSED REAL ESTATE............................................................. 43,963 --
OFFICE PROPERTIES AND EQUIPMENT.................................................... 348,813 358,497
INCOME TAXES REFUNDABLE............................................................ 105,764 15,323
OTHER ASSETS....................................................................... 33,290 23,902
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$ 63,828,329 $ 66,438,937
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LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS........................................................................... $ 46,317,816 $ 49,194,746
DEFERRED INCOME TAXES PAYABLE...................................................... 165,288 111,808
ACCRUED INTEREST PAYABLE........................................................... 31,676 32,864
OTHER LIABILITIES.................................................................. 51,372 70,866
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Total liabilities................................................................ 46,566,152 49,410,284
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STOCKHOLDERS' EQUITY:
Common stock..................................................................... 10,758 10,758
Employee benefit plans........................................................... (846,209) (918,319)
Additional paid-in capital....................................................... 7,950,404 7,930,355
Retained earnings-substantially restricted....................................... 10,147,224 10,005,859
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Total stockholders' equity..................................................... 17,262,177 17,028,653
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$ 63,828,329 $ 66,438,937
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GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
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JUNE 30, JUNE 30,
1997 1996
(UNAUDITED) (UNAUDITED)
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INTEREST INCOME:
Loans receivable-
Mortgage loans...................................................................... $ 374,582 $ 319,689
Other loans......................................................................... 10,294 11,405
Investment securities............................................................... 258,181 348,021
Mortgage-backed and related securities.............................................. 448,535 489,027
Other interest-earning assets....................................................... 28,668 12,976
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Total interest income.............................................................. 1,120,260 1,181,118
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INTEREST EXPENSE:
Passbook savings...................................................................... 24,399 29,110
Certificates of deposit............................................................... 546,846 658,502
FHLB advances......................................................................... 8,899 --
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Total interest expense............................................................. 580,144 687,612
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Net interest income................................................................ 540,116 493,506
PROVISION FOR LOAN LOSSES............................................................... -- --
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Net interest income after provision for loan losses................................ 540,116 493,506
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NON-INTEREST INCOME:
Gains on foreclosed real estate....................................................... -- 10,094
Gain on investments................................................................... -- 2,000
Other................................................................................. 2,481 2,454
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Total non-interest income.......................................................... 2,481 14,548
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NON-INTEREST EXPENSE:
Compensation and benefits............................................................. 110,789 94,930
Occupancy and equipment............................................................... 8,897 8,659
SAIF deposit insurance premium........................................................ 6,280 30,357
Professional services................................................................. 88,001 57,442
Other taxes........................................................................... 20,531 18,087
Other................................................................................. 56,496 61,256
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Total non-interest expense......................................................... 290,994 270,731
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INCOME BEFORE PROVISION FOR INCOME TAXES................................................ 251,603 237,323
PROVISION FOR INCOME TAXES.............................................................. 96,370 68,663
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NET INCOME.............................................................................. $ 155,233 $ 168,660
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NET INCOME PER SHARE.................................................................... $ .14 $ .15
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GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED
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JUNE 30, JUNE 30,
1997 1996
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(UNAUDITED) (UNAUDITED)
INTEREST INCOME:
Loans receivable-Mortgage loans....................................................... $ 729,684 $ 639,021
Other loans........................................................................... 19,311 23,164
Investment securities................................................................. 509,217 647,974
Mortgage-backed and related securities................................................ 910,759 955,330
Other interest-earning assets......................................................... 65,936 99,742
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Total interest income............................................................... 2,234,907 2,365,231
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INTEREST EXPENSE:
Passbook savings...................................................................... 49,142 59,908
Certificates of deposit............................................................... 1,106,007 1,322,381
FHLB advances......................................................................... 14,628 --
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Total interest expense.............................................................. 1,169,777 1,382,289
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Net interest income................................................................. 1,065,130 982,942
PROVISION FOR LOAN LOSSES............................................................... -- --
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Net interest income after provision for loan losses................................. 1,065,130 982,942
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NON-INTEREST INCOME:
Gains on foreclosed real estate....................................................... -- 14,181
Gain on investments................................................................... -- 2,000
Other................................................................................. 6,850 4,544
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Total non-interest income........................................................... 6,850 20,725
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NON-INTEREST EXPENSE:
Compensation and benefits............................................................. 219,424 190,716
Occupancy and equipment............................................................... 17,643 18,932
SAIF deposit insurance premium........................................................ 12,896 60,812
Professional services................................................................. 131,615 93,105
Other taxes........................................................................... 34,841 31,707
Other................................................................................. 114,030 117,218
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Total non-interest expense.......................................................... 530,449 512,490
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INCOME BEFORE PROVISION FOR INCOME TAXES.............................................. 541,531 491,177
PROVISION FOR INCOME TAXES.............................................................. 193,039 152,318
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NET INCOME.............................................................................. $ 348,492 $ 338,859
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NET INCOME PER SHARE.................................................................... $ .33 $ .30
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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
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BALANCES, December 31, 1995................ $ 11,970 $ (1,098,907) $9,502,671 $ 10,062,529 $ 18,478,263
NET INCOME, year ended December 31, 1996... -- -- -- 529,582 529,582
DIVIDENDS DECLARED, $.40 per share......... -- -- (432,777) -- (432,777)
ESOP SHARES RELEASED, 6,461 shares......... -- 64,610 (108) -- 64,502
RRP STOCK AMORTIZED, 7,998 shares.......... -- 115,978 -- -- 115,978
PURCHASE OF 121,216 TREASURY SHARES........ (1,212) -- (1,139,431) (586,252) (1,726,895)
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BALANCES, December 31, 1996................ 10,758 (918,319) 7,930,355 10,005,859 17,028,653
NET INCOME, six months ended June 30, 1997
(unaudited).............................. -- -- -- 348,492 348,492
DIVIDENDS DECLARED, $.20 per share
(unaudited).............................. -- -- 5,000 (205,151) (200,151)
ESOP SHARES RELEASED, 2,940 shares
(unaudited).............................. -- 29,400 15,049 (1,976) 42,473
RRP STOCK AMORTIZED, 2,946 shares
(unaudited).............................. -- 42,710 -- -- 42,710
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BALANCES, June 30, 1997 (unaudited)........ $ 10,758 $ (846,209) $7,950,404 $ 10,147,224 $ 17,262,177
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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,
1997 1996
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OPERATING ACTIVITIES:............................................................... (Unaudited) (Unaudited)
Net income........................................................................ $ 348,492 $ 338,859
Adjustments to reconcile net income to net cash provided by operating
activities-
Gain on investments............................................................. -- (2,000)
Provision for depreciation...................................................... 10,174 10,285
Amortization and accretion...................................................... (34,091) (45,230)
Provision for deferred income taxes............................................. 53,480 24,873
ESOP compensation............................................................... 42,473 6,000
RRP compensation................................................................ 42,710 45,443
FHLB stock dividends............................................................ (28,300) (26,000)
Net change in--
Accrued interest receivable................................................... 58,207 32,949
Other assets.................................................................. (9,388) (25,292)
Income taxes refundable....................................................... (90,441) (111,555)
Accrued interest payable...................................................... (1,188) 4,419
Other liabilities............................................................. (19,494) (28,316)
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Net cash provided by operating activities................................... 372,634 224,435
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INVESTING ACTIVITIES:
Net increase in loans............................................................. (1,973,362) (302,183)
Purchases of investment securities................................................ -- (13,030,499)
Maturities of investment securities............................................... 3,200,000 12,924,030
Sales and calls of investment securities.......................................... -- 350,000
Purchases of mortgage-backed securities........................................... -- (4,933,375)
Principal collected on mortgage-backed securities................................. 2,491,416 3,028,748
Purchases of office properties and equipment...................................... (490) (11,469)
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Net cash provided by (used for) investing activities.......................... 3,717,564 (1,974,748)
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FINANCING ACTIVITIES:
Net decrease in savings accounts.................................................. (133,251) (203,005)
Net increase (decrease) in certificates of deposit................................ (2,743,679) 291,369
Advances from the FHLB............................................................ 3,250,000 --
Repayment of FHLB advances........................................................ (3,250,000) --
Dividends paid.................................................................... (200,151) (1,535,556)
Purchase of common stock.......................................................... -- (937,296)
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Net cash used for financing activities........................................ (3,077,081) (2,384,488)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... 1,013,117 (4,134,801)
CASH AND CASH EQUIVALENTS, beginning of period...................................... 1,348,415 6,542,257
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CASH AND CASH EQUIVALENTS, end of period............................................ $2,361,532 $2,407,456
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid................................................................. $ 230,000 $ 239,000
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Interest paid on deposit accounts................................................. $1,170,965 $1,377,870
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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, 1996. The results for the six
months ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1997.
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 and six months ended June 30, 1997
and 1996 was computed using the weighted average (1,041,240 and 1,140,618,
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, and are
used for debt service. There were 17,147 and 11,014 shares released to the
ESOP at June 30, 1997 and June 30, 1996, respectively. Dividends on
allocated shares used for debt service are charged to retained earnings and
paid by releasing additional shares to the ESOP with the same corresponding
value.
(5) PURCHASE OF COMMON STOCK
Through June 30, 1997, the Company had purchased 168,816 shares of its
outstanding common stock on the open market at an aggregate cost of
$2,416,160. 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.
(6) 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 equal to the average
market price of the shares during the period. ESOP compensation expense
recorded during the three and six months ended June 30, 1997 and 1996 was
$22,360 and $42,473, and $3,000 and $6,000, respectively.
-9-
(7) RECOGNITION AND RETENTION PLAN AND TRUST
The Company has established a Recognition and Retention Plan and Trust
("RRP"). As of June 30, 1997, 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,
1997, 32,228 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, 1997, the deferred cost of unearned RRP shares totaled
$517,679 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 $21,598 and $42,710 for the three and six
months ended June 30, 1997, and $22,707 and $45,443 for the three and six
months ended June 30, 1996.
(8) STOCK OPTION PLAN
The Company established a Stock Option Plan (the "Plan") in 1995. A
total of 124,457 shares may be issued pursuant to the Plan. Through June 30,
1997 an aggregate of 74,667 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, 1997 and 1996. No options have been exercised as
of June 30, 1997.
No compensation expense has been recognized in these interim financial
statements for the value of stock options earned as permitted by Statement of
Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation.
(9) SAIF INSURANCE ASSESSMENT
Beginning January 1, 1997, the Bank's SAIF assessments were reduced to
$.064 for every $100 of insured deposits, from the prior level of $.23 per
$100 of insured deposits. Such reduction reflects the consequences of the
1996 legislation which eliminated the deposit insurance premium differential
between SAIF-insured institutions and Bank Insurance Fund-insured
institutions.
(10) PENDING ACQUISITION
On June 17, 1997, the Company entered into an Agreement and Plan of
Merger ("Agreement") with Peoples Bancorp, Inc. ("Peoples"), an Ohio
multi-bank holding company headquartered in Marietta, Ohio, whereby Peoples
agreed to acquire the Company and the Bank. The Agreement provides for the
acquisition of 100% of the Company's outstanding common stock. The purchase
consideration consists of $18.75 per share of the Company's common stock,
which may be paid in cash, Peoples common stock or both, at the election of
each stockholder, as more fully described in the Agreement. The transaction
is subject to the approval of the Company's stockholders and the receipt of
all required regulatory approvals, as well as other customary conditions.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Changes in Financial Condition
General. At June 30, 1997, the Company's total assets amounted to $63.8
million as compared to $66.4 million at December 31, 1996, a decrease of $2.6
million, or 3.9%. The $2.6 million decrease consisted primarily of decreases
in investment securities held to maturity and mortgage-backed securities held
to maturity of $3.1 million and $2.5 million, respectively, partially offset
by increases in cash and cash equivalents and loans receivable, net, of $1.1
million and $1.9 million, respectively.
Cash and Cash Equivalents. These balances consist of cash on hand and
short-term (liquid) interest-bearing deposits in other financial
institutions. The $1.1 million increase, from $1.3 million at December 31,
1996 to $2.4 million at June 30, 1997, was primarily due to the retention of
proceeds from maturing investment securities and principal repayments on
mortgage-backed securities during the period, less cash requirements to fund
loan demand and maturing savings deposits.
Investment Securities. Investment securities consist primarily of U.S.
Treasury and U.S. Governmental agency securities. The $3.1 million decrease,
from $17.5 million at December 31, 1996 to $14.4 million at June 30, 1997,
resulted from maturing securities with no corresponding reinvestments.
Maturity proceeds were used primarily to fund loan commitments and maturing
savings deposits.
At June 30, 1997, the market value of the Company's investment securities
portfolio was less than the carrying value by approximately $150,000, as
compared to an unrealized loss of approximately $100,000 at December 31,
1996. These changes in market value are not deemed to be significant and the
Company intends, and has the ability, to hold its investment securities to
maturity.
Mortgage-Backed Securities. Mortgage-backed securities have always been a
primary component of the Company's interest-earning assets, due to the
relatively low demand for competitive-rate, single family mortgage loans in
the Company's lending area. The $2.5 million decrease, from $27.7 million at
December 31, 1996 to $25.2 million at June 30, 1997 consisted entirely of
principal repayments. Such proceeds were used primarily to fund loan
commitments and maturing savings deposits.
At June 30, 1997, the market value of the Company's mortgage-backed
securities portfolio exceeded the carrying value by approximately $394,000.
This compared to an unrealized gain of approximately $40,000 at December 31,
1996. The Company intends, and has the ability, to hold its mortgage-backed
securities to maturity.
Loans Receivable, net. Loans receivable, net, increased from $19.1 million
at December 31, 1996 to $21.0 million at June 30, 1997, an increase of 9.9%.
Such increase resulted from a continuing emphasis on a competitive loan
pricing policy as part of the Company's strategy to increase its mortgage
loan market share.
Loan Concentrations. The Company does not have a concentration of its loan
portfolio in any one industry or to any one borrower. Real estate lending
(both mortgage and construction loans) continues to be the largest component
of the loan portfolio, representing $20.4 million, or 97.1%,
-11-
of total gross loans, while consumer loans, consisting of loans secured by
deposit accounts, totaled $.6 million, or 2.9%, of total gross loans
outstanding at June 30, 1997.
The Company's lending is concentrated to borrowers who reside in and/or which
are collateralized by real estate located in Boyd, Carter and Greenup County,
Kentucky. Employment in these areas is highly concentrated in the petroleum
and steel industries. Therefore, many debtors' ability to honor their
contracts is dependent upon these economic sectors.
Allowance for Loan Losses. The allowance for loan losses as a percentage of
total loans decreased from .47% at December 31, 1996 to .39% at June 30,
1997. The total dollar amount of the allowance remained unchanged totaling
$81,000 at both periods.
There were no loans charged off or recoveries during the three and six months
ended June 30, 1997 and 1996.
Total non-performing loans (non-accruing loans and accruing loans greater
than 90 days delinquent) totaled $529,000 and $209,000, respectively, or
2.52% and 1.09% of total loans outstanding, respectively, at June 30, 1997
and December 31, 1996. Total non-performing assets (non-performing loans and
foreclosed real estate) totaled .90% and .31% of total assets at June 30,
1997 and December 31, 1996, respectively. Of the Company's non-performing
loans at June 30, 1997, $487,000 consist of seven single-family residential
loans, while $42,000 consists of one commercial real estate loan.
The Company had no loans specifically classified as impaired at June 30, 1997
or 1996, and had no troubled debt restructurings during the periods then
ended.
Office Properties and Equipment. The Company's net investment in facilities
and equipment totaled approximately $349,000 at June 30, 1997 as compared to
$358,000 at December 31, 1996.
Liabilities. The Company's liabilities consist primarily of customer
deposits. Liabilities decreased $2.8 million, or 5.8%, from $49.4 million at
December 31, 1996 to $46.6 million at June 30, 1997. Deposits decreased $2.9
million, or 5.9%, from $49.2 million at December 31, 1996 to $46.3 million at
June 30, 1997. Such decreases can be attributed to relatively unchanged
market rates of interest paid on deposits during the period when compared to
higher yielding investment alternatives available to the Company's customers.
Occasionally, borrowings from the FHLB of Cincinnati are utilized to satisfy
short-term liquidity needs. The Company borrowed and repaid $3.2 million
from the FHLB during the six months ended June 30, 1997. The Company had no
comparable borrowings during the six months ended June 30, 1996.
Stockholders' Equity. The Company's stockholders' equity totaled $17.3
million at June 30, 1997, as compared to $17.0 million at December 31, 1996.
The $.3 million increase for the period ended June 30, 1997 was primarily
attributable to net income for the period of $348,000 and the release of
common stock to the employee benefit plans, offset by the payment of
dividends.
Comparison of Operating Results for the Three Months Ended
June 30, 1997 and June 30, 1996
Net Income. Net income decreased $13,427, or 8.0%, from $168,660 for the
three months ended June 30, 1996 to $155,233 for the three months ended June
30, 1997. Net income per share was $.14 and $.15 for the 1997 and 1996
quarters, respectively. The decrease resulted from decreases
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in interest income and non-interest income of $60,858 and $12,067, or 5.2%
and 82.9%, respectively, and increases in non-interest expenses and the
provision for income taxes of $20,263 and $27,707, or 7.5% and 40.4%,
respectively, offset by a reduction in interest expense of $107,468, or 15.6%.
Interest Income. The $60,858 decrease in interest income, from $1,181,118
for the three months ended June 30, 1996 to $1,120,260 for the three months
ended June 30, 1997 was primarily due to lower volumes of interest-earning
assets, except for loans receivable, partially offset by higher yielding
investment securities and mortgage-backed securities.
Interest Expense. The $107,468 decrease in interest expense, from $687,612
for the three months ended June 30, 1996 to $580,144 for the three months
ended June 30, 1997 resulted primarily from a lower volume of
interest-bearing liabilities, and to a lesser extent, from lower rates paid
on deposits.
Provision for Loan Losses. No provision for loan losses was necessary during
the 1997 or 1996 quarter ended June 30, reflecting management's determination
that the allowance for loan losses was adequate at both reporting periods.
In making this determination, management makes a review of non-performing
loans, the overall quality of the loan portfolio, levels of past due loans,
and prior loan loss experience.
Non-Interest Income. The $12,067 decrease in non-interest income, from
$14,548 for the three months ended June 30, 1996 to $2,481 for the three
months ended June 30, 1997, resulted primarily from $10,094 in partial
recoveries during the 1996 period of prior losses on foreclosed real estate,
with no comparable recoveries during the 1997 period.
Non-Interest Expense. Non-interest expense increased $20,263, from $270,731
for the three months ended June 30, 1996 to $290,994 for the three months
ended June 30, 1997. This resulted primarily from increases in compensation
and benefits of $15,859 and professional services expenses of $30,559,
partially offset by a reduction in SAIF deposit insurance premiums and other
expenses of $24,077 and $4,760, respectively. The increase in compensation
and benefits was largely due to a $16,360 increase in ESOP compensation
expense for the 1997 quarter as compared to the 1996 quarter. During the
1996 quarter, the Company had more dividends available which had been paid on
unallocated ESOP shares to meet debt service requirements on the ESOP loan,
thus reducing the Company's required contributions in the 1996 quarter as
compared to the 1997 period. The increase in professional services expenses
was primarily the result of additional expenses incurred during the 1997
quarter in connection with the pending acquisition of the Company by Peoples
Bancorp, Inc. See Note 10 to the Consolidated Financial Statements. The
reduction in the SAIF deposit insurance premiums reflects the consequences of
the 1996 legislation which lowered the Bank's deposit insurance assessment
from $.23 per hundred of insured deposits to $.064 per hundred. The
reduction in other expenses primarily reflects a lower Kentucky Corporate
License Fee in the 1997 quarter as compared to the 1996 quarter, such fee
being assessed on the stockholders' equity of Gateway, on an unconsolidated
basis.
Provision for Income Taxes. The provision for income taxes increased $27,707
for the quarter ended June 30, 1997 as compared to the quarter ended June 30,
1996. The increase is due to the reduction in the 1997 quarter as compared
to the 1996 quarter in Kentucky net operating loss carrybacks. Gateway is
subject to Kentucky income taxes on an unconsolidated basis, whereas the Bank
is not.
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Comparison of Operating Results for the Six Months Ended
June 30, 1997 and June 30, 1996
Net Income. Net income increased $9,633, or 2.8%, from $338,859 for the six
months ended June 30, 1996 to $348,492 for the six months ended June 30,
1997. Net income per share was $.33 and $.30 for the 1997 and 1996 six month
periods, respectively. The increase resulted from a decrease in interest
expense of $212,512, or 15.4%, which was offset by decreases in interest
income of $130,324, or 5.5%, non-interest income of $13,875, or 66.9%, and
increases in non-interest expenses of $17,959, or 3.5%, and the provision for
income taxes of $40,721, or 26.7%.
Interest Income. The $130,324 decrease in interest income, from $2,365,231
for the six months ended June 30, 1996 to $2,234,907 for the comparable 1997
period was primarily due to lower volumes of interest earning assets, except
for loans receivable, partially offset by higher yielding investment
securities and mortgage-backed securities. The average yield on
interest-earning assets increased from 6.63% for the six months ended June
30, 1996 to 6.94% for the six months ended June 30, 1997.
Interest Expense. The $212,512 decrease in interest expense, from $1,382,289
for the six months ended June 30, 1996 to $1,169,777 for the comparable 1997
period resulted primarily from a lower volume of interest-bearing
liabilities, and to a lesser extent, from lower rates paid on deposits. The
average rate paid on interest-bearing liabilities fell to 4.89% from 5.14%
for the six months ended June 30, 1997 as compared to the six months ended
June 30, 1996.
The difference in the yield on interest-earning assets and the rate paid on
interest-bearing liabilities resulted in an interest rate spread of 2.05% for
the six months ended June 30, 1997 as compared to 1.49% for the six months
ended June 30, 1996, primarily due to higher yielding mortgage-backed
securities and investment securities, along with the decline in rates paid on
interest-bearing liabilities, offset by a slightly lower yielding loan
portfolio.
Provision for Loan Losses. The Company recorded no provision for loan losses
for the six months ended June 30, 1997 and 1996. Management's decision to
make no provision for loan losses reflects their assessment that the current
loan loss allowance is adequate. Management considers non-performing loans,
past due loans, the overall quality of the loan portfolio, and prior loan
loss experience in making this determination.
Non-Interest Income. The $13,875 decrease in non-interest income, from
$20,725 for the six months ended June 30, 1996 to $6,850 for the six months
ended June 30, 1997, resulted primarily from $14,181 in partial recoveries
during the 1996 period of prior losses on foreclosed real estate, with no
comparable recoveries during the 1997 period.
Non-Interest Expense. Non-interest expense increased $17,959, from $512,490
for the six months ended June 30, 1996 to $530,449 for the six months ended
June 30, 1997. This resulted primarily from increases in compensation and
benefits of $28,708 and professional services expenses of $38,510, partially
offset by a reduction in SAIF deposit insurance premiums of $47,916. The
increase in compensation and benefits was largely due to a $36,473 increase
in ESOP compensation expense for the 1997 period as compared to the 1996
period. During the 1996 period, the Company had more dividends available
which had been paid on unallocated ESOP shares to meet debt service
requirements on the ESOP loan, thus reducing the Company's required
contributions in the 1996 period as compared to the 1997 period. The
increase in professional services expenses was primarily the result of
additional expenses incurred during the 1997 six month period in
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connection with the pending acquisition of the Company by Peoples Bancorp,
Inc. See Note 10 to the Consolidated Financial Statements. The reduction in
the SAIF deposit insurance premiums reflects the consequences of the 1996
legislation which lowered the Bank's deposit insurance assessment from $.23
per hundred of insured deposits to $.064 per hundred.
Provision for Income Taxes. The provision for income taxes increased
$40,721, from $152,318 for the six months ended June 30, 1996 to $193,039 for
the comparable 1997 period, primarily due to increased pre-tax income. The
effective tax rates were 35.6% and 31.0% for the six months ended June 30,
1997 and 1996, respectively. The increase in the effective tax rate resulted
from the reduction in the 1997 period in available Kentucky net operating
loss carrybacks which resulted in state tax refunds during the 1996 period.
The Company is subject to Kentucky income taxes whereas the Bank is not.
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 Bank'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. At June 30, 1997, the Bank had no
outstanding advances from the Federal Home Loan Bank of Cincinnati or other
borrowings. During the six months ended June 30, 1997, the Bank borrowed,
and subsequently repaid, $3,250,000 from the FHLB to meet short-term
liquidity needs.
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, and to maintain a portfolio of
mortgage-backed and investment securities. At June 30, 1997, the total
approved loan commitments outstanding amounted to $168,500. 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, 1997, totaled
$32.2 million. Management believes that a significant portion of maturing
deposits will remain with the Bank. At June 30, 1997, the Bank had a
liquidity ratio of 21.9% which exceeded the required minimum liquid asset
ratio of 5.0% of assets.
At June 30, 1997, the Bank had regulatory capital which was well in excess of
applicable limits. At June 30, 1997, 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, 1997, the Bank's tangible capital was
$15.3 million or 24.7% of adjusted total assets, core capital was $15.3
million or 24.7% of adjusted total assets and risk-based capital was $15.4
million or 80.2% of adjusted risk-weighted assets, exceeding the requirements
by $14.4 million, $13.4 million and $13.8 million, respectively.
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Recent Accounting Pronouncements
In management's opinion, there are no recent accounting pronouncements which
have been adopted, or pending pronouncements that, if adopted, which have had
or would have a significant effect on the Company's financial position or
results of operations.
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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 15, 1997.
b) Not applicable.
c) Two 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 two directors for a three
year term expiring in 2000 - John H. Fugeman
and Harold Freedman each received votes for
945,085; not voted 128,619; withheld 2,050.
2) 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, 1997 - votes
for 944,910; against 800; abstain 1,425; not
voted 128,619.
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
--- ----------- ----
3.1 Articles of Incorporation of Gateway Bancorp, Inc.1/
3.2 Bylaws of Gateway Bancorp, Inc.1/
3.3 Articles of Correction of Gateway Bancorp, Inc. dated
April 11, 1995 2/
3.4 Articles of Amendment of Gateway Bancorp, Inc. dated
June 18, 1996 2/
27 Financial Data Schedule E-1
- --------------------------
1/ Incorporated by reference from the Registration Statement on Form
S-1 (Registration No. 33-84784) filed by the Registrant with the
Securities and Exchange Commission ("Commission") on October 4, 1994,
as amended.
2/ Incorporated by reference from the Form 10-QSB for the quarterly
period ended June 30, 1996 filed by the Registrant with the
Commission on August 13, 1996.
b) Reports on Form 8 - K
On May 1, 1997, the Company filed a report to
indicate that on April 25, 1997, Peoples Bancorp,
Inc. ("Peoples"), an Ohio multi-bank holding company
headquartered in Marietta, Ohio, and the Company
signed a letter of intent ("Letter of Intent")
providing for the acquisition by Peoples of the
Company and the Bank. The Letter of Intent and a
press release with respect to the Letter of Intent
were filed as exhibits to the report.
On June 24, 1997, the Company filed a report to
indicate that on June 17, 1997, Peoples and the
Company had entered into an Agreement and Plan of
Merger ("Agreement") whereby Peoples would acquire
100% of the Company's outstanding common stock for
$18.75 per share, to be payable in cash, Peoples
common stock, or both, at the election of each
stockholder, as more fully described in the
Agreement. The transaction is subject to the
approval of the Company's stockholders and the
receipt of all required regulatory approvals, as well
as other customary conditions. The Agreement and a
press release with respect to the Agreement were
filed as exhibits to the report.
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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 8, 1997 By: /s/ Rebecca R. Jackson
-------------- -----------------------------------
Rebecca R. Jackson, President and
Chief Executive Officer
Date: August 8, 1997 By: /s/ Pamela Howard
-------------- -----------------------------------
Pamela Howard, Assistant Secretary/
Treasurer (chief accounting officer)
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