As filed with the Securities and Exchange Commission on June 18, 2007
Registration No. 333-141520
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Gateway Community Financial Corp.
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(Exact name of registrant as specified in charter)
United States 6035 01-0569172
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(State or other jurisdiction (Primary SIC No.) (I.R.S. Employer
of incorporation or organization) Identification No.)
381 Egg Harbor Drive, Sewell, New Jersey 08080
(856) 589-6600
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(Address and telephone number of principal executive offices)
Robert C. Ahrens, President and Chief Executive Officer
381 Egg Harbor Drive, Sewell, New Jersey 08080
(856) 589-6600
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(Name, address and telephone number of agent for service)
Please send copies of all communications to:
Samuel J. Malizia, Esq.
Tiffany A. Hasselman, Esq.
MALIZIA SPIDI & FISCH, PC
901 New York Ave., N.W.
Suite 210 East
Washington, D.C. 20001
(202) 434-4660
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine^
PROSPECTUS
GATEWAY COMMUNITY FINANCIAL CORP.
(Holding Company for Gloucester County Federal Savings Bank)
Up to 3,105,000 Shares of Common Stock
(Subject to Increase to up to 3,570,750 Shares)
Gateway Community Financial Corp. is offering for sale shares of its
common stock that will represent 45% of its outstanding common stock upon
completion of this offering. The remaining 55% of the common stock outstanding
upon completion of this offering will be held by Gateway Community Financial,
MHC, the mutual holding company parent of Gateway Community Financial Corp. Upon
completion of the offering, Gateway Community Financial Corp. will have between
5,100,000 and 6,900,000 shares outstanding, including shares that will be held
by Gateway Community Financial, MHC. The total number of shares of Gateway
Community Financial Corp. common stock outstanding upon completion of the
offering is subject to an independent appraisal that must be updated before the
offering can be completed and may be increased to an adjusted maximum of
7,935,000 shares without resoliciting subscribers. The shares sold in the
offering would, in that case, total 3,570,750 shares.
The offering is expected to expire at __:__ _.m., Eastern time, on
____________, 2007. We may extend this expiration date without notice to you
until ____________, 2007, unless the Office of Thrift Supervision approves a
later date.
Sandler O'Neill & Partners, L.P. will use its best efforts to assist us
in our selling efforts, but is not required to purchase any of the common stock
that is being offered for sale. Purchasers will not pay a commission to purchase
shares of common stock in the offering. All shares being sold are being offered
at a price of $10.00 per share. The offering will not be completed if we do not
sell a minimum of 2,295,000 shares. We have applied to have our common stock
listed for trading on the Nasdaq Global Market under the symbol "GCFC."
The minimum purchase is 25 shares. Once submitted, orders are
irrevocable unless the offering is terminated or extended beyond ____________,
2007. If the offering is extended beyond ____________, 2007, subscribers will
have the right to modify or rescind their purchase orders. We will hold funds
received with orders in a deposit account that we have established at Gloucester
County Federal Savings Bank for that sole purpose. We may decide during the
offering also to hold funds received with orders in a deposit account at another
insured depository institution. In either case, we will pay interest on all
funds received at a rate equal to Gloucester County Federal Savings Bank's
regular passbook savings rate. If we do terminate the offering, we will promptly
return your funds with interest. If we extend the offering beyond ____________,
2007, you will be given an opportunity to confirm, modify or rescind your order,
and if an affirmative response is not received, we will promptly return your
funds with interest.
This investment involves a degree of risk, including the possible loss
of principal.
Please read Risk Factors beginning on page ___.
OFFERING SUMMARY
Price Per Share: $10.00
Maximum,
Minimum Midpoint Maximum as adjusted
------- -------- ------- -----------
Number of shares......................... 2,295,000 2,700,000 3,105,000 3,570,750
Gross proceeds........................... $22,950,000 $27,000,000 $31,050,000 $35,707,500
Estimated offering expenses(1)........... $768,000 $810,000 $851,000 $899,000
Estimated net proceeds................... $22,182,000 $26,190,000 $30,199,000 $34,809,000
Estimated net proceeds per share......... $9.67 $9.70 $9.73 $9.75
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(1) See Plan of Distribution and Marketing Arrangements on page___ for
a description of the fees payable to Sandler O'Neill & Partners, L.P.
in connection with this offering.
These securities are not deposits or savings accounts and are not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, the Federal Deposit Insurance Corporation nor any state securities
regulator has approved or disapproved these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Sandler O'Neill + Partners, L.P.
The date of this prospectus is _________, 2007.
TABLE OF CONTENTS
Page
----
Summary.......................................................................................
Risk Factors..................................................................................
A Warning About Forward-Looking Statements....................................................
Use of Proceeds...............................................................................
Our Policy Regarding Dividends................................................................
Market for the Stock..........................................................................
Capitalization................................................................................
Pro Forma Data................................................................................
Historical and Pro Forma Capital Compliance...................................................
Selected Financial and Other Data.............................................................
Management's Discussion and Analysis of Financial Condition and Results of Operations.........
Business of Gateway Community Financial, MHC..................................................
Business of Gateway Community Financial Corp..................................................
Business of Gloucester County Federal Savings Bank............................................
Regulation....................................................................................
Taxation......................................................................................
Management....................................................................................
The Offering..................................................................................
Restrictions on Acquisition of Gateway Community Financial Corp...............................
Description of Capital Stock..................................................................
Registrar and Transfer Agent..................................................................
Legal and Tax Opinions........................................................................
Experts.......................................................................................
Change in Independent Auditor.................................................................
Registration Requirements.....................................................................
Where You Can Find Additional Information.....................................................
Index to Consolidated Financial Statements....................................................
[Map page]
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SUMMARY
This summary contains an overview of the key aspects of the offering. To
understand this offering fully, you should read this entire document carefully,
including the consolidated financial statements and the notes to the
consolidated financial statements beginning on page F-1 of this document.
Throughout this document, the terms "we", "us" or "our" refer to Gateway
Community Financial Corp. or Gloucester County Federal Savings Bank, or both, as
the context indicates.
Gateway Community Financial Corp.
Gateway Community Financial Corp. is a federally-chartered corporation
that serves as a holding company for Gloucester County Federal Savings Bank , a
federally-chartered savings bank with roots in the community going back to 1903.
Gloucester County Federal Savings Bank currently operates five offices located
in Gloucester and Camden Counties, New Jersey. Gateway Community Financial
Corp.'s principal executive offices are located at the administrative offices of
Gloucester County Federal Savings Bank at 381 Egg Harbor Road, Sewell, New
Jersey 08080. The phone number at that address is (856) 589-6600. Gloucester
County Federal Savings Bank maintains a website at www.gcfbank.com.
Financial Condition. The following table summarizes our balance sheet
composition as of each of the last five fiscal year ends.
At December 31,
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2006 2005 2004 2003 2002
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(In thousands)
Assets..................................... $351,864 $308,011 $315,927 $293,414 $312,402
Loans receivable, net...................... 210,492 180,916 167,320 163,343 182,660
Investment securities...................... 52,797 41,315 48,451 50,361 58,222
Mortgage-backed securities................. 59,185 54,032 61,201 40,658 23,235
Cash and cash equivalents.................. 10,618 14,031 19,760 19,448 28,729
Deposits................................... 315,962 277,544 286,611 266,895 283,732
Short-term borrowings...................... 4,400 - - - -
Total equity............................... 28,903 28,546 26,934 25,332 27,062
As of March 31, 2007, our assets totaled $372.1 million and our
deposits totaled $320.0 million, a 19.1% increase and a 12.8% increase,
respectively, over assets and deposits as of December 31, 2002.
Loans receivable, net of the allowance for loan losses, totaled $211.0
million at March 31, 2007, representing a 15.5% increase over December 31, 2002.
Our loan portfolio consists primarily of one-to- four family mortgage loans,
which amounted to approximately 48% of our total loans at March 31, 2007. The
remainder of our loan portfolio consists of home equity loans and lines of
credit (approximately 27%), auto loans (approximately 9%), commercial real
estate mortgages (approximately 7%),manufactured
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housing loans (approximately 4%), commercial loans and lines of credit
(approximately 2%), savings account and other consumer loans (approximately 2%),
aircraft loans (approximately 1%) and construction loans (approximately 1%).
Results of Operations. The following table summarizes our results of
operations for the last five fiscal years.
For the Year Ended December 31,
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2006 2005 2004 2003 2002
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(In thousands)
Interest and dividend income ................ $ 16,273 $ 14,221 $ 13,913 $ 14,477 $ 17,306
Interest expense ............................ 9,377 5,871 5,204 5,899 9,007
-------- -------- -------- -------- --------
Net interest income ......................... 6,896 8,350 8,709 8,578 8,299
Provisions for (recoveries of provisions for)
loan losses .............................. (348) (917) (13) 4,342 7,550
-------- -------- -------- -------- --------
Net interest income after provisions for
(recoveries of provisions for) loan losses . 7,244 9,267 8,722 4,236 749
Noninterest income .......................... 856 883 876 793 712
Noninterest expense ......................... 7,631 7,634 7,689 7,384 6,022
-------- -------- -------- -------- --------
Income (loss) before income tax
expense (benefit) ........................ 469 2,516 1,909 (2,355) (4,561)
Income tax expense (benefit) ................ 90 893 259 (673) (1,924)
-------- -------- -------- -------- --------
Net income (loss) ........................... $ 379 $ 1,623 $ 1,650 $ (1,682) $ (2,637)
======== ======== ======== ======== ========
In 2002 and 2003, we had net losses of $2.6 million and $1.7 million,
respectively, as a result of large provisions to the allowance for loan losses
during those years in connection with the significant asset quality problems
that we experienced with regard to our commercial real estate and commercial
loan portfolios. Provisions to the allowance were $7.6 million in 2002 and $4.3
million in 2003. Please see the Asset Quality Problems and Provisions for Loan
Losses section at page __ for a discussion of the problems we experienced with
commercial lending in the past. As we worked through the problems and our asset
quality improved, we recognized recoveries from the allowance for loan losses in
each of the last three years. In 2004, we recognized a relatively small recovery
of $13,000. In 2005 and 2006, the recoveries from the allowance were larger and
had a greater effect on net income for those years: for 2005, our net income of
$1.6 million included a $917,000 (pre-tax) recovery of loan losses; for 2006,
our net income of $379,000 included a $348,000 (pre-tax) recovery of loan
losses. At this time, we do not anticipate further recoveries of loan loss
provisions out of the allowance for loan losses.
For the year ended December 31, 2006, our net interest income fell by
17.4% compared to 2005. Our net interest rate spread and margin have been
reduced as a result of the flat or inverted interest rate yield curve
environment, which has hurt our net interest rate spread and net interest margin
because the interest rates we pay on our deposits have repriced upwards faster
than the interest rates that we earn on our loans and investments. As of
December 31, 2006, we had $113.5 million in certificates of deposit that will
mature within one year. If the yield curve remains flat, these deposits are
expected to reprice upwards faster than loans and investments, which will reduce
our net interest income.
For the quarter ended March 31, 2007, we reported a net loss of
$200,000 as our net interest income continued to decline as a result of
continued margin compression, and failed to cover our operating expenses for the
quarter. Net interest income for the quarter ended March 31, 2007 was $1.7
million, while noninterest expenses amounted to $2.2 million. We expect to
report a loss for the second quarter of 2007 as well. If the current interest
rate environment persists, we may not be able to achieve profitability from our
core operations in the near term and we may report a loss for the year ending
December 31, 2007.
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For more information about our financial condition and results of
operations, see Selected Financial and Other Data at page __ and Management's
Discussion and Analysis of Financial Condition and Results of Operation at page
__.
The Offering
Currently, 100% of the outstanding stock of Gateway Community Financial
Corp. is held by Gateway Community Financial, MHC, a federally-chartered mutual
holding company. Upon completion of this offering, 55% of the outstanding stock
of Gateway Community Financial Corp. will be held by Gateway Community
Financial, MHC and 45% will be held by public stockholders.
This chart shows our current corporate structure (before this
offering).
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Gateway Community Financial, MHC
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|
| 100%
|
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Gateway Community Financial Corp.
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|
| 100%
|
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Gloucester County Federal Savings Bank
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This chart shows our new corporate structure (after this offering).
Upon completion of the offering, Gloucester County Federal Savings Bank will
change its name to "GCF Bank."
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Gateway Community Minority Public
Financial, MHC Stockholders
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| |
| 55% | 45%
| |
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Gateway Community Financial Corp.
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|
| 100%
|
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GCF Bank
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Purpose of the Offering
The primary reason for our decision to sell stock is to support our
future growth plans. We currently qualify as a well-capitalized institution,
however, our regulatory capital ratios are below peer and state median levels
and we do not expect that our current capital and net income can support the
asset growth we would like to achieve. The proceeds of the offering will
increase our capital, allowing us to seek to implement a growth strategy while
maintaining a solid capital position. Our growth strategy calls for increasing
deposits at our existing branches and possibly opening de novo branches, if
appropriate opportunities arise, and using those funds to originate loans and
grow the loan portfolio. We also intend to supplement internal growth with the
acquisition of other financial institutions or branches, if appropriate
acquisition opportunities arise.
Selling stock will also mean that Gloucester County Federal Savings
Bank's depositors, employees, management and directors will have an opportunity
to acquire an equity ownership interest in us and thereby obtain an economic
interest in our future operations. In addition, we intend to utilize stock
benefit plans as a means of attracting and retaining qualified and experienced
officers, directors and employees.
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In connection with the offering, we will establish an employee stock ownership
plan under which all eligible full time employees of the Bank will receive
shares of Gateway Community Financial Corp. common stock.
Use of Proceeds
Gloucester County Federal Savings Bank will receive a minimum of 50% of
the net proceeds from the offering as a capital contribution and will use those
proceeds for general business purposes. The offering proceeds may also be used
to finance the possible acquisition of other financial institutions or branches
as well as the possible opening of de novo branches, if appropriate
opportunities arise. We do not, however, have any current understandings,
agreements or arrangements in connection with branching or acquisitions.
We will lend a portion of the offering proceeds to the Gloucester
County Federal Savings Bank Employee Stock Ownership Plan to enable it to buy up
to 8% of the shares sold in the offering. The balance of the offering proceeds
will be retained by Gateway Community Financial Corp. and deposited with or
loaned to Gloucester County Federal Savings Bank, providing the Bank with funds
to support the Bank's lending activities. This will enable the bank to reduce
its outstanding borrowings. Gateway Community Financial Corp. may also use the
offering proceeds it retains for general corporate purposes, including
repurchasing shares of its common stock, paying cash dividends or supporting
acquisitions of other financial institutions, branches or financial services
companies. We do not, however, have any current understandings, agreements or
arrangements for any such acquisitions.
Conduct of the Offering
Rights to subscribe for shares of Gateway Community Financial Corp.
common stock have the following order of priority:
o Priority 1 - depositors of Gloucester County Federal Savings Bank at
the close of business on December 31, 2005 with deposits of at least
$50.00.
o Priority 2 - the Gloucester County Federal Savings Bank Employee Stock
Ownership Plan.
o Priority 3 - depositors of Gloucester County Federal Savings Bank at
the close of business on March 31, 2007 with deposits of at least
$50.00.
o Priority 4 - depositors of Gloucester County Federal Savings Bank at
the close of business on _________, 2007 with deposits of at least
$50.00.
Please note: Subscription rights are not transferable, and persons with
subscription rights may not subscribe for shares for the benefit of any other
person. If you violate this prohibition, you may lose your rights to purchase
shares and may face criminal prosecution and/or other sanctions.
If we receive subscriptions for a number of shares that exceeds the
maximum of the offering range, we may be unable to fill, or may only partially
fill, your order. Shares will be allocated in the order of the priorities shown
above pursuant to a formula outlined in the plan of stock issuance adopted by
our board of directors.
We are offering for sale a minimum of 2,295,000 shares and a maximum of
3,105,000 shares. The independent appraisal that we used to set the number of
shares being offered must be updated before we can complete the stock offering,
and this could result in the number of shares being increased to up to an
adjusted maximum of 3,570,750 shares. We may sell that number of shares without
any notice to you.
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If the updated independent appraisal is higher than the adjusted maximum, we
will be required to return all stockholders' funds to them with interest.
If we sell between the maximum and the adjusted maximum number of
shares, the Gloucester County Federal Savings Bank Employee Stock Ownership Plan
will have the first priority right to purchase the additional shares to the
extent that its subscription has not previously been filled. Any shares
remaining will be allocated in the order of the priorities described above. See
The Offering - Subscription Offering for a description of the allocation
procedure.
We may offer shares not sold in the subscription offering to the
general public in a community offering. In the community offering, we will give
a preference first to natural persons and trusts of natural persons who reside
in Gloucester and Camden Counties, New Jersey (the counties in which Gloucester
County Federal Savings Bank has offices), second to other residents of New
Jersey, and third to the general public. This part of the offering may commence
concurrently with the subscription offering or any time thereafter and may
terminate at any time without notice but no later than ____________, 2007,
unless extended.
Shares not sold in the subscription or community offering may be
offered for sale in a syndicated community offering, which would be an offering
to the general public on a best efforts basis managed by Sandler O'Neill &
Partners, L.P. This part of the offering may terminate at any time without
notice but no later than ____________, 2007, unless extended.
We have the right to reject, in whole or in part, any orders for stock
received in the community offering and syndicated community offering.
Deadline for Ordering Stock
The subscription offering will expire at __:__ _.m., Eastern time, on
____________, 2007. We may extend this expiration date without notice to you for
up to 45 days, until ____________, 2007. Once submitted, your order is
irrevocable unless the offering is extended beyond ____________, 2007. We may
request permission from the Office of Thrift Supervision to extend the offering
beyond ____________, 2007, but in no event may the offering be extended beyond
____________, 2009. If the offering is extended beyond ____________, 2007, we
will notify each subscriber, and subscribers will have the right to confirm,
modify or rescind their subscriptions. If an affirmative response is not
received, a subscriber's subscription will be canceled and funds will be
returned promptly with interest.
We may cancel the offering at any time prior to completion. If we do,
orders for common stock already submitted will be canceled and subscribers'
funds will be returned promptly with interest.
Purchase Limitations
Limitations on the purchase of stock in the offering have been set by
the plan of stock issuance adopted by our Board of Directors. These limitations
include the following:
o The minimum purchase is 25 shares.
o No individual may purchase more than 15,000 shares.
o The purchases of individuals who are considered to be associates of
each other or who are deemed to be acting in concert with each other
will be limited so that no more than 25,000 shares in aggregate are
purchased by such individuals. Persons with joint account relationships
are presumed to be acting in concert with each other.
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o Persons with a joint account may only purchase up to an aggregate of
15,000 shares if that is the only account under which they have
subscription rights - they are not entitled to place multiple orders
that would in the aggregate exceed 15,000 shares. If, however, persons
with a joint account have one or more other accounts at Gloucester
County Federal Savings Bank (including a second joint account that is
identical to the first joint account), they may place orders using
those accounts in order to reach the higher 25,000 share limit for
associates and persons acting in concert.
Please call the stock information center if you have any questions
about how many shares you may order, including whether other persons ordering
stock will be deemed to be your associates or acting in concert with you.
Contact information for the stock information center appears on page __.
If determined to be necessary or desirable by the Board of Directors,
the plan may be amended by a two-thirds vote of the full Board, with the
concurrence of the Office of Thrift Supervision. Thus, we may increase or
decrease the purchase limitations. In the event the maximum purchase limitation
is increased, persons who subscribed for the maximum will be notified and
permitted to increase their subscription.
Procedure for Ordering Stock
If you want to place an order for shares in the offering, you must
complete an original stock order form and send it to us together with full
payment. You must sign the certification that is on the reverse side of the
stock order form. We must receive your stock order form before the end of the
subscription offering or the end of the community offering, as appropriate. Once
we receive your order, you cannot cancel or change it without our consent. We
may, in our sole discretion, reject orders received in the community offering or
syndicated community offering either in whole or in part. If your order is
rejected in part, you cannot cancel the remainder of your order.
To ensure that we properly identify your subscription rights, you must
provide on your stock order form all of the information requested for each of
your deposit accounts as of the eligibility dates (December 31, 2005 and March
31, 2007). If you fail to do so, your subscription may be reduced or rejected if
the offering is oversubscribed.
You may pay for shares in the subscription offering or the community
offering in any of the following ways:
o In cash, if delivered in person. If you choose to pay by cash, you must
deliver the stock order and certification form and payment in person to
any branch office of Gloucester County Federal Savings Bank and it will
be exchanged for a bank check or money order. Please do not send cash
in the mail.
o By check or money order made payable to Gateway Community Financial
Corp.
o By authorizing withdrawal from an account at Gloucester County Federal
Savings Bank. To use funds in a Gloucester County Federal Savings Bank
IRA account, you must transfer your account to an unaffiliated
institution or broker. Since IRA account transfers take time to
complete, please contact the stock information center as soon as
possible for assistance.
We will hold funds received with orders in a deposit account that we
have established at Gloucester County Federal Savings Bank for that sole
purpose. We may decide during the offering also to hold funds received with
orders in a deposit account at another insured depository institution. In either
case, we will pay interest on all funds received at a rate equal to Gloucester
County Federal Savings Bank's regular passbook savings rate from the date we
receive your funds until the offering is completed or terminated.
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All funds authorized for withdrawal from deposit accounts with us,
including certificates of deposit, will continue to earn interest at the
applicable account or certificate of deposit rate until the offering is
completed or terminated. However, if, as a result of a withdrawal from a
certificate of deposit, the balance falls below the minimum balance requirement,
the remaining funds will be transferred to a savings account and will earn
interest at our regular passbook savings rate. There will be no early withdrawal
penalty for withdrawals from certificates of deposit used to pay for stock.
Proposed Stock Purchases by Management
Our directors and executive officers and their associates have
indicated that they intend to purchase an aggregate of approximately 215,000
shares of common stock in the offering. If 2,700,000 shares are sold (the
midpoint of the offering range), their anticipated purchases would represent
8.0% of the shares sold in the offering and 3.6% of the 6,000,000 total shares
outstanding after the offering, including shares issued to Gateway Community
Financial, MHC. At the maximum of the offering range, these percentages decrease
to 6.9% and 3.1%.
Our Estimated Pro Forma Value
Our estimated pro forma market value was established by an independent
appraisal provided by Feldman Financial Advisors, Inc. The appraisal was based
on our current and projected financial condition and results of operations and
also reflects the effect of the capital to be raised by the offering as well as
the effect of the stock benefit plans we expect to implement after the offering.
Feldman Financial Advisors has estimated that as of May 25, 2007, the
pro forma market value of Gateway Community Financial Corp. ranged from a
minimum of $51 million to a maximum of $69 million. This valuation is based on
the full pro forma market value of Gateway Community Financial Corp. as though
100% of the stock was being sold to the public. The Board of Directors
considered our present level of capital and our business plans and determined
that shares representing 45% of the full valuation should be sold in the
offering.
Peer Group Analysis. Feldman Financial Advisors relied primarily on the
comparative market value methodology in determining the estimated pro forma
market value of Gateway Community Financial Corp. In applying this methodology,
Feldman Financial Advisors analyzed financial and operational comparisons of
Gloucester County Federal Savings Bank with a group of companies deemed to be
comparable to us. In accordance with Office of Thrift Supervision appraisal
guidelines, the peer group companies for a minority offering are other mutual
holding companies. In that the market pricing ratios for the peer group
companies may reflect a discount for the controlling majority interest owned by
the mutual holding companies, that discount would also be reflected in our pro
forma market value since our market value is estimated in relation to the peer
group companies' market value. The percentage of the minority shares held by
insiders of the peer group companies would generally not be expected to have any
significant impact on the market value of the minority interest held by public
stockholders, and Feldman Financial Advisors did not make any adjustments to our
estimated pro forma market value in connection with the amount of our shares
expected to be owned by our directors, officers and employees.
Ten publicly traded mutual holding companies were selected to comprise
the peer group for estimating our pro forma market value. The companies in the
peer group
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range in asset size from $268 million to $574 million and have market
capitalizations ranging from $29 million to $113 million. Feldman Financial
Advisors examined how we compare to the peer group on various bases, including
earnings prospects, market area, management, acquisition activity in the state
of New Jersey, stock market conditions, subscription interest, liquidity and
dividend policy.
In estimating our pro forma market value, Feldman Financial Advisors
took into account that this type of offering is typically priced at a discount
on a price-to-book basis to publicly traded companies due to the low returns on
equity that are expected post-offering. One measure of profitability is the
return on equity, which measures the amount of net income produced by a company
in relation to that company's net worth. Since it will take a period of time to
invest and leverage the additional capital provided by the offering, the return
on equity for Gateway Community Financial Corp. is expected to be low compared
to other publicly traded mutual holding companies that have been in existence
for longer periods. Feldman Financial Advisors also took into account that this
type of offering is typically priced at a discount on a price-to-book basis to
publicly traded companies due to the inherent uncertainty regarding the degree
of success any issuer will have in effectively deploying capital. After the
offering, Gateway Community Financial Corp. will be faced with the challenge of
successfully investing the additional capital to generate profitable and
competitive earnings returns in a difficult interest rate environment.
Feldman Financial Advisors utilized the market pricing ratios of the
peer group to establish appropriate pro forma pricing ratios for Gateway
Community Financial Corp. The estimated pro forma market value was established
by working backwards from the pro forma pricing ratios once Feldman Financial
Advisors determined appropriate ratios for Gateway Community Financial Corp.
based on how Gloucester County Federal Savings Bank compares to the peer group
companies on a financial and operational basis. In that comparison, Feldman
Financial Advisors made a downward adjustment to our pro forma pricing based on
their belief that our profitability after the offering is expected to trail
behind the performance of the peer group. Feldman Financial Advisors also made
an upward adjustment to our pro forma pricing based on the recent after-market
performance of mutual holding company stock offerings, particularly those of New
Jersey companies, such as us.
Pricing Ratios. Consistent with Office of Thrift Supervision appraisal
guidelines, Feldman Financial Advisors' analysis relied primarily on two key
market pricing ratios: the price-to-earnings ratio and the price-to-book value
ratio. The ratio of "price-to-earnings" is calculated as the price of one share
of stock divided by the earnings per share. The price per share in the offering
is $10.00. On a pro forma fully converted basis, Gateway Community Financial
Corp.'s estimated earnings are $977,000 at the maximum of the offering range, or
approximately $0.15 per share, resulting in a pro forma fully converted
price-to-earnings ratio of 66.7x at the maximum of the offering range ($10.00 is
66.7 times greater than $0.15). The ratio of "price-to-book value" is calculated
as the price of one share of stock divided by the per share value of the
company's net worth (also known as the per share book value). On a pro forma
fully converted basis, Gateway Community Financial Corp.'s estimated total
equity is $88.4 million at the maximum of the offering range, or approximately
$12.81 per share, resulting in a pro forma fully converted price-to- book ratio
of 78.1% at the maximum of the offering range ($10.00 is 78.1% of $12.81). See
Pro Forma
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Data at page __ for a full discussion of these projections and The Offering
Range at page __ for a full discussion of the calculation of the ratios.
Shown below are the average and median price to earnings multiples and
price to book value ratios of the peer group companies and our price to earnings
multiple and price to book value ratio at the minimum, midpoint, maximum and
adjusted maximum of our pro forma market value as estimated by the appraisal.
These pricing ratios are calculated on a fully-converted basis, as though we had
sold the full amount (100%) of our estimated pro forma market value instead of
only 45% of that value. The pricing ratios for the peer group have also been
adjusted to assume that they were fully public, with all of their outstanding
shares held by public stockholders.
Price-to-earnings Price-to-book
multiple value ratio
-------- -----------
Pricing ratios for peer group on a fully-converted basis:
Average........................................................ 33.6x 91.6%
Median......................................................... 30.5x 95.3%
Pro forma pricing ratios for Gateway Community
Financial Corp. on a fully-converted basis:
Minimum...................................................... 58.8x 70.1%
Midpoint....................................................... 62.5x 74.5%
Maximum...................................................... 66.7x 78.1%
Maximum, as adjusted....................................... 66.7x 81.5%
The independent appraisal is not necessarily indicative of the
post-stock offering trading value; therefore you should not assume or expect
that the valuation of Gateway Community Financial Corp. as indicated above means
that the common stock will trade at or above the $10.00 purchase price after the
stock offering is completed. You should not assume that Gateway Community
Financial Corp.'s common stock will not trade below $10.00 per share.
After-Market Performance of Peer Group. The following table provides
information regarding the after-market performance of the peer group of publicly
traded mutual holding companies included in the appraisal prepared by Feldman
Financial Advisors. This table is not intended to indicate how our stock may
perform. Furthermore, the data presented in the table reflects a small number of
transactions with a wide variation in time periods that the issuers have existed
as publicly traded mutual holding companies.
After-Market Appreciation
Date -----------------------------------
of Initial After After Through
Company (Market/Symbol) Offering 1 Day 1 Month 5/25/07
- ---------------------- -------- ----- ------- -------
AJS Bancorp, Inc. (OTCBB: AJSB) 12/17/01 32.0% 32.5% 149.5%
Colonial Bankshares, Inc. (Nasdaq: COBK) 06/30/05 6.0% 7.5% 52.5%
FedFirst Financial Corp. (Nasdaq: FFCO) 04/07/05 (6.6)% (14.5)% (7.5)%
Lake Shore Bancorp, Inc. (Nasdaq: LSBK) 04/04/06 7.0% 2.9% 23.5%
Magyar Bancorp, Inc. (Nasdaq: MGYR) 01/24/06 6.5% 6.0% 46.9%
Naugatuck Valley Financial (Nasdaq: NVSL) 10/01/04 8.0% 4.2% 19.9%
Ocean Shore Holding Co. (Nasdaq: OSHC) 12/22/04 21.5% 6.3% 33.0%
Pathfinder Bancorp, Inc. (Nasdaq: PBHC) 11/16/95 20.0% 40.0% 139.2%
PSB Holdings, Inc. (Nasdaq: PSBH) 10/05/04 5.0% 4.5% 7.0%
Service Bancorp, Inc. (OTCBB: SERC) 10/08/98 0.0% (10.0)% 227.5%
Average - peer group 9.9% 7.9% 69.2%
Median - peer group 6.8% 5.3% 40.0%
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The stock price of a particular company is subject to various factors,
including, but not limited to, the amount of proceeds a company raises, the
company's historical and anticipated operating results, the nature and quality
of the company's assets, the company's market area, and the quality of
management and management's ability to deploy proceeds (such as through loans
and investments, the acquisition of other financial institutions or other
businesses, the payment of dividends and common stock repurchases). In addition,
stock prices may be affected by general market and economic conditions, the
interest rate environment, the market for financial institutions and merger or
takeover transactions, the presence of professional and other investors who
purchase stock on speculation, as well as other unforeseeable events not in the
control of management. Before you make an investment decision, we urge you to
carefully read this prospectus, including, but not limited to, the Risk Factors
section beginning on page ___. You should not assume that Gateway Community
Financial Corp.'s common stock will trade at prices similar to other mutual
holding companies.
Conditions to Completing the Offering
We cannot complete the offering unless:
o we sell at least 2,295,000 shares, the minimum of the offering range;
and
o we receive final authorization from the Office of Thrift Supervision to
complete the offering.
Office of Thrift Supervision authorization does not constitute a
recommendation or endorsement of an investment in our stock by the Office of
Thrift Supervision.
Market for Gateway Community Financial Corp.'s Common Stock
We applied to have our common stock listed for trading on the Nasdaq
Global Market under the symbol "GCFC." Sandler O'Neill & Partners, L.P.
currently intends to become a market maker in the common stock, but it is under
no obligation to do so. We cannot assure you that other market makers will be
obtained or that an active and liquid trading market for the shares of common
stock will develop or if developed, will be maintained. After our common stock
begins trading, you may contact a stock broker to buy or sell shares.
Dividends
We have not yet established a dividend policy, and we have not yet made
plans as to the amount or timing of cash dividends that Gateway Community
Financial Corp. may pay after the offering. The timing, amount and frequency of
dividends will be determined by the Board of Directors. There are also
restrictions on our ability to pay dividends. See Our Policy Regarding
Dividends.
If we pay dividends to stockholders of Gateway Community Financial
Corp., it is anticipated that dividends payable to Gateway Community Financial,
MHC would be waived. We must receive the non- objection of the Office of Thrift
Supervision for any dividend waiver by Gateway Community Financial, MHC. See
Regulation - Regulation of Gateway Community Financial Corp.
Restrictions on the Acquisition of Gateway Community Financial Corp. and
Gloucester County Federal Savings Bank
Federal regulations, as well as provisions contained in the charter and
bylaws of Gateway Community Financial Corp. and Gloucester County Federal
Savings Bank, restrict the ability of any person, firm or entity to acquire
Gateway Community Financial Corp., Gloucester County Federal Savings Bank, or
their capital stock. These restrictions include the requirement that a potential
acquirer of common stock
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obtain the prior approval of the Office of Thrift Supervision before acquiring
in excess of 10% of the voting stock of Gateway Community Financial Corp. or
Gloucester County Federal Savings Bank. The Office of Thrift Supervision may
grant such approval after the passage of three years following the offering.
Because a majority of the shares of outstanding common stock of Gateway
Community Financial Corp. must be owned by Gateway Community Financial, MHC, any
acquisition of Gateway Community Financial Corp. must be approved by Gateway
Community Financial, MHC, and Gateway Community Financial, MHC would not be
required to pursue or approve a sale of Gateway Community Financial Corp. even
if such sale were favored by a majority of Gateway Community Financial Corp.'s
public stockholders. Additionally, Office of Thrift Supervision regulations
prohibit anyone from acquiring more than 10% of Gateway Community Financial
Corp.'s common stock for a period of three years following the offering, unless
such prohibition is waived by the Office of Thrift Supervision. The current
policy of the Office of Thrift Supervision is not to waive this prohibition.
Additionally, certain provisions within Gateway Community Financial
Corp.'s charter and bylaws limit the rights of stockholders and may deter
potential takeovers or make it more difficult and expensive to pursue a change
in control or takeover attempt that our Board of Directors opposes. Amendments
to these provisions require the approval of 80% of the outstanding shares if not
approved by the Board of Directors. As a result, you may not have an opportunity
to participate in such a transaction, and the trading price of our stock may not
rise to the level of other institutions that are more vulnerable to hostile
takeovers. Such provisions include:
o the election of directors to staggered three-year terms;
o provisions restricting stockholders from calling special meetings
of stockholders;
o the absence of cumulative voting by stockholders in elections of
directors;
o advance notice requirements for stockholder nominations and new
business; and
o the limitation of the voting rights of a single stockholder to no
more than 10% of the then-outstanding shares, including shares
held by Gateway Community Financial, MHC, for a period of five
years from the date this stock offering is completed.
Tax Effects of the Offering
The minority stock offering will not be a taxable transaction for
purposes of federal or state income taxes for Gateway Community Financial, MHC,
Gateway Community Financial Corp., Gloucester County Federal Savings Bank or
persons eligible to subscribe for stock in the offering. See Material Federal
and State Tax Consequences of the Offering.
Stock Benefit Plans
We intend to establish certain benefit plans that will use our stock to
provide additional compensation to employees and directors. The Gloucester
County Federal Savings Bank Employee Stock Ownership Plan, for the benefit of
employees eligible to participate in the plan, intends to purchase 8% of the
shares sold in the offering. We also intend to adopt a stock option plan and a
restricted stock plan for the benefit of directors and officers. Officers,
directors, and employees will not be required to pay cash for shares received
under the Gloucester County Federal Savings Bank Employee Stock
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Ownership Plan or shares received under the restricted stock plan, but will be
required to pay the exercise price to exercise stock options. The exercise price
for the options will be at least equal to the market price of our common stock
on the date of grant.
The stock benefit plans will result in additional annual compensation
and benefit expenses which will reduce our earnings. See Pro Forma Data, for an
illustration of the possible reduction in net income and stockholders' equity
resulting from these benefit plans. The amount of and timing of the actual
increase in compensation and benefits expense is uncertain because applicable
accounting standards require that the expense be based on the fair market value
of the shares of common stock at specific points in the future; however, we
expect them to be material. See Pro Forma Data beginning on page __ for an
estimate of the expenses from the ESOP, restricted stock plan and option plan.
At the maximum of the offering range, the expenses are estimated to be $568,000
annually. This represents an approximately 11% increase over total compensation
and benefits expense to directors, officers and employees of $4.4 million for
2006. Officers and other employees will receive all of the benefits under the
employee stock ownership plan, as directors are not eligible to participate in
that plan because it is a tax-qualified retirement plan not open to persons not
employed by the Bank. The amount of shares allocated to individuals under the
employee stock ownership plan is determined on the basis of their compensation
relative to the compensation of all participants in the plan. Benefits under the
restricted stock plan and stock option plan are expected to be awarded to
officers and directors, however, the amount to any individual will be determined
by the Board of Directors at such time as the awards are made, in their sole
discretion.
The following table presents information, at the maximum of the
offering range, regarding the number of shares and options expected to be made
available under the stock benefit plans. The value of the share awards is based
on an assumed value of $10.00 per share; however, this does not mean you should
assume the stock will trade at or above $10.00 per share. It could trade below
$10.00 per share. The value of the option grants was determined using the
Black-Scholes option-pricing formula. See Pro Forma Data. Ultimately, the value
of awards under the stock benefit plans will depend on the actual trading price
of our stock at a particular time, which depends on numerous factors, some of
which are out of our control.
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At the Maximum of the Offering Range
---------------------------------------------------------------------------------
Persons Percentage of
Eligible Number Percentage of Total Shares
to of Shares Outstanding
Receive Estimated Shares/ Sold in After
Awards Value Options the Offering the Offering
------ ----- ------- ------------ ------------
Employee Stock Ownership Plan......... Employees $2,484,000 248,400 8.0% 3.6%
Directors
Restricted stock...................... and Officers $1,352,000 135,200 4.4% 1.96%
Directors
Stock options......................... and Officers $1,376,067 338,100 10.9% 4.9%
If we implement the restricted stock plan within one year of the
offering and Gloucester County Federal Savings Bank's tangible capital following
the stock offering is less than 10%, then the number of shares that may be
awarded under the restricted stock plan will be reduced and may not exceed 1.47%
of the total shares outstanding rather than the 1.96% shown in the table above.
If, at our discretion, we further reduce the restricted stock plan to 1.3%, we
may keep the number of shares in the employee stock ownership plan at 3.6%. If
we reduce the restricted stock plan to only 1.47% of the outstanding shares,
however, then the employee stock ownership plan would also be reduced, to 3.4%.
Dilution. If newly issued shares are used to fund stock options and
awards made under the restricted stock plan instead of outstanding shares
purchased in the open market by Gateway Community Financial Corp., the resulting
dilution to your ownership interest in Gateway Community Financial Corp. would
be 4.7% for the option plan and 1.9% for the restricted stock plan. It is our
current intention, however, to purchase stock in the open market to fund the
restricted stock plan and stock option plan to avoid stockholder dilution. The
cost of purchasing shares in the open market will depend on the trading price of
the stock at the time the purchases are made. We would expect to be able to use
existing equity to fund the purchase of shares.
Stockholder Approval. The stock option plan and restricted stock plan
will comply with all applicable Office of Thrift Supervision regulations in
effect at the time the plans are adopted. Those regulations are subject to
change. Under current Office of Thrift Supervision Regulations, the plans must
be approved by a majority of the total votes eligible to be cast by our public
stockholders - meaning all stockholders other than our mutual holding company
parent, Gateway Community Financial, MHC, which will own 55% of our outstanding
stock upon completion of the offering and will continue to hold a majority of
our outstanding stock so long as we remain in mutual holding company form. The
Office of Thrift Supervision has proposed changes to its regulations that would
eliminate the requirement to obtain the separate vote of the public stockholders
for the plans if they are implemented more than one year after completion of a
mutual holding company stock offering. If the Office of Thrift Supervision
adopts those regulations as proposed, Gateway Community Financial, MHC, as the
holder of a majority of the shares of Gateway Community Financial Corp. would
control the outcome of any vote to approve an equity incentive plan that occurs
more than one year after the completion of the offering.
See Management - Stock Benefit Plans and Pro Forma Data for more
information about the stock benefit plans.
Possible Conversion of Gateway Community Financial, MHC to Stock Form
In the future, Gateway Community Financial, MHC may convert from the
mutual holding company form of organization, wherein a majority of the
outstanding stock is held by the mutual holding company,
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to a corporation with 100% of its shares held by public stockholders. This type
of conversion transaction is commonly known as a "second-step conversion." The
Board of Directors has no current plans to undertake a second-step conversion
transaction.
Risk Factors
This investment entails various risks including the possible loss of
principal. You may not be able to sell the stock at or above the $10.00 offering
price. You should carefully read the information under Risk Factors beginning on
page __.
Stock Information Center
For assistance, please contact the stock information center at (___)
___-____. The stock information center's hours of operation are generally __:__
a.m. to __:__ p.m., Eastern time, Monday through Friday. The stock information
center is closed on weekends and holidays.
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RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in our
common stock.
Low interest rate spreads and margins and low levels of noninterest income have
reduced our profitability, and we may report a loss for the fiscal year ending
December 31, 2007.
We reported a net loss of $200,000 for the quarter ended March 31, 2007
as our net interest income continued to decline and failed to cover our
operating expenses for the quarter. Our net interest income decreased during
2005 and 2006 as the result of the continued compression of our interest rate
spread and net interest margin caused by the flat or inverted interest rate
yield curve environment during these periods. Additionally, our net interest
margin is negatively impacted by our relatively low yield on interest-earning
assets. Our low yield on interest-earning assets is attributable to the fact
that cash and securities represent a relatively large amount of our total assets
(38% at March 31, 2007) as opposed to loans, which generally earn higher yields
than other interest-earning assets. Our average yield on loans for 2006 was
5.74%, while our average yield on securities and other interest-earning assets
was 4.40%.
Our profitability is also negatively impacted by our relatively low
levels of noninterest income. Our high concentration of certificates of deposit
as a percentage of total deposits (50% at March 31, 2007) and our low level of
loans as a percentage of total assets have prevented us from generating a steady
stream of noninterest income from deposit account charges and loan origination
fees.
In addition to our first quarter loss, we expect to report a loss for
the second quarter of 2007 as well and may report a loss for the fiscal year
ending December 31, 2007. If the flat or inverted yield curve
15
environment persists, we may not be able to alleviate the reduction in our net
interest rate spread and margin, which could prevent us from achieving
profitability from our core operations in the near term.
In recent years we charged off a significant amount of loans. If we experience
additional loan losses going forward that exceed the amount we have reserved for
loan losses, our earnings will be adversely affected.
The risk of credit losses on loans varies with, among other things,
general economic conditions, the type of loan being made, the creditworthiness
of the borrower over the term of the loan and, in the case of a collateralized
loan, the value and marketability of the collateral for the loan. Management
maintains an allowance for loan losses based upon historical experience, an
evaluation of economic conditions and regular reviews of delinquencies and loan
portfolio quality.
Over the last five years, we charged off $10.3 million of loans, net of
amounts recovered. If our assumptions and judgments about the ultimate
collectibility of the loan portfolio prove to be incorrect and the allowance for
loan losses is inadequate to absorb losses or if we are required to make
material additions to the allowance, our earnings and capital could be
significantly and adversely affected.
There are risks associated with our plan to commence actively re-growing our
commercial real estate and commercial loans since that type of lending poses
higher risks and we experienced significant trouble with this type of lending in
the past.
The repayment risk related to commercial loans is considered to be
greater than the risk related to residential loans. Unlike residential mortgage
loans, which generally are made on the basis of the borrower's ability to make
repayment from his or her employment and other income, and which are secured by
real property with values that tend to be more easily ascertainable, commercial
loans typically are made on the basis of the borrower's ability to make
repayment from the cash flow of the borrowers' business, which may include lease
income. In addition, commercial loans generally result in larger balances to
single borrowers, or related groups of borrowers, than one- to four-family
loans.
Beginning in the late 1990s we aggressively built a commercial loan
portfolio; at December 31, 2002, our loan portfolio included $67.1 million of
commercial real estate mortgage loans and commercial loans, which represented
approximately 34% of our total loans at that time. The portfolio initially
appeared to be sound and was performing with only minor weaknesses, but after
several years there was an increasing number of loans that exhibited weaknesses
or deficiencies and in 2003 we charged-off $8.6 million of commercial loans that
were determined to uncollectible. Over the last five years, our charge-offs of
commercial real estate and commercial loans, net of recoveries, amounted to $9.8
million.
16
The size of the commercial real estate and commercial loan portfolios
as a percentage of total loans decreased as we worked through the problems in
those portfolios and we were from 2003 to 2005, barred by the Office of Thrift
Supervision from any new commercial lending. At March 31, 2007, our commercial
portfolio was $19.1 million, or 9% of total loans. We now intend to actively
re-commence origination of these types of loans. We have hired two commercial
lenders, one in March 2007 and one in May 2007. See Management's Discussion and
Analysis - Asset Quality and Provisions for Loan Losses at page __.
We intend to increase our originations of certain higher yielding consumer
loans, but such loans present higher risk.
In 2004, we began originating loans for the purchase and refinance of
manufactured housing. This portfolio totaled $7.8 million at March 31, 2007, and
we intend to grow this portfolio to approximately $12 million by December 31,
2007. Our lending policy limits this portfolio to no more than 8% of total
assets, which would be a limit of approximately $30 million as of March 31,
2007. In the first quarter of 2007, we established a program for financing the
purchase of non-commercial use, personal airplanes. As of March 31, 2007, we had
originated $1.4 million of aircraft loans, and our current goal is to grow that
portfolio to as much as $15 million by the end of 2007. Our lending policy
limits this portfolio to no more than 150% of our capital, which would be a
limit of approximately $40 million as of March 31, 2007. We intend to originate
aircraft loans to borrowers throughout the United States, not just in our
primary market area. These types of loans are generally considered to involve a
higher degree of credit risk and if we experience losses in these portfolios,
our earnings would be adversely affected.
Changes in interest rates may adversely affect our net interest rate spread and
net interest margin, which would hurt our earnings.
We derive our income mainly from the difference or "spread" between the
interest earned on loans, securities and other interest-earning assets, and
interest paid on deposits, borrowings and other interest-bearing liabilities. In
general, the larger the spread, the more we earn. When market rates of interest
change, the interest we receive on our assets and the interest we pay on our
liabilities will fluctuate. This can cause decreases in our spread and can
adversely affect our income.
Several years ago market interest rates were at historically low
levels. However, between June 2004 and June 2006, the U.S. Federal Reserve
steadily increased its target federal funds rate, raising it 17 times, from
1.00% to 5.25%. While the federal funds rate and other short-term market
interest rates, which we use as a guide to our deposit pricing, have increased,
intermediate- and long-term market interest rates, which we use as a guide to
our loan pricing, have not increased proportionately. This has led to a
"flattening" of the market yield curve, which has even "inverted" recently as
short-term rates have exceeded longer-term rates. The relatively flat yield
curve has hurt our net interest rate spread and net interest margin because the
interest rates we pay on our deposits have repriced upwards faster than the
interest rates that we earn on our loans and investments. As of December 31,
2006, we had $113.5 million in certificates of deposit that will mature within
one year. If the yield curve remains flat, these deposits are expected to
reprice upwards faster than loans and investments, which will reduce our net
interest income.
Interest rates also affect how much money we lend. For example, when
interest rates rise, the cost of borrowing increases and loan originations tend
to decrease. In addition, changes in interest rates can affect the average life
of loans and investment securities. A reduction in interest rates generally
results in increased prepayments of loans and mortgage-backed securities, as
borrowers refinance their debt in order to reduce their borrowing cost. This
causes reinvestment risk, because we generally are not able to reinvest
17
prepayments at rates that are comparable to the rates we earned on the prepaid
loans or securities. Changes in market interest rates could also reduce the
value of our financial assets. If we are unsuccessful in managing the effects of
changes in interest rates, our financial condition and results of operations
could suffer.
Our return on equity is currently low and will decrease after this offering.
This could negatively impact the price of our stock.
The net proceeds from the offering will substantially increase our
equity capital. It will take a significant period of time to prudently invest
this capital. For the year ended December 31, 2006, our return on average
equity, which is the ratio of our earnings divided by our average equity
capital, was 1.33%. After the offering, our estimated ratio of pro forma
earnings divided by pro forma stockholders` equity is expected to be
approximately 1.10% at the midpoint of the appraisal of $27 million. Because the
stock market values a company based in part on its return on equity, our low
return on equity could negatively affect the trading price of our stock. See Pro
Forma Data.
Strong competition within our market area may limit our growth and
profitability.
Competition in the banking and financial services industry in New
Jersey is intense. Many of our competitors have substantially greater resources
and lending limits than we do and offer services that we do not or cannot
provide. Price competition for loans might result in us originating fewer loans,
or earning less on our loans, and price competition for deposits might result in
a decrease in our total deposits or higher rates on our deposits. Competition in
the market for hiring experienced lenders and other highly- qualified bank
officers is also a challenge, which may restrict our ability to grow.
Our business is geographically concentrated in southern New Jersey, and a
downturn in conditions in our market area could have an adverse impact on our
profitability.
A substantial amount of our loans are to individuals and businesses in
southern New Jersey. Any decline in the economy of this market could have an
adverse impact on our earnings. Adverse economic changes may also have a
negative effect on the ability of our borrowers to make timely repayments of
their loans. Additionally, because we have a significant amount of real estate
loans, decreases in local real estate values could adversely affect the value of
property used as collateral. If we are required to liquidate a significant
amount of collateral during a period of reduced real estate values to satisfy
the debt, our earnings and capital could be adversely affected.
Additional compensation and benefit expenses following the offering will
negatively impact our profitability.
Following the offering, we will recognize additional annual employee
compensation and benefit expenses stemming from the shares granted to employees,
officers and directors under new benefit plans, including the Gloucester County
Federal Savings Bank Employee Stock Ownership Plan. We cannot predict the actual
amount of the new stock-related compensation and benefit expenses because
applicable accounting standards require that they be based on the fair market
value of the shares of common stock at specific points in the future; however,
we expect them to be material. See Pro Forma Data beginning on page __ for an
estimate of the expenses from the ESOP, restricted stock plan and option plan.
At the maximum of the offering range, the expenses are estimated to be $568,000
annually.
18
New expenses that we will incur as a public company will affect our earnings.
Following the offering, our noninterest expense is likely to increase
as a result of the financial accounting, legal and various other additional
noninterest expenses usually associated with operating as a public company,
particularly as a result of the requirements of the Sarbanes-Oxley Act of 2002.
In addition, the Bank's senior management will be required to devote a
significant amount of time to such matters, diverting their full attention from
regular operations.
The implementation of stock-based benefit plans may dilute your ownership
interest in Gateway Community Financial Corp.
We intend to adopt a stock option plan and a restricted stock plan
following the stock offering. These stock benefit plans will be funded through
either open market purchases or from the issuance of authorized but unissued
shares. Stockholders would experience a reduction in ownership interest in the
event newly issued shares are used to fund stock options and awards made under
the restricted stock plan. The use of newly issued shares of stock to fund the
restricted stock plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 1.9%. The use of newly
issued shares of stock to fund exercises of options granted under the stock
option plan instead of open market purchases would dilute the voting interests
of existing stockholders by approximately 4.7%.
Provisions in our charter and bylaws limiting the rights of stockholders may
deter potential takeovers and may reduce the trading price of our stock.
Provisions in our charter and bylaws may make it difficult and
expensive to pursue a change in control or takeover attempt that our Board of
Directors opposes. As a result, you may not have an opportunity to participate
in such a transaction, and the trading price of our stock may not rise to the
level of other institutions that are more vulnerable to hostile takeovers. Such
provisions include:
o the election of directors to staggered three-year terms;
o provisions restricting stockholders from calling special meetings
of stockholders;
o the absence of cumulative voting by stockholders in elections of
directors;
o advance notice requirements for stockholder nominations and new
business; and
o a provision that limits the voting rights of a single stockholder
to no more than 10% of the then-outstanding shares, including
shares held by Gateway Community Financial, MHC, for a period of
five years from the date this stock offering is completed.
Persons who purchase stock in the offering will own a minority of Gateway
Community Financial Corp.'s common stock and will not be able to exercise voting
control over most matters put to a vote of stockholders, including any proposal
regarding the acquisition of Gateway Community Financial Corp.
Gateway Community Financial, MHC will own 55% of Gateway Community
Financial Corp.'s common stock after the offering. The MHC's Board of Directors
is comprised of the same persons as Gateway Community Financial Corp.'s Board of
Directors and will generally be able to exercise voting control over matters put
to a vote of stockholders of Gateway Community Financial Corp., such as a vote
on a sale or merger of Gateway Community Financial Corp. or other transaction in
which stockholders could receive a premium for their shares and the election of
directors of Gateway Community Financial Corp.
19
In addition, our directors, and officers are expected to purchase
approximately 215,000 shares of stock in this stock offering. If 2,700,000
shares are sold (the midpoint of the offering range), their anticipated
purchases would represent 8.0% of the shares sold in the offering and 3.6% of
the 6,000,000 total shares outstanding after the offering, including shares
issued to Gateway Community Financial, MHC. At the maximum of the offering
range, these percentages decrease to 6.9% and 3.1%. In addition, the officers,
employees and directors may receive up to 5.6% of the stock owned by the public
under the restricted stock plan and stock option plan.
Our stock price may decline when trading commences.
We cannot guarantee that if you purchase shares in the offering you
will be able to sell them at or above the $10.00 purchase price. After the
shares of our common stock begin trading, the trading price of the common stock
will be determined by the marketplace, and will be influenced not only by our
operating results but by many factors outside of our control, including
prevailing interest rates, investor perceptions and general industry,
geopolitical and economic conditions. Publicly traded stocks, including stocks
of financial institutions, have recently experienced substantial market price
volatility. These market fluctuations might not be related to the operating
performance of particular companies whose shares are traded.
We operate in a highly regulated environment and may be adversely affected by
changes in laws and regulations.
We are subject to extensive regulation, supervision and examination by
the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.
Such regulation and supervision govern the activities in which an institution
and its holding companies may engage and are intended primarily for the
protection of the insurance fund and depositors. Regulatory authorities have
extensive discretion in connection with their supervisory and enforcement
activities, including the imposition of restrictions on the operation of an
institution, the classification of assets by the institution and the adequacy of
an institution's allowance for loan losses. Any change in such regulation and
oversight, whether in the form of regulatory policy, regulations, or
legislation, including changes in the regulations governing mutual holding
companies, could have a material impact on us and our operations.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be
identified by the use of words such as "believes," "expects," "anticipates,"
"estimates" or similar expressions. Forward-looking statements include:
o statements of our goals, intentions and expectations;
o statements regarding our business plans, prospects, growth and
operating strategies;
o statements regarding the quality of our loan and investment
portfolios; and
o estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks and
uncertainties. Actual results may differ materially from those contemplated by
the forward-looking statements due to, among others, the following factors:
20
o general economic conditions, either nationally or in our market area,
that are worse than expected;
o changes in the interest rate environment that reduce our interest
margins or reduce the fair value of financial instruments;
o our ability to enter into new markets and/or expand product offerings
successfully and take advantage of growth opportunities;
o increased competitive pressures among financial services companies;
o changes in consumer spending, borrowing and savings habits;
o legislative or regulatory changes that adversely affect our business;
o adverse changes in the securities markets;
o our ability to successfully manage our growth; and
o changes in accounting policies and practices, as may be adopted by the
bank regulatory agencies, the Financial Accounting Standards Board or
the Public Company Accounting Oversight Board.
Any of the forward-looking statements that we make in this prospectus
and in other public statements we make may turn out to be wrong because of
inaccurate assumptions we might make, because of the factors illustrated above
or because of other factors that we cannot foresee. Consequently, no
forward-looking statement can be guaranteed.
USE OF PROCEEDS
We are conducting this stock offering principally to raise capital to
support our anticipated future growth. The actual net proceeds will depend on
the expenses incurred by us in connection with the offering and the total number
of shares of stock issued in the offering, which depends on the independent
valuation and market considerations. Although the actual net proceeds from the
sale of the common stock cannot be determined until the offering is completed,
we estimate that net proceeds from the sale of common stock will be between
$22.2 million and $30.2 million, or $34.8 million at the adjusted maximum. The
net proceeds may vary significantly because total expenses of the stock offering
may be significantly more or less than those estimated. Payments for shares made
through withdrawals from existing deposit accounts at Gloucester County Federal
Savings Bank will not result in the receipt of new funds for investment but will
result in a reduction of Gloucester County Federal Savings Bank's deposits and
interest expense as funds are transferred from interest-bearing certificates or
other deposit accounts.
21
Gateway Community Financial Corp. intends to use proceeds from the
offering as follows:
MAXIMUM,
MINIMUM MIDPOINT MAXIMUM As Adjusted
------- -------- ------- -----------
Percent Percent Percent Percent
of Net of Net of Net of Net
Amount Proceeds Amount Proceeds Amount Proceeds Amount Proceeds
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Estimated net proceeds....... $22,182 $26,190 $30,199 $34,809
Less:
Investment in the Bank....... 11,091 50.0% 13,095 50.0% 15,100 50.0% 17,405 50.0%
Loan to the Employee
Stock Ownership Plan.... 1,836 8.3% 2,160 8.2% 2,484 8.2% 2,857 8.2%
------- ------- ------- -------
Proceeds retained by
Gateway Community
Financial Corp............ $9,255 41.7% $10,935 41.8% $12,615 41.8% $14,547 41.8%
====== ======= ======= =======
Gloucester County Federal Savings Bank will receive at least 50% of the
net proceeds from the offering as a capital contribution and will use those
proceeds for general business purposes. The Bank will receive such additional
amount as may be necessary so that the ratio of the Bank's tangible capital to
its total assets upon completion of the offering is at least 10%. The proceeds
will provide the opportunity for the Bank to significantly grow its assets and
maintain status as a well-capitalized financial institution under applicable
banking regulations. The offering proceeds may also be used to finance the
possible acquisition of other financial institutions or branches as well as the
possible opening of de novo branches, if appropriate opportunities arise. We do
not, however, have any current understandings, agreements or arrangements in
connection with branching or acquisitions.
We will lend a portion of the offering proceeds to the Gloucester
County Federal Savings Bank Employee Stock Ownership Plan to enable it to buy up
to 8% of the shares sold in the offering. If it does not buy the full amount of
its intended common stock purchase in the offering, it may purchase shares of
common stock in the open market after the stock offering. If the purchase price
of the common stock is higher than $10 per share, the amount of proceeds
required for the purchase by the Gloucester County Federal Savings Bank Employee
Stock Ownership Plan will increase.
The balance of the offering proceeds will be retained by Gateway
Community Financial Corp. and deposited with or loaned to Gloucester County
Federal Savings Bank, providing funds to support the Bank's operations. This
will enable the Bank to reduce its outstanding Federal Home Loan Bank
borrowings. Gateway Community Financial Corp. may also use the offering proceeds
it retains for general corporate purposes, including repurchasing shares of its
common stock, paying cash dividends or supporting acquisitions of other
financial institutions, branches or financial services companies. We do not,
however, have any current understandings, agreements or arrangements for any
such acquisitions.
OUR POLICY REGARDING DIVIDENDS
We have not yet determined what our dividend policy will be, and we
have no plans or understandings as to the amount or timing of cash dividends
that Gateway Community Financial Corp. may pay after the offering. Future
declarations of dividends by the Board of Directors will depend on a number of
factors, including investment opportunities, growth objectives, financial
condition, profitability, tax considerations, minimum capital requirements,
regulatory limitations, stock market characteristics and general economic
conditions. The timing, frequency and amount of dividends will be determined by
the
22
Board. There can be no assurance that dividends will in fact be paid on the
stock or that, if paid, dividends will not be reduced or eliminated in future
periods.
Gateway Community Financial Corp.'s ability to pay dividends may also
depend on the receipt of dividends from Gloucester County Federal Savings Bank,
which is subject to a variety of regulatory limitations on the payment of
dividends. See Regulation - Regulation of Gloucester County Federal Savings Bank
- - Dividend and Other Capital Distribution Limitations. Furthermore, as a
condition to the Office of Thrift Supervision giving its authorization to
conduct the stock offering, we have agreed that we will not initiate any action
within one year of completion of the stock offering involving the payment of a
special distribution or return of capital to stockholders of Gateway Community
Financial Corp.
If Gateway Community Financial Corp. pays dividends to its
stockholders, it is anticipated that dividends payable to Gateway Community
Financial, MHC would be waived. We must notify the Office of Thrift Supervision
of any proposed dividend waiver by Gateway Community Financial, MHC. The Office
of Thrift Supervision reviews dividend waiver notices on a case-by-case basis,
and, in general, does not object to any such waiver if: (i) the waiver would not
be detrimental to the safe and sound operations of the subsidiary savings
association and (ii) the mutual holding company's board of directors determines
that such waiver is consistent with such directors' fiduciary duties to the
mutual holding company's members.
MARKET FOR THE STOCK
There is not, at this time, any market for Gateway Community Financial
Corp.'s stock. We have applied to have our common stock listed for trading on
the Nasdaq Global Market under the symbol "GCFC." Sandler O'Neill & Partners,
L.P. has advised us that it intends to make a market in our common stock
following the offering, but it is under no obligation to do so.
The development of an active trading market depends on the existence of
willing buyers and sellers, the presence of which is not within our control, or
that of any market maker. The number of active buyers and sellers of our stock
at any particular time may be limited. Under such circumstances, you could have
difficulty selling your shares of common stock. We cannot assure you that an
active and liquid trading market for the shares of common stock will develop or,
if developed, will be maintained. Nor can we assure you that, if you purchase
shares of common stock in the offering, you will be able to sell them at a price
equal to or above $10.00 per share.
CAPITALIZATION
Set forth below is the historical capitalization as of March 31, 2007
of Gateway Community Financial Corp. and the pro forma capitalization of Gateway
Community Financial Corp. as of March 31, 2007 after giving effect to the
offering and to the assumptions set forth under Pro Forma Data. No effect has
been given to the issuance of additional shares of stock pursuant to any stock
option plan that may be adopted by Gateway Community Financial Corp. and
presented for approval by the stockholders after the offering. An amount equal
to 4.9% of the total number of shares outstanding after the offering, including
shares held by Gateway Community Financial, MHC, would be reserved for issuance
upon the exercise of options to be granted under the stock option plan following
the stock offering. See Management - Stock Benefit Plans - Stock Option Plan.
23
Pro Forma Capitalization at March 31, 2007
----------------------------------------------------------
Maximum,
Minimum Midpoint Maximum as adjusted
Historical, 2,295,000 2,700,000 3,105,000 3,570,750
at shares sold shares sold shares sold shares sold
March 31, at $10.00 at $10.00 at $10.00 at $10.00
2007 per share per share per share per share
---- --------- --------- --------- ---------
(In thousands)
Deposits(1)..................................... $319,998 $319,998 $319,998 $319,998 $319,998
Borrowings...................................... 21,000 21,000 21,000 21,000 21,000
-------- -------- -------- -------- --------
Total deposits and borrowings................ $340,998 $340,998 $340,998 $340,998 $340,998
======== ======== ======== ======== ========
Stockholders' equity:
Preferred stock, $0.10 par value,
5,000,000 shares authorized, no shares
issued or outstanding....................... $ - $ - $ - $ - $ -
Common stock, $0.10 par value,
25,000,000 shares authorized, assuming
shares outstanding as shown(2)(3)........... 1 510 600 690 794
Additional paid-in capital(2)(3)................ 249 21,921 25,839 29,758 34,264
Retained earnings............................... 28,486 28,486 28,486 28,486 28,486
Accumulated other comprehensive income.......... 12 12 12 12 12
Less:
Common stock acquired by the
Gloucester County Federal Savings Bank
Employee Stock Ownership Plan(4).............. - (1,836) (2,160) (2,484) (2,857)
Common stock acquired by
the restricted stock plan(5).................. - (1,000) (1,176) (1,352) (1,555)
------- ------- ------- ------- -------
Total stockholders' equity................... $28,748 $48,093 $51,601 $55,110 $59,144
======= ======= ======= ======= =======
- -----------------
(1) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the offering. Withdrawals to purchase common stock will
reduce pro forma deposits by the amounts of the withdrawals.
(2) Pro forma data includes shares to be held by Gateway Community
Financial, MHC after completion of the stock offering. Gateway
Community Financial, MHC is currently the sole stockholder of Gateway
Community Financial Corp. and holds 10,000 shares of common stock of
Gateway Community Financial Corp. Upon completion of the offering,
Gateway Community Financial, MHC will hold 55% of the total shares of
Gateway Community Financial Corp. to be outstanding. Total outstanding
shares upon completion of the offering will be 5,100,000, 6,000,000,
6,900,000 and 7,935,000, at the minimum, midpoint, maximum and adjusted
maximum, respectively.
(3) The historical stockholders' equity includes the initial capitalization
of the mid-tier holding company upon its formation in 2001. The pro
forma stockholders' equity includes this initial capitalization. The
pro forma additional paid-in capital amounts represent the net offering
proceeds, less the par value of all shares outstanding upon completion
of the offering. Total outstanding shares upon completion of the
offering will be 5,100,000, 6,000,000, 6,900,000 and 7,935,000, at the
minimum, midpoint, maximum and adjusted maximum, respectively.
(4) Assumes that 8% of the shares sold in the offering will be purchased by
the Gloucester County Federal Savings Bank Employee Stock Ownership
Plan, and that the funds used to acquire those shares will be borrowed
from Gateway Community Financial Corp., concurrent with the offering.
For an estimate of the impact of the loan on earnings, see Pro Forma
Data. Gloucester County Federal Savings Bank intends to make scheduled
discretionary contributions to the Gloucester County Federal Savings
Bank Employee Stock Ownership Plan sufficient to enable it to service
and repay its debt over a ten year period. The amount of shares to be
acquired by the Gloucester County Federal Savings Bank Employee Stock
Ownership Plan is reflected as a reduction of stockholders' equity. See
Management - Stock Benefit Plans - Employee Stock Ownership Plan. If
the Gloucester County Federal Savings Bank Employee Stock Ownership
Plan is unable to purchase stock in the stock offering due to an
oversubscription in the offering by Eligible Account
24
Holders having first priority, and the purchase price in the open
market is greater than the original $10.00 price per share, there will
be a corresponding reduction in stockholders' equity.
(5) Assumes that an amount equal to 1.96% of the total number of shares
outstanding after the offering, including shares held by Gateway
Community Financial, MHC, is purchased by the restricted stock plan
following the stock offering. The stock purchased by the restricted
stock plan is reflected as a reduction of stockholders' equity. See
footnote (2) to the table under Pro Forma Data.
PRO FORMA DATA
The actual net proceeds from the sale of the stock cannot be determined
until the offering is completed. The net proceeds to Gateway Community Financial
Corp. are currently estimated to be between $22.2 million and $30.2 million
($34.8 million at the adjusted maximum), based on the following assumptions:
o shares sold in the offering will be sold in either the subscription
offering or the community offering, with no shares being sold in a
syndicated community offering; and
o expenses of the offering, including the fees and expenses of Sandler
O'Neill & Partners, L.P., are estimated to be between approximately
$768,000 at the minimum and $851,000 at the maximum ($899,000 at the
adjusted maximum).
The following table sets forth Gateway Community Financial Corp.'s
historical net income and stockholders' equity prior to the offering and pro
forma net income and stockholders' equity giving effect to the offering. In
preparing this table, we have made the following assumptions:
o Pro forma net income has been calculated assuming the stock had been
sold at the beginning of the period and the net proceeds had been
invested at an average yield of 5.0% and 4.9% for the year ended
December 31, 2006 and the quarter ended March 31, 2007, which
approximates the yield on a one-year U.S. Treasury bill on December
31, 2006 and March 31, 2007, respectively. The yield on a one-year
U.S. Treasury bill, rather than an arithmetic average of the average
yield on interest-earning assets and the average rate paid on
deposits, has been used to estimate income on net proceeds because we
believe that the one-year U.S. Treasury bill rate is a more accurate
estimate of the rate that would be obtained on an investment of net
proceeds from the offering. The pro forma after-tax yield (based upon
a 40.0% tax rate) on the net proceeds is assumed to be 3.00% and 2.94%
for the year ended December 31, 2006 and the quarter ended March 31,
2007, respectively.
o We assumed that 8.0% of the shares sold in the offering were purchased
in the offering by the Gloucester County Federal Savings Bank Employee
Stock Ownership Plan (ESOP) at a price of $10.00 per share using funds
borrowed from Gateway Community Financial Corp. We assumed that
Gloucester County Federal Savings Bank would make annual contributions
to the Gloucester County Federal Savings Bank Employee Stock Ownership
Plan in an amount at least equal to the principal and interest
requirement of the loan. We have assumed a 10-year amortization period
for the loan. The stock acquired by the Gloucester County Federal
Savings Bank Employee Stock Ownership Plan is reflected as a reduction
of stockholders' equity. See Management - Stock Benefit Plans -
Employee Stock Ownership Plan.
o We assumed that the stock option plan had been approved by
stockholders of Gateway Community Financial Corp. and that Gateway
Community Financial Corp. had reserved for future issuance upon the
exercise of options to be granted under the plan an amount of stock
equal to 4.9% of the
25
total number of shares outstanding after the offering, including
shares held by Gateway Community Financial, MHC. We assumed that
options for all shares reserved under the plan were granted to plan
participants at the beginning of the period and that 30% of the
options granted were non- qualified options for income tax purposes.
We assumed that the options would vest at a rate of 20% per year and
that compensation expense would be recognized on a straight-line basis
over the 5-year vesting period. See Management - Stock Benefit Plans -
Stock Option Plan.
o We assumed that the restricted stock plan had been approved by
stockholders of Gateway Community Financial Corp. and that the
restricted stock plan had acquired an amount of stock equal to 1.96%
of the total number of shares outstanding after the offering,
including shares held by Gateway Community Financial, MHC, at the
beginning of the periods presented through open market purchases at a
price of $10.00 per share using funds contributed to the restricted
stock plan by Gloucester County Federal Savings Bank. We assumed that
all shares held by the plan were granted to plan participants at the
beginning of the period, that the shares would vest at a rate of 20%
per year and that compensation expense will be recognized on a
straight-line basis over the 5-year vesting period. See Management -
Stock Benefit Plans - Restricted Stock Plan.
o We assumed that no withdrawals were made from deposit accounts to
purchase shares in the offering.
o Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by the indicated number of
shares of stock, as adjusted in the pro forma earnings per share to
give effect to the purchase of shares by the Gloucester County Federal
Savings Bank Employee Stock Ownership Plan.
o Pro forma stockholders' equity amounts have been calculated as if the
stock had been sold at the end of the period and no effect has been
given to the assumed earnings effect of the transaction.
The following pro forma data relies on the assumptions we outlined
above, and this data does not represent the fair market value of the common
stock, the current value of assets or liabilities, or the amount of money that
would be distributed to stockholders if Gateway Community Financial Corp. were
liquidated. The pro forma data does not predict how much we will earn in the
future. You should not use the following information to predict future results
of operations.
26
The following table summarizes historical and pro forma data of Gateway
Community Financial Corp. at or for the year ended December 31, 2006 based on
the assumptions set forth above and in the notes to the tables and should not be
used as a basis for projections of market value of the stock following the stock
offering.
Pro Forma
At or For the Year Ended December 31, 2006
-----------------------------------------------
Maximum,
Minimum Midpoint Maximum as adjusted
2,295,000 2,700,000 3,105,000 3,570,750
shares sold shares sold shares sold shares sold
at $10.00 at $10.00 at $10.00 at $10.00
per share per share per share per share
--------- --------- --------- ---------
(Dollars in thousands,
except share and per share amounts)
Gross proceeds ........................................... $ 22,950 $ 27,000 $ 31,050 $ 35,708
Less expenses ............................................ (768) (810) (851) (899)
-------- -------- -------- --------
Net proceeds ........................................... 22,182 26,190 30,199 34,809
Less ESOP adjustment ..................................... (1,836) (2,160) (2,484) (2,857)
Less restricted stock plan adjustment .................... (1,000) (1,176) (1,352) (1,555)
-------- -------- -------- --------
Estimated investable net proceeds ..................... $ 19,346 $ 22,854 $ 26,363 $ 30,397
======== ======== ======== ========
Net Income:
Historical ............................................ $ 379 $ 379 $ 379 $ 379
Pro forma income on net proceeds ...................... 580 686 791 912
Pro forma ESOP adjustment(1) .......................... (110) (130) (149) (171)
Pro forma restricted stock plan adjustment(2) ......... (120) (141) (162) (187)
Pro forma option adjustment(3) ........................ (190) (223) (257) (295)
-------- -------- -------- --------
Pro forma net income .................................. $ 539 $ 571 $ 602 $ 638
======== ======== ======== ========
Earnings Per Share:
Historical ............................................ $ 0.07 $ 0.06 $ 0.05 $ 0.04
Pro forma income on net proceeds ...................... 0.12 0.12 0.12 0.12
Pro forma ESOP adjustment(1) .......................... (0.02) (0.02) (0.02) (0.02)
Pro forma restricted stock plan adjustment(2) ......... (0.02) (0.02) (0.02) (0.02)
Pro forma option adjustment(3) ........................ (0.04) (0.04) (0.04) (0.04)
-------- -------- -------- --------
Pro forma earnings per share(4) ....................... $ 0.11 $ 0.10 $ 0.09 $ 0.08
======== ======== ======== ========
Stockholders' Equity:
Historical ............................................ $ 28,903 $ 28,903 $ 28,903 $ 28,903
Estimated net proceeds ................................ 22,182 26,190 30,199 34,809
Less: common stock acquired by ESOP(1) ................ (1,836) (2,160) (2,484) (2,857)
Less: common stock acquired by restricted stock plan(2) (1,000) (1,176) (1,352) (1,555)
-------- -------- -------- --------
Pro forma stockholders' equity ........................ $ 48,249 $ 51,757 $ 55,266 $ 59,300
======== ======== ======== ========
Book Value Per Share:
Historical ............................................ $ 5.67 $ 4.82 $ 4.19 $ 3.64
Estimated net proceeds ................................ 4.35 4.37 4.38 4.39
Less: common stock acquired by ESOP(1) ................ (0.36) (0.36) (0.36) (0.36)
Less: common stock acquired by restricted stock plan(2) (0.20) (0.20) (0.20) (0.20)
-------- -------- -------- --------
Pro forma book value per share(4) ..................... $ 9.46 $ 8.63 $ 8.01 $ 7.47
======== ======== ======== ========
Offering price as a percentage of pro forma
book value per share .................................. 105.7% 115.9% 124.8% 133.9%
Offering price to pro forma earnings per share ........... 90.9x 100.0x 111.1x 125.0x
27
- --------------
(1) The expense of Gloucester County Federal Savings Bank's contribution to
its Employee Stock Ownership Plan (ESOP) is based on an assumed average
fair value of $10.00 per share. If the fair market value is different
than $10.00 per share at the time the shares are released to ESOP
participants, the related expense recognized will be different. A
higher fair market value will result in higher compensation expense for
the Bank.
(2) The issuance of authorized but unissued shares of stock to the
restricted stock plan instead of open market purchases would dilute the
voting interests of stockholders that purchased shares in the offering
by approximately 1.9%. If the actual cost of the shares acquired by the
restricted stock plan is different than $10.00 per share, the expense
recognized will be different. There can be no assurance that
stockholder approval of the restricted stock plan will be obtained or
that the actual purchase price of the shares will be equal to $10.00
per share. See Management - Stock Benefit Plans - Restricted Stock
Plan.
(3) The pro forma net income assumes that the options granted under the
stock option plan have a value of $4.31 per option, which was
determined using the Black-Scholes-Merton option pricing formula using
the following assumptions: (i) the trading price on date of grant was
$10.00 per share; (ii) exercise price is equal to the trading price on
the date of grant; (iii) dividend yield of 0%; (iv) vesting period of 5
years and expected life of 10 years; (v) expected volatility of 16.79%;
and risk-free interest rate of 5.00%. Because there is currently no
market for Gateway Community Financial Corp.'s common stock, the
assumed expected volatility is based on the SNL Financial MHC index. If
the fair market value per share on the date of grant is different than
$10.00, or if the assumptions used in the option pricing formula are
different from those used in preparing this pro forma data, the value
of the options and the related expense recognized will be different.
There can be no assurance that the actual fair market value per share
on the date of grant, and correspondingly the exercise price of the
options, will be $10.00 per share. The issuance of authorized but
unissued shares of stock instead of open market purchases to fund
exercises of options granted under the stock option plan would dilute
the voting interests of stockholders that purchased shares in the
offering by approximately 4.7%. See Management - Stock Benefit Plans -
Stock Option Plan.
(4) For purposes of calculating earnings per share, only the shares
committed to be released under the Gloucester County Federal Savings
Bank Employee Stock Ownership Plan were considered outstanding. For
purposes of calculating book value per share, all shares under the
Gloucester County Federal Savings Bank Employee Stock Ownership Plan
were considered outstanding. We have also assumed that no options
granted under the stock option plan were exercised during the period
and that the trading price of Gateway Community Financial Corp. common
stock at the end of the period was $10.00 per share. Under this
assumption, using the treasury stock method, no additional shares of
stock were considered to be outstanding for purposes of calculating
earnings per share or book value per share.
28
The following table summarizes historical and pro forma data of Gateway
Community Financial Corp. at or for the quarter ended March 31, 2007 based on
the assumptions set forth above and in the notes to the tables and should not be
used as a basis for projections of market value of the stock following the stock
offering.
Pro Forma
At or For the Quarter Ended March 31, 2007
----------------------------------------------
Maximum,
Minimum Midpoint Maximum as adjusted
2,295,000 2,700,000 3,105,000 3,570,750
shares sold shares sold shares sold shares sold
at $10.00 at $10.00 at $10.00 at $10.00
per share per share per share per share
--------- --------- --------- ---------
(Dollars in thousands,
except share and per share amounts)
Gross proceeds ........................................... $ 22,950 $ 27,000 $ 31,050 $ 35,708
Less expenses ............................................ (768) (810) (851) (899)
-------- -------- -------- --------
Net proceeds ........................................... 22,182 26,190 30,199 34,809
Less ESOP adjustment ..................................... (1,836) (2,160) (2,484) (2,857)
Less restricted stock plan adjustment .................... (1,000) (1,176) (1,352) (1,555)
-------- -------- -------- --------
Estimated investable net proceeds ..................... $ 19,346 $ 22,854 $ 26,363 $ 30,397
======== ======== ======== ========
Net Income (Loss):
Historical ............................................ $ (200) $ (200) $ (200) $ (200)
Pro forma income on net proceeds ...................... 142 168 194 224
Pro forma ESOP adjustment(1) .......................... (28) (33) (37) (43)
Pro forma restricted stock plan adjustment(2) ......... (30) (35) (41) (47)
Pro forma option adjustment(3) ........................ (45) (53) (61) (70)
-------- -------- -------- --------
Pro forma net income .................................. $ (160) $ (152) $ (145) $ (136)
======== ======== ======== ========
Earnings (Loss) Per Share:
Historical ............................................ $ (0.04) $ (0.03) $ (0.03) $ (0.03)
Pro forma income on net proceeds ...................... 0.03 0.03 0.03 0.03
Pro forma ESOP adjustment(1) .......................... (0.01) (0.01) (0.01) (0.01)
Pro forma restricted stock plan adjustment(2) ......... (0.01) (0.01) (0.01) (0.01)
Pro forma option adjustment(3) ........................ (0.01) (0.01) (0.01) (0.01)
-------- -------- -------- --------
Pro forma earnings per share(4) ....................... $ 0.03 $ 0.03 $ 0.02 $ 0.02
======== ======== ======== ========
Stockholders' Equity:
Historical ............................................ $ 28,748 $ 28,748 $ 28,748 $ 28,748
Estimated net proceeds ................................ 22,182 26,190 30,199 34,809
Less: common stock acquired by ESOP(1) ................ (1,836) (2,160) (2,484) (2,857)
Less: common stock acquired by restricted stock plan(2) (1,000) (1,176) (1,352) (1,555)
-------- -------- -------- --------
Pro forma stockholders' equity ........................ $ 48,096 $ 51,603 $ 55,112 $ 59,146
======== ======== ======== ========
Book Value Per Share:
Historical ............................................ $ 5.64 $ 4.79 $ 4.17 $ 3.62
Estimated net proceeds ................................ 4.35 4.37 4.38 4.39
Less: common stock acquired by ESOP(1) ................ (0.36) (0.36) (0.36) (0.36)
Less: common stock acquired by restricted stock plan(2) (0.20) (0.20) (0.20) (0.20)
-------- -------- -------- --------
Pro forma book value per share(4) ..................... $ 9.43 $ 8.60 $ 7.99 $ 7.45
======== ======== ======== ========
Offering price as a percentage of pro forma
book value per share .................................. 106.0% 116.3% 125.2% 134.2%
Offering price to pro forma earnings per share(5)......... NM NM NM NM
29
- -------------------------
(1) The expense of Gloucester County Federal Savings Bank's contribution to
its Employee Stock Ownership Plan (ESOP) is based on an assumed average
fair value of $10.00 per share. If the fair market value is different
than $10.00 per share at the time the shares are released to ESOP
participants, the related expense recognized will be different. A
higher fair market value will result in higher compensation expense for
the Bank.
(2) The issuance of authorized but unissued shares of stock to the
restricted stock plan instead of open market purchases would dilute the
voting interests of stockholders that purchased shares in the offering
by approximately 1.9%. If the actual cost of the shares acquired by the
restricted stock plan is different than $10.00 per share, the expense
recognized will be different. There can be no assurance that
stockholder approval of the restricted stock plan will be obtained or
that the actual purchase price of the shares will be equal to $10.00
per share. See Management - Stock Benefit Plans - Restricted Stock
Plan.
(3) The pro forma net income assumes that the options granted under the
stock option plan have a value of $4.31 per option, which was
determined using the Black-Scholes-Merton option pricing formula using
the following assumptions: (i) the trading price on date of grant was
$10.00 per share; (ii) exercise price is equal to the trading price on
the date of grant; (iii) dividend yield of 0%; (iv) vesting period of 5
years and expected life of 10 years; (v) expected volatility of 16.79%;
and risk-free interest rate of 5.00%. Because there is currently no
market for Gateway Community Financial Corp.'s common stock, the
assumed expected volatility is based on the SNL Financial MHC index. If
the fair market value per share on the date of grant is different than
$10.00, or if the assumptions used in the option pricing formula are
different from those used in preparing this pro forma data, the value
of the options and the related expense recognized will be different.
There can be no assurance that the actual fair market value per share
on the date of grant, and correspondingly the exercise price of the
options, will be $10.00 per share. The issuance of authorized but
unissued shares of stock instead of open market purchases to fund
exercises of options granted under the stock option plan would dilute
the voting interests of stockholders that purchased shares in the
offering by approximately 4.7%. See Management - Stock Benefit Plans -
Stock Option Plan.
(4) For purposes of calculating earnings per share, only the shares
committed to be released under the Gloucester County Federal Savings
Bank Employee Stock Ownership Plan were considered outstanding. For
purposes of calculating book value per share, all shares under the
Gloucester County Federal Savings Bank Employee Stock Ownership Plan
were considered outstanding. We have also assumed that no options
granted under the stock option plan were exercised during the period
and that the trading price of Gateway Community Financial Corp. common
stock at the end of the period was $10.00 per share. Under this
assumption, using the treasury stock method, no additional shares of
stock were considered to be outstanding for purposes of calculating
earnings per share or book value per share.
(5) This ratio is not meaningful since there was a loss rather than
earnings for the quarter ended March 31, 2007.
30
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents Gloucester County Federal Savings Bank's
historical and pro forma capital position relative to its regulatory capital
requirements as of March 31, 2007. Pro forma capital levels assume receipt by
the Bank of 50% of the net proceeds at all points of the offering range.
However, such additional amount as may be necessary will be contributed to the
Bank so that the ratio of its tangible capital to its total assets upon
completion of the offering is at least 10%. For a discussion of the assumptions
underlying the pro forma capital calculations presented below, see Use of
Proceeds, Capitalization and Pro Forma Data. For a discussion of the capital
standards applicable to Gloucester County Federal Savings Bank, see Regulation -
Regulation of Gloucester County Federal Savings Bank - Regulatory Capital
Requirements.
Pro Forma at March 31, 2007
------------------------------------------------------------------------------------
Maximum, as adjusted
Minimum Midpoint Maximum 3,570,750 shares
Actual, at 2,295,000 shares sold 2,700,000 shares sold 3,105,000 shares sold sold
March 31, 2007 at $10.00 per share at $10.00 per share at $10.00 per share at $10.00 per share
------------------- -------------------- ------------------- ------------------- -------------------
Percentage Percentage Percentage Percentage Percentage
Amount of Assets(1) Amount of Assets(1) Amount of Assets(1) Amount of Assets(1) Amount of Assets(1)
------ ------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------
(Dollars in thousands)
GAAP Capital........... $28,472 7.68% $36,728 9.69% $38,231 10.04% $39,735 10.40% $41,465 10.8%
Tangible Capital(2).... $27,334 7.37% $35,590 9.39% $37,093 9.74% $38,598 10.10% $40,327 10.50%
Tangible Capital
Requirement.......... 5,564 1.50 5,688 1.50 5,710 1.50 5,733 1.50 5,759 1.50
------- ---- ------- ---- ------- ----- ------- ----- ------- -----
Excess................. $21,770 5.87% $29,902 7.89% $31,383 8.24% $32,865 8.60% $34,568 9.00%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Core Capital........... $27,334 7.37% $35,590 9.39% $37,093 9.74% $38,598 10.10% $40,327 10.50%
Core Capital
Requirement.......... 11,128 3.00 11,375 3.00 11,420 3.00 11,465 3.00 11,517 3.00
------- ---- ------- ---- ------- ----- ------- ----- ------- -----
Excess................. $16,206 4.37% $24,215 6.39% $25,673 6.74% $27,133 7.10% $28,810 7.50%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Total Risk-Based
Capital(3)(4)........ $28,513 13.84 $36,769 17.50% $38,272 18.15% $39,776 18.79% $41,506 19.53%
Risk-Based Capital
Requirement.......... 16,481 8.00 16,812 8.00 16,872 8.00 16,932 8.00 17,001 8.00
------- ---- ------- ---- ------- ----- ------- ----- ------- -----
Excess................. $12,032 5.84% $19,957 9.50% $21,400 10.15% $22,844 10.79% $24,505 11.53%
======= ==== ======= ==== ======= ===== ======= ===== ======= =====
Reconciliation of pro forma increase in
GAAP and regulatory capital:
Bank's receipt of 50% of the net proceeds
from the offering....................... $11,091 $13,095 $15,100 $17,405
Less: funding of employee stock
ownership plan........................ (1,836) (2,160) (2,484) (2,857)
Less: funding of future restricted
stock plan........................... (1,000) (1,176) (1,352) (1,555)
------- ------- ------- -------
Total pro forma increase in GAAP and
regulatory capital................. $ 8,255 $ 9,759 $11,263 $12,993
======= ======= ======= =======
- --------------------
(1) Tangible and core capital levels are shown as a percentage of total
adjusted assets. The risk-based capital level is shown as a percentage of
risk-weighted assets.
(2) Generally accepted accounting principles, referred to as "GAAP," capital
includes goodwill, intangible assets and unrealized gain (loss) on
available for sale securities, net, which are not included in regulatory
capital.
(3) Assumes net proceeds are invested in assets that carry a 50%
risk-weighting.
(4) The difference between core capital and risk-based capital is attributable
to the addition of general loan loss reserves of $1.8 million and the
deduction of $644,000 of other assets required to be deducted.
31
SELECTED FINANCIAL AND OTHER DATA
The following financial information and other data should be read
together with the consolidated financial statements and the notes thereto
beginning on page F-1 of this document. The data at and for the three months
ended March 31, 2007 and 2006 is unaudited, however, in the opinion of
management, all adjustments, consisting of normal recurring adjustments, that
are necessary for a fair presentation of the interim periods have been
reflected.
At December 31,
At March 31, ----------------------------------------------------
2007 2006 2005 2004 2003 2002
-------- -------- -------- -------- -------- --------
(In thousands)
Balance Sheet Data:
Assets ........................... $372,081 $351,864 $308,011 $315,927 $293,414 $312,402
Loans receivable, net ............ 211,035 210,492 180,916 167,320 163,343 182,660
Investment securities ............ 67,067 52,797 41,315 48,451 50,361 58,222
Mortgage-backed securities........ 64,197 59,185 54,032 61,201 40,658 23,235
Cash and cash equivalents......... 9,026 10,618 14,031 19,760 19,448 28,729
Deposits ......................... 319,998 315,962 277,544 286,611 266,895 283,732
Short-term borrowings ............ 21,000 4,400 - - - -
Total equity ..................... 28,748 28,903 28,546 26,934 25,332 27,062
For the Year Ended December 31,
--------------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
(In thousands)
Summary of Operations:
Interest and dividend income .............. $ 16,273 $ 14,221 $ 13,913 $ 14,477 $ 17,306
Interest expense .......................... 9,377 5,871 5,204 5,899 9,007
-------- -------- -------- -------- --------
Net interest income ....................... 6,896 8,350 8,709 8,578 8,299
Provisions for (recoveries of
provisions for) loan losses ............ (348) (917) (13) 4,342 7,550
-------- -------- -------- -------- --------
Net interest income after provisions for
(recoveries of provisions for) loan losses 7,244 9,267 8,722 4,236 749
Noninterest income ........................ 856 883 876 793 712
Noninterest expense ....................... 7,631 7,634 7,689 7,384 6,022
-------- -------- -------- -------- --------
Income (loss) before income tax
expense (benefit) ...................... 469 2,516 1,909 (2,355) (4,561)
Income tax expense (benefit) .............. 90 893 259 (673) (1,924)
-------- -------- -------- -------- --------
Net income (loss) ......................... $ 379 $ 1,623 $ 1,650 $ (1,682) $ (2,637)
======== ======== ======== ======== ========
For the Three Months
Ended March 31,
2007 2006
------- -------
(In thousands)
Summary of Operations:
Interest and dividend income .............................. $ 4,621 $ 3,645
Interest expense .......................................... 2,958 1,786
------- -------
Net interest income ....................................... 1,663 1,859
Provisions for (recoveries of provisions for) loan losses.. - (200)
------- -------
Net interest income after provisions for
(recoveries of provisions for) loan losses ............... 1,663 2,058
Noninterest income ........................................ 190 202
Noninterest expense ....................................... 2,178 1,921
------- -------
Income (loss) before income tax expense (benefit) ......... (325) 339
Income tax expense (benefit) .............................. (125) 117
------- -------
Net income (loss) ......................................... $ (200) $ 222
======= =======
32
At or For the
Three Months At or For the Year Ended December 31,
Ended March 31, -----------------------------------------------------
2007 2006 2006 2005 2004 2003 2002
------- ------- ------- ------- ------- ------- -------
Performance Ratios:
Return on average assets
(net income divided by
average total assets) ......... (0.22)% 0.29% 0.11% 0.53% 0.54% (0.56)% (0.87)%
Return on average equity
(net income divided by
average equity) ................ (2.78)% 3.11% 1.33% 6.04% 6.43% (6.44)% (8.87)%
Net interest rate spread ......... 1.83% 2.39% 2.06% 2.80% 2.98% 3.38% 2.82%
Net interest margin on
average interest-earning
assets ......................... 2.02% 2.58% 2.25% 2.94% 3.08% 3.33% 3.02%
Average interest-earning
assets to average
interest-bearing liabilities.... 105.44% 107.49% 106.20% 106.40% 105.64% 97.99% 106.16%
Efficiency ratio (noninterest
expense divided by the
sum of net interest income
and noninterest income) ........ 117.54% 93.21% 98.44% 82.68% 80.22% 78.80% 66.83%
Noninterest expense to
average assets ................. 2.42% 2.50% 2.30% 2.49% 2.52% 2.45% 1.98%
Asset Quality Ratios:
Non-performing loans to
total loans, net ............... 0.92% 1.51% 1.17% 1.75% 0.80% 1.46% 0.84%
Non-performing assets to
total assets ................... 0.70% 1.01% 0.80% 1.14% 0.58% 0.99% 0.51%
Net loan charge-offs
(recoveries of loans
charged-off) to
average loans
outstanding .................... (0.02)% 0.71% 0.44% 0.01% (0.07)% 5.02% 0.35%
Allowance for loan
losses to total loans .......... 0.86% 1.32% 0.85% 1.65% 2.31% 2.31% 4.36%
Allowance for loan
losses to non-performing
loans .......................... 92.40% 87.18% 72.99% 94.46% 290.76% 158.73% 522.19%
Capital Ratios:
Average equity to
average assets ................. 8.01% 9.30% 8.71% 8.85% 8.48% 8.65% 9.75%
Equity to assets
at period end .................. 7.73% 9.21% 8.21% 9.27% 8.53% 8.63% 8.66%
33
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis reflects Gateway Community Financial
Corp.'s consolidated financial statements and other relevant statistical data
and is intended to enhance your understanding of our financial condition and
results of operations. The consolidated financial condition and results of
operations of Gateway Community Financial Corp. include Gloucester County
Federal Savings Bank. Gateway Community Financial Corp. does not at the present
time engage in any activities other than serving as a holding company for
Gloucester County Federal Savings Bank. You should read the information in this
section in conjunction with Gateway Community Financial Corp.'s consolidated
financial statements and accompanying notes thereto beginning on page F-1 of
this document, and the other statistical data provided in this prospectus.
Overview
General. Our primary business is attracting retail deposits from the
general public and using those deposits, together with funds generated from
operations, principal repayments on securities and loans, and borrowed funds,
for our lending and investing activities. We provide residential, consumer and
commercial financing. Our securities portfolio consists of U.S. government
agency securities, mortgage-backed securities and other investment grade
securities.
Our results of operations depend mainly on our net interest income,
which is the difference between the interest income earned on our loan and
investment portfolios and interest expense paid on our deposits and borrowed
funds. Net interest income is a function of the average balances of loans and
investments versus deposits and borrowed funds outstanding in any one period and
the yields earned on those loans and investments and the cost of those deposits
and borrowed funds. The loans we originate are generally long- term loans with
fixed interest rates. At March 31, 2007, 70% of our total loans had maturities
of ten years or more, and nearly 98% of loans with maturities greater than one
year had fixed interest rates. The impact of having a loan portfolio consisting
primarily of long term fixed rate loans is that in a period of rising interest
rates, our cost of funds is expected to increase more rapidly than the yields
earned on our loan portfolio because our main source of funds is deposits with
generally shorter maturities or no maturity. This would cause a narrowing of our
net interest rate spread and a decrease in our earnings.
During the past several years, the operating environment for financial
institutions has been challenging. Short-term interest rates, which influence
the pricing of our deposits and borrowings, have been rising in conjunction with
the rate increases implemented by the Federal Reserve Board since June 2004,
while longer-term interest rates, which guide the pricing of our loans, have
been relatively constant. This has resulted in a yield curve environment that
has been flat or "inverted"; i.e. short-term interest rates have been higher
than long-term interest rates. This has had a negative effect on our net
interest spread, net interest margin and net interest income. While the net
proceeds of the stock offering will provide
34
increased funds for lending and investing and increased interest income in the
second half of 2007, a continuation of this flat or inverted yield curve
environment will continue to negatively impact our profitability.
At March 31, 2007, one-to-four family residential real estate mortgages
and home equity loans and lines of credit comprised approximately 75% of our
total loans, and manufactured housing loans comprised 4% of our total loans.
There has been a slowing in the housing markets, and home price appreciation has
decelerated. Information provided by the Bureau of the Census and National
Association of Realtors shows that the housing markets peaked in 2005 and
clearly declined in 2006. These trends are expected to continue in 2007. However
with the exception of the markets that experienced the most extreme price
appreciation in 2005, in most cases housing prices have held up fairly well -
with prices either flat or experiencing only modest declines. This appears to be
true in our local New Jersey market area. During the first quarter of 2007, we
did observe a modest slowdown in demand for one-to-four family residential real
estate mortgages and home equity loans and lines of credit.
The slowdown in the housing market has lead to much discussion on the
credit quality of residential real estate loans. Much of the recent discussion
of decreasing credit quality and increasing defaults has centered on the
sub-prime mortgage market as well as adjustable rate and interest-only
mortgages. We do not participate in the sub-prime market or originate
interest-only mortgages. Additionally, we have limited exposure in adjustable
rate mortgages. To date, we have not seen an increasing trend in delinquencies
in our residential mortgage loan products, although no assurances can be given
that we will not experience increased delinquencies in the future, particularly
if the slowdown in the housing market persists or worsens.
Our results of operations are also significantly affected by
non-interest income and non-interest expense. Non-interest income consists
primarily of income from service fees and charges for normal banking operations.
It also includes income on bank-owned life insurance. Noninterest income is
affected by gains or losses on sales of securities, loans, real estate owned and
other assets. Our noninterest income for 2006 totaled $856,000, as compared to
$883,000 for 2005 and $875,000 for 2004.
Non-interest expense includes compensation and benefits expense,
occupancy and equipment expense and other general and administrative expenses
such as data processing, professional fees and marketing/advertising costs.
Noninterest expense totaled $7.6 million for 2006, nearly unchanged from 2005
and slightly lower than noninterest expense of $7.7 million for 2004.
After the stock offering, additional annual employee compensation and
benefit expenses stemming from the shares granted to employees, officers and
directors under new benefit plans will increase this category of expense. We
will recognize expense for our employee stock ownership plan when shares are
committed to be released to participants' accounts and will recognize expenses
for restricted stock awards over the vesting period of awards made to
recipients. In addition, we will be required to recognize compensation expense
related to stock options outstanding based upon the fair value of such awards at
the date of grant over the period that such awards are earned. Additions to our
lending staff are also expected to result in increases in compensation expense.
We also expect that noninterest expense will be higher going forward as
a result of the accounting, legal and various other additional noninterest
expenses associated with operating as a public company, particularly as a result
of the requirements of the Sarbanes-Oxley Act of 2002.
Provisions for loan losses and recoveries of provisions for loan losses
can also have a material impact on our results of operations. Gloucester County
Federal Savings Bank's allowance for loans losses is established through
provisions for loan losses that are charged against the Bank's income during the
period the provision is made. Loans deemed to be uncollectible are charged
against the allowance for loan
35
losses, and amounts recovered on loans previously charged against the allowance
are credited back to the allowance. We may also make a recovery of prior
provisions for loan losses when management deems it appropriate to reduce the
size of the allowance to reflect the current estimate of known and inherent
losses in the portfolio. Recoveries of prior provisions for loans losses
represented 36% of pre-tax income in 2005 and 74% of pre-tax income in 2006.
Management does not currently anticipate further recoveries of prior provisions
for loan losses.
Past Challenges and Difficulties. Historically, we operated as a
traditional thrift, with limited exposure in commercial lending. In the late
1990s, we ventured from our traditional business strategy of originating
primarily one-to-four family loans and embarked on a rapid expansion of our
commercial real estate and business lending. We aggressively built a commercial
loan portfolio, originating a diverse mix of commercial loans, including not
only commercial real estate mortgages, but also financing of the working capital
needs of businesses with lines of credit and loans on accounts receivable,
inventory and equipment. Our commercial portfolio grew to approximately $71.0
million and represented roughly one- third of our total loans by 2002.
Commercial lending generally poses higher risks than the traditional
lending activities of a savings bank, which primarily focus on financing
non-commercial properties such as one-to-four family residential real estate. A
certain level of specialized expertise is required for successful underwriting
and monitoring of commercial loans, which generally requires substantially
greater evaluation and oversight efforts. Unlike residential mortgage loans,
which are made on the basis of the borrower's ability to make repayment from his
or her employment and other income, and which are secured by real property with
values that tend to be more easily ascertainable, commercial loans typically are
made on the basis of the borrower's ability to make repayment from the cash flow
of the borrower's business. As a result, the availability of funds for the
repayment of commercial loans may be substantially dependent on the success of
the business or rental property itself and the general economic environment. In
addition, commercial loans generally result in larger balances to single
borrowers, or related groups of borrowers, than one- to four-family loans.
Our commercial portfolio initially appeared to be sound and was
performing with only minor weaknesses, but after several years there was an
increasing number of loans that exhibited weaknesses or deficiencies. In early
2003, the potential magnitude of problems in the portfolio became apparent when
our commercial loan officer resigned and we discovered that our commercial loan
officer had engaged in lending activities in excess of her authority, had
withheld material information from the Board of Directors and management, and
had not maintained important records in the loan files. The problems with the
commercial portfolio included poor initial underwriting and loan structuring,
pricing structures and loan terms that were inconsistent with typical banking
practices, inadequate or unidentified collateral support, inadequate
documentation of loans, unsupportive cash flows, loans with limited equity
contribution by the borrower and loans to start-up entities and borrowers in
weak financial position. There was a lack of depth in the evaluation of
borrowers' creditworthiness, and a failure to base the primary credit assessment
on thorough cash flow analysis of the borrowers. In addition, updated financial
statements from commercial borrowers and/or updated verification of the
collateral securing the loan had not been obtained.
When we discovered the extent of the problems in our commercial loan
portfolio, we promptly hired a new commercial loan officer, retained a loan
workout specialist, and contracted with an outside consultant to conduct a
complete review of the commercial portfolio. The first review was completed by
the outside consultant for the March 31, 2003 quarter end and resulted in a
material adverse change from our prior internal assessment of the portfolio.
Later in the year our primary regulator, the Office of Thrift Supervision
("OTS"), evaluated our outside consultant's review and
36
directed us to downgrade an additional $6.8 million of loans to special mention
and an additional $7.6 million to substandard. The result of the loan reviews
was that a total of $23.1 million of our commercial and commercial real estate
loans were designated as classified assets.
We were ordered by the OTS in 2003 to cease further commercial lending
and were directed to take various corrective actions. In response to the
directives of the OTS, we took the following actions to improve the operation
and oversight of our lending activities:
o We revised the classification of assets policy and reconstituted the
asset classification committee. Our policy previously did not have a
definition of adversely classified assets that coincided with
applicable regulatory definitions.
o We added new members to the board of directors. The OTS directed us to
add at least three new, qualified, experienced professionals possessing
relevant backgrounds and knowledge of corporate governance. This was
accomplished in 2004.
o We ceased all new commercial lending while we focused on addressing
weaknesses in the commercial lending program and reducing our
classified asset levels. We also developed a detailed written exit
strategy for all classified assets with balances greater than $250,000.
o We revised our commercial loan policy. The policy now is specific as to
what constitutes an acceptable credit and what minimum financial ratios
(i.e., debt service coverage) are acceptable.
The restriction on our commercial lending was removed by the Office of
Thrift Supervision in late 2004. In 2005, the OTS issued a formal order of
prohibition against our former commercial loan officer. The OTS found that she
had demonstrated willful or continuing disregard for the safety and soundness of
Gloucester County Federal Savings Bank and barred her from further employment in
any type of banking institution.
Allowance for Loan Losses. The level of our allowance for loan losses
has primarily been driven by the level of classified assets over the past five
years. The increase in classified assets resulting from the generally poor
quality of our commercial loan portfolio, as discussed above, necessitated
material provisions to the allowance for loan losses. For the year ended
December 31, 2002, we made provisions for loan losses totaling $7.5 million,
which brought the allowance for loan losses as of December 31, 2002 to $8.3
million, representing 4.36% of total loans at that date. During the year ended
December 31, 2003, we took charge-offs against the allowance for $8.8 million of
loans we deemed uncollectible ($8.6 million of which were commercial loans), and
we made another large provision for loan losses, amounting to $4.3 million,
resulting in an allowance balance at year end of $3.9 million, representing
2.31% of total loans at that date.
In 2004, 2005 and 2006, we took recoveries of loan loss provisions out
of the allowance for loan losses as our level of classified assets decreased and
the outstanding balance of commercial and commercial real estate loans fell.
Most of the remaining classified assets consist of long-term workout
arrangements with borrowers. None of those workout arrangements qualify,
however, as troubled debt restructurings. Portfolio risk has also declined as
the amount of higher risk loans has decreased over the past five years and
recent loan growth has been centered in residential mortgage loans.
37
Classified assets at year end over the last five years have steadily
dropped, from $29.6 million at December 31, 2002 to $22.1 million at December
31, 2003, $16.7 million at December 31, 2004, $8.5 million at December 31, 2005
and $6.2 million at December 31, 2006. Commercial and commercial real estate
loans as a percentage of total loans declined from 34% of total loans at
December 31, 2002, to 23% at December 31, 2003, 17% at December 31, 2004, 11% at
December 31, 2005 and 9% at December 31, 2006. This reduction in classified
loans and improved risk profile of the loan portfolio was the primary reason
that we determined it appropriate to take recoveries of loan loss provisions in
the amount of $13,000 in 2004, $917,000 in 2005 and $348,000 in 2006.
Charge-offs in 2005 were $77,000, and the allowance for loan losses was $3.0
million at December 31, 2005, representing 1.65% of total loans at that date.
Charge-offs in 2006 were $988,000, and the allowance for loan losses stood at
$1.8 million at December 31, 2006, representing 0.85% of total loans at that
date. Of the $23.1 million of commercial and commercial real estates loans that
were designated as classified assets when the problems in the loan portfolio
first became evident, $12.6 million of those loans were subsequently paid off,
while $10.5 million was charged off. At March 31, 2007, classified assets were
$7.3 million, an increase of 18.9% from December 31, 2006.
The allowance currently reflects management's best estimate of the
known and inherent losses in the portfolio that are both probable and reasonable
to estimate and management does not at this time anticipate further recoveries
of loan loss provisions out of the allowance for loan losses.
Current Challenges and Business Strategy. Our earnings are lower than
our peers, primarily because of our low interest rate spreads and margins and
low levels of noninterest income. We have experienced compression of our
interest rate spread and net interest margin as a result of the flat or inverted
interest rate yield curve environment during recent years. Additionally, our net
interest margin has been negatively impacted by our relatively low yield on
interest-earning assets. Our low yield on interest-earning assets is partially
attributable to the fact that securities represent a relatively large proportion
of our total assets (35% at March 31, 2007) as compared to loans, which
generally earn higher yields than other interest-earning assets. Our average
yield on loans for 2006 was 5.74%, while our average yield on securities and
other interest-earning assets was 4.40%.
Our profitability is also negatively impacted by our relatively low
levels of noninterest income. Our high concentration of certificates of deposit
as a percentage of total deposits (50% at March 31, 2007) and our low level of
loans as a percentage of total assets have negatively impacted our ability to
generate noninterest income from deposit account charges and loan origination
fees.
Our noninterest expense represents a high percentage of the income we
are able to produce. Our cost to produce income is measured by our efficiency
ratio, which is calculated as our noninterest expense divided by the sum of our
net interest income and noninterest income. For the years ended December 31,
2006 and 2005, our efficiency ratio was 98.4% and 82.7%, respectively.
Generally, this means that we spent approximately $0.83 to generate $1.00 of
income in 2005 and approximately $0.98 to generate $1.00 of income in 2006.
Our earnings for the years ended December 31, 2005 and 2006 were aided by
recoveries of loan losses. For 2005, our net income of $1.6 million included a
$917,000 (pre-tax) recovery of loan losses, which more than offset a decrease in
net interest income of $359,000. Net income for 2006 fell sharply by $1.2
million to $379,000 and consisted primarily of a $348,000 (pre-tax) recovery of
loan losses. The lower net income for 2006 was primarily due to a $1.5 million
decline in net interest income from $8.4 million for 2005 to $6.9 million for
2006, a decrease of 17.4%. Interest expense increased by $3.5 million, or 59.7%,
to $9.4 million while interest income increased by $2.1 million, or 14.4%, to
$16.3 million.
38
For the quarter ended March 31, 2007, we reported a net loss of
$200,000 as our net interest income continued to decline as a result of
continued margin compression, and failed to cover our operating expenses for the
quarter. We expect to report a loss for the second quarter of 2007 as well. If
the current interest rate environment persists, we may not be able to achieve
profitability from our core operations in the near term and we may report a loss
for the year ending December 31, 2007.
Our current strategy calls for improving our earnings profile by
increasing our interest income. After a decline in loan levels from 2002 to 2003
(primarily in the commercial loan portfolio), our loan portfolio has grown
consistently; total loans decreased 14% from 2002 to 2003 followed by an
increase of 2% from 2003 to 2004, an increase of 7% from 2004 to 2005, and an
increase of 15% from 2005 to 2006. However, as the portfolio has grown it has
also shifted toward residential real estate loans, with a decrease in consumer,
commercial and nonresidential loans, which typically bear higher yields than
one-to four family residential lending. One-to-four family loans as a percentage
of the total portfolio have increased from 26% of total loans at December 31,
2002 to 48% of total loans as of December 31, 2006, while home equity loans and
lines of credit have increased from 16% to 27% of the portfolio during the same
period.
Our current strategy is to increase originations in the more profitable
loan categories, including commercial lending and subcategories of consumer
lending, specifically, manufactured housing and non- commercial, personal use
aircraft. The size of the commercial real estate and commercial loan portfolios
as a percentage of total loans decreased as we worked through problems in those
portfolios. At December 31, 2006, our commercial real estate mortgage and
commercial loan portfolios in aggregate amounted to $19.1 million, representing
approximately 9% of our total loans, as compared to $67.1 million or 34% of our
total loans at December 31, 2002. We now intend to significantly increase the
size of these portfolios and have hired two commercial lenders, one in March
2007 and one in May 2007. We hired a new consumer lender in February 2007 with
experience in aircraft financing and originated $1.4 million of aircraft loans
during the first quarter of 2007. There is no guarantee that increasing
commercial and specialized consumer lending will be profitable for the Bank,
however, senior management and the Board of Directors believe that by more
closely supervising these new loan officers and implementing tigher internal
controls and more conservative underwriting, a recurrance of the asset quality
problems and loan write-offs we experienced in the past can be prevented.
Decreasing the level of liquid assets on our balance sheet and
investing them into higher earning assets will also improve our profitability.
We have made progress over the last five years in this regard as cash and cash
equivalents have steadily decreased. The trend in cash and cash equivalents over
the past five years has been a 32% decrease from 2002 to 2003 (used to fund the
purchase of mortgage-backed securities) followed by an increase of 2% from 2003
to 2004, a decrease of 29% from 2004 to 2005 (used to fund loan originations),
and a decrease of 24% from 2005 to 2006 (which funded loan originations as well
as investments in securities). Cash and cash equivalents continued to decline
during the first quarter of 2007 and totaled $9.0 million as of March 31, 2007.
Another part of our current strategy is growing deposits and using
those deposits to fund growth in the loan portfolio. We experienced good deposit
growth in 2006 after fluctuations in deposits between 2002 and 2005. The trend
in deposits over the past five years has been a 6% decline in total deposits
from 2002 to 2003, an increase of 7% from 2003 to 2004, a decrease of 3% from
2004 to 2005, and then an increase of 14% from 2005 to 2006. During the first
quarter of 2007, deposits increased 1%. Nearly all of the growth during 2006 was
in money market accounts and certificates of deposit. Certificates of deposit
increased 13% between 2005 and 2006 while money market accounts rose by 81%. The
increase in money market accounts is attributable to our introduction in 2005 of
a multi-tiered money market account. In late
39
2006, we launched a savings account product, CyberSaver, a high-yield,
multi-tiered savings account accessible only via the internet and not marketed
through our branches or locally. We have more recently introduced a new money
market account, the CyberSaver Supreme Account, which has a minimum deposit of
$100,000. Money market accounts and certificates of deposit tend to be higher
costing, less stable sources of funds, and our challenge going forward will be
to increase core deposits.
We also intend to re-evaluate our existing branch network. Since
opening in 2003, the Erial branch has struggled and failed to grow deposits to a
point where the location would be profitable. While there is no current plan or
understanding as to the closing or consolidation of the branch, management
expects to make a determination about the closing or consolidation of the branch
before the end of 2007. Increasing deposits at the branch or closing or
consolidating the branch should positively impact our profitability in the long
run. In the short term, however, our results of operations for 2007 may be
adversely affected by additional marketing to improve the branch's prospects as
well as any charges incurred in connection with a closing or consolidation. As a
result of the difficulties we have experienced with this branch, we will be
particularly cautious about evaluating the location of any new de novo branches.
Our growth strategy calls for increasing deposits at our existing branches and
possibly opening de novo branches, if appropriate opportunities arise. Our
experience with the Erial branch, which was the last de novo branch we opened,
makes this strategy particularly challenging for us.
Critical Accounting Policies
Our accounting policies are integral to understanding the results
reported and our significant policies are described in Note 1 to our
consolidated financial statements beginning on page F-1 of this document. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the consolidated statements of financial
condition and revenues and expenses for the periods then ended. Actual results
could differ significantly from those estimates. Material estimates that are
particularly susceptible to significant change relate to the determination of
the allowance for loan losses, the valuation allowance for deferred tax assets
and other-than-temporary impairment of securities.
Allowance for Loan Losses
The allowance for loan losses is maintained by management at a level
which represents their evaluation of known and inherent losses in the loan
portfolio at the consolidated balance sheet date that are both probable and
reasonable to estimate. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience, known and inherent
losses in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, composition
of the loan portfolio, current economic conditions, and other relevant factors.
This evaluation is inherently subjective as it requires material estimates that
may be susceptible to significant change, including the amounts and timing of
future cash flows expected to be received on impaired loans.
The allowance consists of specific and general components. The specific
component relates to loans that are classified as either doubtful, substandard,
or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value
of that loan. The general component covers nonclassified loans and is based on
historical loss experience adjusted for qualitative factors.
Although specific and general loan loss allowances are established in
accordance with management's best estimate, actual losses are dependent upon
future events and, as such, further provisions
40
for loan losses may be necessary. For example, our evaluation of the allowance
includes consideration of current economic conditions, and a change in economic
conditions could reduce the ability of our borrowers to make timely repayments
of their loans. This could result in increased delinquencies and increased non-
performing loans, and thus a need to make increased provisions to the allowance
for loan losses, which would be a charge to income during the period the
provision is made, resulting in a reduction to our earnings. A change in
economic conditions could also adversely affect the value of the properties
collateralizing our real estate loans, resulting in increased charge-offs
against the allowance and reduced recoveries of loans previously charged-off,
and thus a need to make increased provisions to the allowance for loan losses.
Furthermore, a change in the composition of our loan portfolio or growth of our
loan portfolio could result in the need for additional provisions.
Income Taxes
The Company accounts for income taxes under the asset/liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as well as operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is established against deferred tax assets
when, in the judgment of management, it is more likely than not that such
deferred tax assets will not become available. Because the judgment about the
level of future taxable income is dependent to a great extent on matters that
may, at least in part, be beyond the Company's control, it is at least
reasonably possible that management's judgment about the need for a valuation
allowance for deferred tax assets could change in the near term.
Other-than-Temporary Investment Security Impairment
Securities are evaluated periodically to determine whether a decline in
their value is other-than- temporary. Management utilizes criteria such as the
magnitude and duration of the decline, in addition to the reasons underlying the
decline, to determine whether the loss in value is other-than-temporary. The
term "other-than-temporary" is not intended to indicate that the decline is
permanent, but indicates that the prospect for a near-term recovery of value is
not necessarily favorable, or that there is a lack of evidence to support a
realizable value equal to or greater than the carrying value of the investment.
Once a decline in value is determined to be other-than-temporary, the value of
the security is reduced and a corresponding charge to earnings is recognized.
Changes in Financial Condition during the First Quarter of 2007 and the Year
Ended December 31, 2006
Assets. During the first quarter of 2007, total assets increased by
$20.2 million and totaled $372.1 million as of March 31, 2007. The increase was
primarily due to increases in investment securities available for sale and
mortgage-backed securities. During the year ended December 31, 2006, total
assets had increased by $43.9 million, or 14.2%, primarily due to increases in
investment securities available for sale and loans receivable and funded by
increases in deposits and borrowings.
Loans. During the first quarter of 2007, gross loans receivable rose by
$282,000 to $214.0 million. Auto loans decreased during the quarter as we
continued to reduce our indirect auto
41
lending; this portfolio amounted to $18.7 million at March 31, 2007 compared to
$21.1 million at December 31, 2006. Moderate growth in other categories offset
the decrease in auto loans. Residential mortgages increased $869,000 during the
quarter while home equity loans and lines of credit decreased $732,000. Our
aircraft lending program commenced during the quarter and aircraft loans totaled
$1.4 million as of March 31, 2007.
During the year ended December 31, 2006, gross loans receivable had
increased by $27.1 million, or 14.5%. Loan growth in residential mortgages and
home equity loans and lines of credit resulted from growth in our market area
and our increased marketing efforts. The increases in those loan categories
offset a decrease in auto loans, which have decreased over the last several
years following our decision to significantly reduce indirect auto lending
because of the below market rate we were earning on that portfolio.
One- to four-family residential mortgages were $102.8 million at
December 31, 2006 compared to $74.1 million at December 31, 2005, a 38.6%
increase. Home equity loans and lines of credit were $59.3 million at December
31, 2006 compared to $49.7 million at December 31, 2005, a 19.5% increase.
Commercial real estate loans were $14.5 million at December 31, 2006 compared to
$13.9 million at December 31, 2005, a 4.2% increase. Commercial loans were $4.6
million at December 31, 2006 compared to $6.0 million at December 31, 2006, a
24.3% decrease. We have recently hired two commercial lenders as part of our
plan to diversify our loan portfolio and improve our interest rate spread and
margins and we expect that the commercial real estate and commercial loan
portfolios will increase and will represent a larger proportion of our total
loan portfolio. We also anticipate growing the consumer loan portfolio by
focusing on manufactured housing loans and aircraft loans.
Deposits. During the first quarter of 2007, deposits increased by $4.0
million to $320.0 million. Money market deposits increased to $49.1 million at
March 31, 2007 from $44.6 million at December 31, 2006. Certificates of deposit
decreased to $161.5 million at March 31, 2007 from $162.1 million at December
31, 2006 and accounted for approximately 50% of total deposits at March 31, 2007
as compared to 51% at December 31, 2006. Jumbo certificates of deposit (those
with a minimum balance of $100,000) comprised 34.2% of all certificates of
deposit at March 31, 2007 as compared to 33.9% at December 31, 2006.
Interest-bearing savings accounts increased from $63.8 million at December 31,
2006 to $66.4 million at March 31, 2007 while checking accounts decreased from
$35.9 million at December 31, 2006 to $32.7 million at March 31, 2007. In
December of 2006 we introduced a new product, our CyberSavings account, which is
a high-yield, multi-tiered savings account that is accessible only via the
internet and is not marketed through our branches or locally. We are currently
promoting this product by offering the highest tier rate for the first 90 days,
regardless of the account balance. CyberSavings accounts totaled approximately
$17 million by the end of the first quarter of 2007. We have also recently
created a CyberSaver Supreme account, which requires a minimum balance of
$100,000. Unlike regular CyberSavings, the Supreme account is a money market
product, as opposed to a savings account.
During the year ended December 31, 2006, deposits had increased by
$38.4 million, or 13.8%. Money market deposits increased by 81% during the year
to $44.6 million at December 31, 2006. Certificates of deposit increased by
$18.5 million or 12.9% to $162.1 million at December 31, 2006 and accounted for
approximately 51% of our total deposits at both year-ends. Jumbo certificates of
deposit (those with a minimum balance of $100,000) comprised 33.9% of all
certificates of deposit as of December 31, 2006. Certificates of deposit as of
December 31, 2006 that were scheduled to mature during 2007 amounted to $113.5
million. Deposits increased as a result of the offering of competitive rates and
42
advertising. The increased deposits were used to fund loan growth and the
purchase of securities during the year. The Bank does not currently utilize
brokered deposits.
Securities. During the quarter ended March 31, 2007, investment
securities and mortgage-backed securities increased $19.3 million to $131.3
million at March 31, 2007. The average balance of investment securities during
the quarter was $60.2 million, while the average balance of mortgage-backed
securities was $61.6 million. The increase in securities was funded primarily
with borrowings. During the year ended December 31, 2006, securities had
increased $16.6 million, or 17.4% to $112.0 million at December 31, 2006, from
$95.3 million at December 31, 2005. This increase was due primarily to our
investment of funds from existing cash and cash equivalents and new deposits and
borrowings in U.S. government agency securities and mortgage-backed securities.
Cash and Cash Equivalents. Cash and cash equivalents continued to
decline during the first quarter of 2007 and totaled $9.0 million as of March
31, 2007. During the year ended December 31, 2006, cash and cash equivalents had
decreased to $10.6 million at December 31, 2006 from $14.0 million at December
31, 2005. The decrease was the result of the liquidity represented by these
funds being used to fund loan originations and investments in securities during
the year.
Bank-Owned Life Insurance. We have purchased insurance on the lives of
a group of our key employees. The policies were purchased to help offset the
increase in the costs of various retirement benefits. The cash surrender value
of these policies is included as an asset on our balance sheet, and any increase
in the cash surrender value is recorded as noninterest income. In the event of
the death of an insured individual under these policies, we would receive a
death benefit, which would be recorded as noninterest income. As of March 31,
2007, bank-owned life insurance amounted to $7.5 million. During the year ended
December 31, 2006, bank-owned life insurance had increased from $7.2 million at
December 31, 2005 to $7.5 million at December 31, 2006, reflecting an increase
in the cash surrender value of the policies.
Borrowings. We increased our Federal Home Loan Bank borrowings during
the first quarter of 2007, and they amounted to $21.0 million at March 31, 2007.
The average balance of borrowings during the quarter was $9.6 million. We used
borrowed funds to fund the purchase of securities during the quarter as part of
a strategy to increase our interest-earning assets. Funds borrowed from the
Federal Home Loan Bank of New York totaled $4.4 million at December 31, 2006,
compared to no borrowings outstanding at December 31, 2005. The increase in
borrowed funds, combined with the increase in deposits, was used to fund growth
of the loan portfolio and the purchase of investment securities.
Equity. At March 31, 2007, total equity was $28.7 million. The decrease
from 2006 year end reflected the net loss incurred during the quarter, which was
partially offset by a $45,000 decrease in accumulated other comprehensive loss.
43
As of March 31, 2007, the Bank exceeded all applicable regulatory capital
requirements and was well-capitalized. Total equity was $28.9 million at
December 31, 2006 and $28.5 million at December 31, 2005. The increase during
2006 reflected net income of $379,000 for the year, offset by a $22,000 increase
in accumulated other comprehensive losses resulting from higher unrealized
losses on investment securities available for sale at December 31, 2006.
Comparison of Operating Results for 2006, 2005 and 2004
General. Net income for 2006 decreased by $1.2 million, or 76%, to
$379,000 for 2006 compared to $1.6 million for 2005. Net income was
significantly lower for 2006 versus 2005 primarily due to a $1.4 million, or
17.4%, decline in net interest income and a smaller recovery of loan losses,
which decreased from $917,000 in 2005 to $348,000 in 2006. Net income for 2005
was slightly lower than 2004 net income of $1.7 million, as an increase in
recoveries of loan losses of $904,000 in 2005 partially offset a decrease in net
interest income of $359,000 and an increase in income taxes of $634,000.
Net Interest Income. Net interest income decreased to $6.9 million for
2006 from $8.4 million for 2005 and $8.7 million for 2004. The decrease was
primarily attributable to a decrease in our interest rate spread to 2.06% for
2006 from 2.80% for 2005 and 2.98% for 2004. Our interest rate spread continues
to trend downward. Our interest rate spread for the first quarter of 2007 was
1.83%. The decrease in the net interest spread was due to average yields on
interest-earning assets increasing at a slower pace than the cost of
interest-bearing liabilities. During 2005 and 2006, the Federal Reserve Board of
Governors continued to increase its target for the federal funds rate, resulting
in increases in short-term interest rates while longer-term rates remained
relatively stable.
The tables on pages _____ set forth the components of our net interest
income, yields on interest-earning assets and costs of interest-bearing
liabilities, and the effect on net interest income attributable to changes in
volumes and rates.
Interest Income. Interest income increased $2.1 million, or 14.4%, to
$16.3 million for 2006 from $14.2 million for 2005. The increase resulted from a
$25.1 million increase in average interest-earning assets which had the effect
of increasing interest income by $1.8 million. In addition, there was a 28 basis
point increase in the overall yield on interest earning assets to 5.27% for 2006
from 4.99% for 2005, which increased interest income by $243,000. The average
balance of loans outstanding increased $28.6 million from 2005 to 2006, along
with an increase in the average balance of investment securities of $7.5 million
and a decrease in mortgage-backed securities of $6.0 million. Other interest
earning assets decreased by $5.1 million. The average yield on loans decreased
to 5.74% for 2006 from 5.81% for 2005. The average yields on investment
securities increased to 4.54% from 3.79% and the average yield on
mortgage-backed securities increased to 4.34% from 3.93% for 2006 and 2005,
respectively.
Interest income for 2005 was $308,000 higher than 2004 interest income
of $13.9 million. The increase was primarily attributable to a $1.9 million
increase in average interest-earning assets, which increased interest income by
$320,000. Although the average yield on total interest-earning assets increased
from 4.92% to 4.99%, decreases in the average yields on loans and investment
securities resulted in a decrease in interest income of $13,000.
Interest Expense. Interest expense increased $3.5 million, or 59.7%, to
$9.4 million for 2006 from $5.9 million for 2005. The increase resulted from a
$24.1 million increase in average interest-bearing
44
liabilities, which increased interest expense by $1.3 million, and a 102 basis
point increase in the overall cost of interest-bearing liabilities to 3.21% for
2006 from 2.19% for 2005, which increased interest expense by $2.2 million. The
average balance of savings accounts decreased by $13.1 million, while money
market accounts increased by $12.1 million and certificates of deposit increased
by $13.1 million from 2005 to 2006, as depositors moved funds into
higher-yielding accounts in the higher interest rate environment. The cost of
certificates of deposit increased to 4.17% for 2006 from 3.24% for 2005 and the
average rate paid on money market accounts increased from 1.83% to 3.83%. The
average balance of borrowed funds increased $12.7 million from 2005 to 2006. The
cost of borrowed funds increased to 5.36% from 4.06%.
Interest expense for 2005 was $667,000 higher than 2004 interest
expense of $5.2 million. The increase was primarily attributable to an increase
in the average cost of total interest-bearing liabilities from 1.94% to 2.19%,
which increased interest expense by $507,000. Average rates paid on all deposit
categories other than savings accounts increased during 2005, reflecting the
increasing interest rate environment. As depositors shifted funds into
higher-yielding accounts, the average balances of money market and savings
accounts decreased in the aggregate by $8.2 million and the average balance of
certificates of deposit increased by $7.8 million, which increased interest
expense by $161,000.
Provision for Loan Losses. The allowance for loan losses is a valuation
account that reflects our estimation of the losses known and inherent in our
loan portfolio to the extent they are both probable and reasonable to estimate.
The allowance is established through provisions for loan losses that are charged
to income in the period they are established. We charge losses on loans against
the allowance for loan losses when we believe the collection of loan principal
is unlikely. Recoveries on loans previously charged off are added back to the
allowance. We may also make recoveries of prior provisions charged against
income when management deems it appropriate to reduce the size of the allowance
to reflect the current estimate of future losses.
In each of the last three years, we took recoveries from the allowance
for loan losses after having made provisions to the allowance of $4.3 million in
2003 and $7.6 million in 2002. As of December 31, 2006, our classified loans
amounted to $6.2 million as compared to $16.7 million at December 31, 2004. This
reduction in classified loans was the primary reason that we determined it
appropriate to take recoveries of $13,000, $917,000 and $348,000 in 2004, 2005,
and 2006, respectively. The amount recovered from the allowance each year is
reflected in the net income for that year.
Noninterest Income. Noninterest income decreased by $27,000, or 3.1%,
to $856,000 for 2006 from $883,000 for 2005. Service charges and other fees
increased by $71,000; nearly all of the increase was the result of fees
collected from the overdraft program which we implemented in August of 2005.
Earnings on bank-owned life insurance increased $11,000. These increases were
offset by a decrease in other miscellaneous noninterest income of $79,000. We
also incurred losses on the sale of securities of $30,000 in 2006 that were not
present in 2005.
Noninterest income for 2005 was $7,000 higher than noninterest income
for 2004. Increases in income in 2005 from bank-owned life insurance and other
miscellaneous non-interest income of $35,000 and $11,000, respectively, were
offset by a $15,000 decrease in income from service charges and other fees and a
gain of $23,000 on the sale of securities in 2004 that was not present in 2005.
Income on bank-owned life insurance increased in each of the last three
years and represented approximately 24%, 28% and 30% of total noninterest income
in 2004, 2005 and 2006, respectively. Our investment in bank-owned life
insurance totaled $7.5 million at December 31, 2006 versus $7.2 million a year
earlier.
45
Noninterest Expense. Noninterest expense was $7.6 million in both 2006
and 2005, slightly lower than $7.7 million in 2004. The largest component of
noninterest expense is compensation and employee benefits, which at $4.4 million
for 2006 represented 58% of total noninterest expense for the year. Other
significant components of noninterest expense are occupancy and equipment
expense, data processing, federal deposit insurance premiums and professional
fees. Other miscellaneous noninterest expenses include costs such as
advertising, printing and office supplies, insurance premiums, postage and
various loan expenses.
Compensation and benefits expense increased approximately 2% annually
in 2006 and 2005 to $4.4 million in 2006, from $4.3 million in 2005 and $4.2
million in 2004. These small increases resulted from normal increases in salary
and benefit levels. Compensation and benefits expense will be higher for 2007 as
the result of our hiring additional personnel in our lending department and a
new senior management officer to train as the replacement for our chief
financial officer upon his retirement later this year. Compensation and benefits
expense will increase following the completion of the stock offering as the
result of increased compensation expenses associated with the purchase of shares
of common stock by our employee stock ownership plan, and the adoption of one or
more stock-based incentive plans or other compensation plans in lieu of equity
based compensation plans. The financial reporting expense for the equity based
compensation plans is not determinable with certainty at this time, however,
like any expense, it will reduce our net income and adversely affect our
profitability. See Future Stock Benefit Plans at page __.
Next to compensation and employee benefits expense, the largest
component of noninterest expense is occupancy and equipment expense, which
totaled $1.2 million for 2006, down 3.5% from $1.3 million for 2005 and nearly
equivalent to 2004. We incurred additional occupancy expense during 2005 as the
result of high snow/ice removal expenses during that winter. Expenses also
decreased during 2006 because we did not replace certain assets during the year
that were fully depreciated during the prior year. Data processing expense over
the last three years has steadily increased, from $561,000 for 2004 to $586,000
for 2005 to $608,000 for 2006. These expenses are the result of our investment
in software related to an overdraft deposit program, Bank Secrecy Act compliance
and loan processing. Professional fees and other noninterest expenses have
decreased since 2004 as a result of improvements in asset quality since then. We
expect professional fees and other noninterest expenses to increase following
the offering as a result of the increased costs associated with managing a
public company.
Income Taxes. Income tax expense for 2006 was $90,000 as compared to
$893,000 for 2005 and $259,000 for 2004. The reduction for 2006 reflects the
much lower pre-tax income for that year as well as a reduction in the effective
tax rate. The decrease in the effective tax rate was due to an increase in
income from tax-exempt securities. The increase in income tax expense for 2005
as compared to 2004 reflects higher pre-tax income for 2005 compared to 2004 as
well as a $273,000 valuation allowance in 2004 that had the effect of reducing
taxes for that year.
Comparison of Operating Results for the Three Months Ended March 31, 2007 and
March 31, 2006
General. For the three months ended March 31, 2007 we reported a net
loss of $200,000 as compared to net income of $222,000 for the three months
ended March 31, 2006. Our results of operations for first quarter 2007 reflect
the compression of our net interest income to a point that our income from
normal operations did not cover our normal operating expenses. For the three
months ended March 31, 2006, our net income of $222,000 included a $200,000
(pre-tax) recovery of loan loss provisions out of the allowance for loan losses.
Without that recovery, our income for the quarter ended March 31, 2006 would
have been $90,000.
46
For the quarter ended March 31, 2007, our net interest income of $1.7
million and noninterest income of $190,000 did not cover our noninterest expense
of $2.2 million. We expect that we may incur an operating loss for the quarter
ending June 30, 2007 as well. Our income will be aided later this year as we
earn income on the investment of the proceeds of the stock offering. However, we
may incur charges later this year in connection with the closing or
consolidation of one of our existing branches, which has been underperforming.
Management expects to make a determination about the closing or consolidation of
such branch before the end of 2007.
Net Interest Income. Net interest income decreased by $196,000, or
10.5%, to $1.7 million for the three months ended March 31, 2007 from $1.9
million for the same three months in 2006. There was a 56 basis point decrease
in our interest rate spread to 1.83% for the first quarter of 2007 from 2.39%
for the first quarter of 2006.
Interest Income. Interest income increased $976,000, or 26.8%, to $4.6
million for the first quarter of 2007 from $3.6 million for the first quarter of
2006. The increase resulted from a $48.7 million, or 16.9% increase in average
interest-earning assets and a 47 basis point, or 9.3%, increase in the overall
yield on interest earning assets to 5.54% for the first quarter of 2007, from
5.07% for the first quarter of 2006. The average balance of loans increased
$25.2 million, or 13.5%, between the two periods, while the average balance of
investment securities increased by $17.3 million, or 40.4%, and the average
balance of mortgage-backed securities increased by $7.5 million, or 13.8%. The
average balance of other interest-earning assets decreased by $1.4 million. The
average yield on loans improved to 5.76% for the first quarter of 2007, from
5.57% for the first quarter of 2006. The average yield on investment securities
increased to 5.68% from 3.81% and the average yield on mortgage backed
securities increased to 4.73% from 4.41%.
Interest Expense. Interest expense increased $1.2 million, or 65.6%, to
$3.0 million for the first quarter of 2007 from $1.8 million for the first
quarter of 2006. The increase resulted from a $51.3 million, or 19.2%, increase
in average interest-bearing liabilities and a 104 basis point increase in the
overall cost of interest-bearing liabilities to 3.71% for the first quarter of
2007 from 2.67% for the first quarter of 2006. Money market accounts increased
by 78.2%, while savings accounts increased by 13.8% and certificates of deposits
increased by 11.3%. The average balance of borrowed funds was $9.6 million
during the first quarter of 2007 as compared to $2.2 million during the first
quarter of 2006. The average cost of borrowed funds increased to 5.36% from
4.67%. The average cost of interest-bearing demand deposits, money market
deposits, savings accounts and certificates of deposit rose by 69 basis points,
97 basis points, 137 basis points and 84 basis points, respectively.
Provision for Loan Losses. In the first quarter of 2006, we took a
$200,000 recovery of loan loss provisions out of the allowance for loan losses.
We made no provisions for loan losses or recoveries of loan loss provisions
during the first quarter of 2007. As of March 31, 2007, the allowance
represented 0.86% of total loans as compared to 1.32% at March 31, 2006. The
allowance currently reflects management's best estimate
47
of the known and inherent losses in the portfolio that are both probable and
reasonable to estimate and management does not at this time anticipate further
recoveries of loan loss provisions out of the allowance for loan losses.
Noninterest Income. Noninterest income for the first quarter of 2007
was $190,000 as compared to $202,000 for the first quarter of 2006. An $11,000
decrease in income from service charges and other fees and a $10,000 decrease in
other miscellaneous noninterest income were offset by a $9,000 increase in
earnings on bank-owned life insurance.
Noninterest Expense. Non-interest expense was $257,000, or 13.4%,
higher for the first quarter of 2007 as compared to the first quarter of 2006,
as a result of an $88,000, or 7.7%, increase in compensation and employee
benefits expense, an $81,000, or 30.0%, increase in occupancy and equipment
expense, a $21,000 increase in data processing expense and a $60,000 increase in
other miscellaneous noninterest expenses. Compensation and employee benefit
expense rose mainly as the result of increased staffing. We added two positions
in branch management and lending support as well as two new loan officers. A
variety of items contributed to the increase in occupancy and equipment expense,
including our remodeling of the Glassboro branch, new lending and deposit
software and higher utilities expense . The increase in data processing expense
was related to security features for online accounts. The largest item
contributing to the increase in other noninterest expense was costs in
connection with a property that became real estate owned during the quarter.
Income Taxes. We recorded a credit to income of $125,000 as an income
tax benefit for the first quarter of 2007 as a result of our net loss for the
quarter. Income tax expense for the first quarter of 2006 was $117,000.
48
Average Balance Sheet. The following table sets forth certain
information relating to Gateway Community Financial Corp. as of December 31,
2006 and for each of the last three years. The average yields and costs are
derived by dividing income or expense by the average daily balance of assets or
liabilities, respectively.
For the Year Ended December 31,
At December 31, ----------------------------------------------------------------------------------
2006 2006 2005 2004
-------------------- ---------------------------- --------------------------- -------------------------
Average
Average Average Average Average Average Average Yield/
Balance Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Cost
------- ---------- ------- -------- ---------- ------- -------- --------- ------- -------- --------
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1)....... $212,305 5.81% $199,752 $11,474 5.74% $171,130 $ 9,940 5.81% $165,622 $ 9,800 5.92%
Mortgage-backed
securities.............. 59,185 4.85% 55,642 2,416 4.34% 61,596 2,423 3.93% 56,933 2,108 3.70%
Investment securities..... 52,797 4.88% 51,845 2,285 4.54% 44,323 1,660 3.79% 48,024 1,862 3.90%
Other interest-
earning assets.......... 1,407 5.78% 3,007 98 3.26% 8,098 197 2.43% 12,662 143 1.13%
-------- -------- ------- -------- ------- -------- -------
Total interest-
earning assets......... 325,694 5.48% 310,246 16,273 5.27% 285,147 14,220 4.99% 283,241 13,913 4.92%
------- ------- -------
Noninterest-
earning assets........... 27,983 23,643 25,039 26,202
Allowance for loan
losses................... (1,813) (2,442) (3,713) (3,947)
-------- -------- -------- --------
Total assets............. $351,864 $331,447 $306,473 $305,496
======== ======== ======== ========
Interest-bearing
liabilities:
Interest bearing
demand.................. $ 35,926 1.49% $ 35,901 373 1.04% $ 36,610 221 0.60% $ 36,491 194 0.53%
Money market
deposits................ 44,637 4.00% 34,959 1,342 3.84% 22,877 422 1.83% 25,837 300 1.16%
Savings accounts.......... 63,760 2.10% 55,250 587 1.06% 68,301 680 1.00% 73,552 734 1.00%
Certificates of
deposit................. 162,107 4.60% 153,155 6,386 4.17% 140,021 4,540 3.24% 132,238 3,975 3.01%
Federal Home Loan
Bank advances........... 4,400 5.33% 12,859 689 5.36% 197 8 4.06% - - -%
-------- -------- ------- -------- ------- -------- -------
Total interest-
bearing liabilities.... 310,830 3.65% 292,124 9,377 3.21% 268,006 5,871 2.19% 268,118 5,203 1.94%
------- ------- -------
Noninterest-bearing
liabilities.............. 12,131 10,721 11,612 11,730
-------- -------- -------- --------
Total liabilities......... 322,961 302,845 279,618 279,848
Retained earnings.......... 28,903 28,602 26,855 25,648
-------- -------- -------- --------
Total liabilities and
retained earnings....... $351,864 $331,447 $306,473 $305,496
======== ======== ======== ========
Net interest income........ $ 6,896 $ 8,349 $8,710
===== ===== =====
Interest rate spread(2).... 1.83% 2.06% 2.80% 2.98%
====== ====== ====== ======
Net yield on interest-
earning assets(3)........ 2.00% 2.25% 2.94% 3.08%
====== ====== ====== ======
Ratio of average
interest-earning assets
to average interest-
bearing liabilities...... 104.78% 106.20% 106.40% 105.64%
====== ====== ====== ======
- -----------------
(1) Non-accruing loans have been included in loans receivable, and the effect
of such inclusion was not material.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
49
Average Balance Sheet. The following table sets forth certain
information relating to Gateway Community Financial Corp. as of March 31, 2007
and for the three month periods ended March 31, 2007 and 2006. The average
yields and costs are derived by dividing income or expense by the average daily
balance of assets or liabilities, respectively.
For the Quarter Ended March 31,
At March 31, -------------------------------------------------------------
2007 2007 2006
-------------------- ------------------------------- -----------------------------
Average Average Average Average Average
Balance Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- ---------- ------- -------- ---------- ------- -------- ---------
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1)........................ $212,858 5.82% $212,598 $3,064 5.76% $187,364 $2,608 5.57%
Mortgage-backed securities................. 64,197 5.25% 61,639 729 4.73% 54,175 597 4.41%
Investment securities....................... 67,067 5.38% 60,180 820 5.68% 42,850 409 3.81%
Other interest-earning assets.............. 1,908 6.75% 1,954 8 1.64% 3,319 31 3.74%
-------- -------- ------ -------- ------
Total interest-earning assets............. 346,030 5.63% 336,371 4,621 5.54% 287,708 3,645 5.07%
------ ------
Noninterest-earning assets.................. 27,874 25,060 22,426
Allowance for loan losses................... (1,823) (1,814) (2,786)
-------- -------- --------
Total assets.............................. $372,081 $359,617 $307,348
======== ======== ========
Interest-bearing liabilities:
Interest bearing demand.................... $32,708 1.27% $ 32,800 115 1.40% $ 33,790 60 0.71%
Money market deposits...................... 49,130 4.04% 46,280 459 3.97% 25,976 195 3.00%
Savings accounts........................... 66,401 2.32% 68,779 405 2.36% 60,442 148 0.99%
Certificates of deposit.................... 161,497 4.45% 161,594 1,851 4.58% 145,227 1,357 3.74%
Federal Home Loan Bank advances............ 21,000 5.49% 9,557 128 5.36% 2,227 26 4.67%
-------- -------- ------ -------- ------
Total interest-bearing liabilities..... . 330,736 3.71% 319,010 2,958 3.71% 267,662 1,786 2.67%
------ ------
Noninterest-bearing liabilities............. 12,597 11,797 11,102
-------- -------- --------
Total liabilities.......................... 343,279 330,807 278,764
Retained earnings........................... 28,748 28,810 28,584
-------- -------- --------
Total liabilities and retained earnings.... $372,081 $359,617 $307,348
======== ======== ========
Net interest income......................... $1,663 $1,859
===== =====
Interest rate spread(2)..................... 1.92% 1.83% 2.39%
====== ====== ======
Net yield on interest-earning assets(3)..... 1.92% 2.02% 2.58%
====== ====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities... 104.62% 105.44% 107.49%
====== ====== ======
- -----------------
(1) Non-accruing loans have been included in loans receivable, and the effect
of such inclusion was not material.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
50
Rate/Volume Analysis. The following table reflects the sensitivity of
Gateway Community Financial Corp.'s interest income and interest expense to
changes in volume and in interest rates during the periods indicated. Each
category reflects the: (1) changes in volume (changes in volume multiplied by
old rate); (2) changes in rate (changes in rate multiplied by old volume); and
(3) net change. The net change attributable to the combined impact of volume and
rate has been allocated proportionally to the absolute dollar amounts of change
in each.
Quarter Ended March 31, Year Ended December 31, Year Ended December 31,
----------------------- ----------------------- -----------------------
2007 vs. 2006 2006 vs. 2005 2005 vs. 2004
------------- ------------- -------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
------ ------ ------
Volume Rate Net Volume Rate Net Volume Rate Net
------ ------ ----- ------ ------ ----- ------ ------ ----
(In thousands)
Interest and dividend income:
Loans receivable ................. $ 361 $ 95 $ 456 $ 1,643 $ (109) $ 1,534 $ 313 $ (173) $ 140
Mortgage-backed securities ....... 86 46 132 95 (102) (7) 179 136 315
Investment securities ............ 186 225 411 288 337 625 (147) (55) (202)
Other interest-earning assets .... (10) (13) (23) (216) 117 (99) (25) 80 55
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets ... $ 624 $ 352 $ 976 $ 1,810 $ 243 $ 2,053 $ 320 $ (12) $ 308
======= ======= ======= ======= ======= ======= ======= ======= =======
Interest expense:
Interest-bearing demands ......... $ (2) $ 57 $ 55 $ (4) $ 156 $ 152 $ 1 $ 26 $ 27
Money market deposits ............ 187 77 264 302 618 920 (29) 151 122
Savings accounts ................. 23 234 257 (143) 50 (93) (52) (2) (54)
Certificates of deposit .......... 164 330 494 456 1,390 1,846 242 323 565
Advances from Federal
Home Loan Bank.................. 98 4 102 678 3 681 -- 7 7
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities................... $ 469 $ 703 $ 1,172 $ 1,289 $ 2,217 $ 3,506 $ 162 $ 505 $ 667
======= ======= ======= ======= ======= ======= ======= ======= =======
Change in net interest income ..... $ 154 $ (350) $ (196) $ 521 $(1,974) $(1,453) $ 158 $ (519) $ (361)
======= ======= ======= ======= ======= ======= ======= ======= =======
51
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. Because the majority of our assets and
liabilities are sensitive to changes in interest rates, a significant form of
market risk for us is interest rate risk, or changes in interest rates.
We derive our income mainly from the difference or "spread" between the
interest earned on loans, securities and other interest-earning assets, and
interest paid on deposits, borrowings and other interest-bearing liabilities. In
general, the larger the spread, the more we earn. When market rates of interest
change, the interest we receive on our assets and the interest we pay on our
liabilities will fluctuate. This can cause decreases in our spread and can
adversely affect our income.
Several years ago market interest rates were at historically low
levels. However, beginning in June 2004, the U.S. Federal Reserve steadily
increased its target federal funds rate, raising it significantly. While the
federal funds rate and other short-term market interest rates, which we use as a
guide to our deposit pricing, have increased, intermediate- and long-term market
interest rates, which we use as a guide to our loan pricing, have not increased
proportionately. This has led to a "flattening" of the market yield curve, which
has even "inverted" recently as short-term rates have exceeded long-term rates
over an intermediate maturity horizon. The relatively flat yield curve has hurt
our net interest rate spread and net interest margin because the interest rates
we pay on our deposits have repriced upwards faster than the interest rates that
we earn on our loans and investments.
Quantitative Analysis. The following tables present Gloucester County
Federal Savings Bank's net portfolio value as of March 31, 2007. The net
portfolio values shown in these tables were calculated by the Office of Thrift
Supervision, based on information provided by Gloucester County Federal Savings
Bank.
At March 31, 2007
------------------------------------------------------------
Net Portfolio Value
Net Portfolio Value as % of Present Value of Assets
---------------------- ----------------------------------
Changes in Net Portfolio Basis Point
Rates(1) $ Amount $ Change % Change Value Ratio Change
-------- -------- -------- -------- ----------- ------
(Dollars in thousands)
+300 bp $19,358 $(20,814) -52% 5.41% (506) bp
+200 bp 26,900 (13,272) -33% 7.33% (314) bp
+100 bp 34,013 (6,159) -15% 9.05% (142) bp
0 bp 40,172 - 10.47% 0
- -100 bp 43,322 3,150 8% 11.15% 67 bp
- -200 bp 43,738 3,566 9% 11.18% 71 bp
- ----------------
(1) The -300bp scenario is not shown due to the relatively low prevailing
interest rate environment.
Future interest rates or their effect on net portfolio value or net
interest income are not predictable. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, prepayments, and deposit run-offs, and
should not be relied upon as indicative of actual results. Certain shortcomings
are inherent in this type of computation. Although certain assets and
liabilities may have similar maturity or periods of repricing, they may react at
different times and in different degrees to changes in the market interest
rates. The interest rate on certain types of assets and liabilities, such as
demand deposits and savings accounts, may fluctuate
52
in advance of changes in market interest rates, while rates on other types of
assets and liabilities may lag behind changes in market interest rates. Certain
assets, such as adjustable rate mortgages, generally have features which limit
changes in interest rates on a short-term basis and over the life of the asset.
In the event of a change in interest rates, prepayments and early withdrawal
levels could deviate significantly from those assumed in making the calculations
set forth above. Additionally, an increased credit risk may result as the
ability of many borrowers to service their debt may decrease in the event of an
interest rate increase.
Notwithstanding the discussion above, the quantitative interest rate
analysis presented above indicates that a rapid increase in interest rates would
adversely affect our net portfolio value and earnings.
Liquidity, Commitments and Capital Resources
The Bank must be capable of meeting its customer obligations at all
times. Potential liquidity demands include funding loan commitments, cash
withdrawals from deposit accounts and other funding needs as they present
themselves. Accordingly, liquidity is measured by our ability to have sufficient
cash reserves on hand, at a reasonable cost and/or with minimum losses.
The Asset and Liability Management Committee of the Board of Directors
sets limits and controls to guide senior management's managing of our overall
liquidity position and risk. This Committee, along with senior management, is
responsible for ensuring that our liquidity needs are being met on both a daily
and long term basis.
Our approach to managing day-to-day liquidity is measured through our
daily calculation of investable funds and/or borrowing needs to ensure adequate
liquidity. In addition, we constantly evaluate our short-term and long-term
liquidity risk and strategy based on current market conditions, outside
investment and/or borrowing opportunities, short and long-term economic trends,
and anticipated short and long-term liquidity requirements. The Bank's loan and
deposit rates may be adjusted as another means of managing short and long-term
liquidity needs. We do not at present participate in derivatives or other types
of hedging instruments to meet liquidity demands.
The following table discloses our contractual obligations as of March
31, 2007. Payment amounts represent the principal amounts for certificates of
deposit and short-term borrowings. The Bank presently conducts business from
five offices plus an administrative building, all of which are owned by the
Bank. Thus, no lease obligations are shown in the following table.
Less Than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
------- -------- --------- --------- --------
(In thousands)
Certificates of deposit............. $161,497 $110,002 $41,338 $4,068 $6,089
Federal Home Loan Bank advances..... 21,000 21,000 - - -
-------- -------- ------- ------ ------
Total........................... $182,497 $131,002 $41,338 $4,068 $6,089
======== ======== ======= ====== ======
53
The following table discloses our commitments as of March 31, 2007, all
of which represent amounts committed to customers.
Total
Amounts Less Than Over
Committed 1 Year 1-3 Years 4-5 Years 5 Years
--------- -------- --------- --------- --------
(In thousands)
Lines of credit............................... $4,210 $143 $1,458 $2,609 $ -
Construction loans in process................. 700 700 - - -
Other commitments to extend credit............ 3,638 3,638 - - -
Standby letters of credit..................... 1,106 1,106 - - -
------ ------ ------ ------ -------
Total..................................... $9,654 $5,587 $1,458 $2,609 $ -
====== ====== ====== ====== =======
Regulatory Capital Compliance. Consistent with its goals to operate a
sound and profitable financial organization, the Bank actively seeks to maintain
its status as a well-capitalized institution in accordance with regulatory
standards. As of March 31, 2007, the Bank exceeded all applicable regulatory
capital requirements and was well-capitalized. See Note 15 to our consolidated
financial statements beginning at page F-1 for more information about the Bank's
regulatory capital compliance.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk in
the normal course of our business of investing in loans and securities as well
as in the normal course of maintaining and improving Gloucester County Federal
Savings Bank's facilities. These financial instruments include significant
purchase commitments, such as commitments related to capital expenditure plans
and commitments to purchase investment securities or mortgage-backed securities,
and commitments to extend credit to meet the financing needs of our customers.
At March 31, 2007, we had no significant off-balance sheet commitments other
than commitments to extend credit totaling $9.7 million, as shown in the table
above.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Our exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual amount of those instruments. We
use the same credit policies in making commitments and conditional obligations
as we do for on-balance-sheet instruments. Since a number of commitments
typically expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. For additional information
regarding our outstanding lending commitments at March 31, 2007, see Note 14 our
consolidated financial statements beginning on page F-1.
54
Impact of Inflation
The financial statements included in this document have been prepared
in accordance with accounting principles generally accepted in the United States
of America. These principles require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services, since such prices are affected by inflation. In a period
of rapidly rising interest rates, the liquidity and maturities of our assets and
liabilities are critical to the maintenance of acceptable performance levels.
The principal effect of inflation on earnings, as distinct from levels
of interest rates, is in the area of noninterest expense. Expense items such as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that we have made. We are unable to determine the extent, if any,
to which properties securing our loans have appreciated in dollar value due to
inflation.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("FAS") No. 123R, Share-Based
Payment, which replaces FAS No. 123, Accounting for Stock-Based Compensation and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. This
statement requires that all share-based payments to employees, including grants
of employee stock options, be recognized as compensation costs in the financial
statements based on their fair values. The impact of the adoption of this
standard will be dependent on the nature and extent of stock- based compensation
granted in future periods. See Pro Forma Data on page __ for an illustration of
the application of this standard.
In February 2006, the FASB issued FAS No. 155, Accounting for Certain
Hybrid Instruments, an amendment of FASB Statements No. 133 and 140. FAS No. 155
allows financial instruments that have embedded derivatives to be accounted for
as a whole (eliminating the need to bifurcate the derivative from its host) if
the holder elects to account for the whole instrument on a fair value basis.
This statement is effective for all financial instruments acquired or issued
after the beginning of an entity's first fiscal year that begins after September
15, 2006. The adoption of this standard is not expected to have a material
effect on our results of operations or financial position.
In March 2006, the FASB issued FAS No. 156, Accounting for Servicing of
Financial Assets. This statement, which is an amendment to FAS No. 140, will
simplify the accounting for servicing assets and liabilities, such as those
common with mortgage securitization activities. Specifically, FAS No. 156
addresses the recognition and measurement of separately recognized servicing
assets and liabilities and provides an approach to simplify efforts to obtain
hedge-like (offset) accounting. FAS No. 156 also clarifies when an obligation to
service financial assets should be separately recognized as a servicing asset or
a servicing liability; requires that a separately recognized servicing asset or
servicing liability be initially measured at fair value, if practicable; and
permits an entity with a separately recognized servicing asset or servicing
liability to choose either of the amortization or fair value methods for
subsequent measurement.
55
The provisions of FAS No. 156 are effective as of the beginning of the first
fiscal year that begins after September 15, 2006. The adoption of this standard
did not have a material effect on our results of operations or financial
position.
In September 2006, the FASB issued FAS No. 157, Fair Value
Measurements, which provides enhanced guidance for using fair value to measure
assets and liabilities. The standard applies whenever other standards require or
permit assets or liabilities to be measured at fair value. The standard does not
expand the use of fair value in any new circumstances. FAS No. 157 is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. Early adoption is
permitted. The adoption of this standard is not expected to have a material
effect on our results of operations or financial position.
In September 2006, the FASB issued FAS No. 158, Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R). FAS No. 158 requires that a company
recognize the overfunded or underfunded status of its defined benefit post
retirement plans (other than multiemployer plans) as an asset or liability in
its statement of financial position and that it recognize changes in the funded
status in the year in which the changes occur through other comprehensive
income. FAS No. 158 also requires the measurement of defined benefit plan assets
and obligations as of the fiscal year-end, in addition to footnote disclosures.
On December 31, 2006, we adopted FAS No. 158, except for the measurement
provisions, which are effective for fiscal years ending after December 15, 2008.
The adoption of this standard is not expected to have a material effect on our
results of operations or financial position.
In February 2007, the FASB issued FAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115. FAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date. FAS No. 159 is
effective for us as of January 1, 2008. We are currently evaluating the impact
the adoption of the standard will have on our results of operations and
financial condition.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of FAS
No. 109, Accounting for Income Taxes, and it seeks to reduce the diversity in
practice associated with certain aspects of measurement and recognition in
accounting for income taxes. This interpretation clarifies that management is
expected to evaluate an income tax position taken or expected to be taken for
likelihood of realization before recording any amounts for such position in the
financial statement. FIN 48 also requires expanded disclosure with respect to
income tax positions taken that are not certain to be realized. This
interpretation is effective for fiscal years beginning after December 15, 2006,
and will require management to evaluate every open tax position that exists in
every jurisdiction on the date of initial adoption. We are currently evaluating
the impact the adoption of the standard will have on our results of operations.
In September 2006, the FASB reached consensus on the guidance provided
by Emerging Issues Task Force Issue 06-4 ("EITF 06-4"), Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements. The guidance is applicable to endorsement split-dollar
life insurance arrangements, whereby the employer owns and controls the
insurance policy, that are associated with a postretirement benefit. EITF 06-4
requires that for a split-dollar life insurance arrangement within the scope of
the issue, an employer should recognize a liability for future benefits in
accordance with FAS No. 106 (if, in substance, a postretirement benefit plan
exists) or
56
Accounting Principles Board Opinion No. 12 (if the arrangement is, in substance,
an individual deferred compensation contract) based on the substantive agreement
with the employee. EITF 06-4 is effective for fiscal years beginning after
December 15, 2007. We are currently evaluating the impact the adoption of the
standard will have on our results of operations and financial condition.
In September 2006, the FASB reached consensus on the guidance provided
by Emerging Issues Task Force Issue 06-5 ("EITF 06-5"), Accounting for Purchases
of Life Insurance-Determining the Amount That Could Be Realized in Accordance
with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life
Insurance. EITF 06-5 states that a policyholder should consider any additional
amounts included in the contractual terms of the insurance policy other than the
cash surrender value in determining the amount that could be realized under the
insurance contract. EITF 06-5 also states that a policyholder should determine
the amount that could be realized under the life insurance contract assuming the
surrender of an individual-life by individual-life policy (or certificate by
certificate in a group policy). EITF 06-5 is effective for fiscal years
beginning after December 15, 2006. We are currently evaluating the impact the
adoption of the standard will have on our results of operations and financial
condition.
In March 2007, the FASB ratified Emerging Issues Task Force Issue No.
06-10 ("EITF 06-10"), Accounting for Collateral Assignment Split-Dollar Life
Insurance Agreements. EITF 06-10 provides guidance for determining a liability
for the postretirement benefit obligation as well as recognition and measurement
of the associated asset on the basis of the terms of the collateral assignment
agreement. EITF 06-10 is effective for fiscal years beginning after December 15,
2007. We are currently evaluating the impact the adoption of the EITF will have
on our results of operations or financial condition.
BUSINESS OF GATEWAY COMMUNITY FINANCIAL, MHC
Gateway Community Financial, MHC is a federal mutual holding company
and is subject to regulation by the Office of Thrift Supervision. Gateway
Community Financial, MHC currently owns 100% of the outstanding common stock of
Gateway Community Financial Corp. Upon completion of the offering, it will own
55%. So long as Gateway Community Financial, MHC is in existence, it will own a
majority of the outstanding common stock of Gateway Community Financial Corp. If
Gateway Community Financial, MHC converted to a full stock company in what is
referred to as a "second-step conversion," it would cease to exist. The Board of
Directors has no current plans to undertake a second- step transaction.
The primary business activity of Gateway Community Financial, MHC going
forward will continue to be owning a majority of Gateway Community Financial
Corp.'s common stock. Gateway Community Financial, MHC, however, is authorized
to engage in any other business activities that are permissible for mutual
holding companies under federal law, including investing in loans and
securities. Gateway Community Financial, MHC does not maintain offices separate
from those of Gloucester County Federal Savings Bank or employ any persons other
than certain Gloucester County Federal Savings Bank officers. Officers of
Gateway Community Financial, MHC are not separately compensated for their
service.
57
BUSINESS OF GATEWAY COMMUNITY FINANCIAL CORP.
Gateway Community Financial Corp. is a federal mutual holding company
subsidiary and is subject to regulation by the Office of Thrift Supervision. It
was organized for the purpose of being a holding company for Gloucester County
Federal Savings Bank.
Gateway Community Financial Corp.'s primary activity is and will
continue to be holding all of the stock of Gloucester County Federal Savings
Bank. Gateway Community Financial Corp. intends to use the proceeds of the
offering as discussed under Use of Proceeds. Gateway Community Financial Corp.
does not maintain offices separate from those of Gloucester County Federal
Savings Bank or employ any persons other than certain Gloucester County Federal
Savings Bank officers. Officers of Gateway Community Financial Corp. are not
separately compensated for their service.
BUSINESS OF GLOUCESTER COUNTY FEDERAL SAVINGS BANK
General
Gloucester County Federal Savings Bank is a federal stock savings bank.
Its deposits are insured by the Federal Deposit Insurance Corporation and it is
regulated by the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation.
Our primary business is attracting retail deposits from the general
public and using those deposits, together with funds generated from operations,
principal repayments on securities and loans, and borrowed funds, for our
lending and investing activities. Our loan portfolio consists of one- to
four-family residential real estate mortgages, commercial real estate mortgages,
construction loans, commercial loans, home equity loans and lines of credit, and
other consumer loans. We also invest in U.S. government agency securities,
mortgage-backed securities and other investment grade securities. At March 31,
2007, our total assets were $372.1 million, and loans receivable, net comprised
approximately 57% of our total assets while our securities portfolio amounted to
approximately 35% of our total assets.
We currently operate from five office locations plus an administrative
center and have 68 employees (counted on a full-time equivalent basis).
Management is currently evaluating the possible closing or consolidation of our
Erial branch, which has been underperforming since its opening in 2003.
Market Area. Our business of attracting deposits and making loans is
primarily conducted within our market area. A downturn in the local economy
could reduce the amount of funds available for deposit and the ability of
borrowers to repay their loans. As a result, our profitability could decrease.
We generally define the core market area for each of our offices by a
number of factors, including political boundaries, natural geographic and
man-made barriers, traffic patterns and the competitive situation. We currently
have four offices in Gloucester County, New Jersey and one office in Camden
County, New Jersey. The demographics for this area reflect an average sized
market which is projected to experience growth in both population and households
through 2011, growth that is projected to be slightly above the national
average, but more than double the population growth of the state of New Jersey
for the same time period. Population and household growth measures are projected
to follow a similar trend through 2011.
58
Our market has higher levels of education and white-collar jobs than
the national average coupled with median household income that is above the
national average. However, the per capita income of both Gloucester and Camden
Counties, as well as the median household income levels are below the comparable
figures for New Jersey.
Within Gloucester County, the cities in which we have located our
branch offices in general tend to be located in the more densely populated
portions of the county. Moreover, these markets have a higher number of
businesses per square mile when compared to the Gloucester County average.
Nevertheless, this remains an average-sized market in terms of potential for
retail deposits and loans with below average propensities for most deposit and
loan products.
Competition. We operate in a market area with a high concentration of
banking and financial institutions, and we face substantial competition in
attracting deposits and in originating loans. A number of our competitors are
significantly larger institutions with greater financial and managerial
resources and lending limits. Our ability to compete successfully is a
significant factor affecting our growth potential and profitability.
Our competition for deposits and loans historically has come from other
insured financial institutions such as local and regional commercial banks,
savings institutions, and credit unions located in our primary market area. We
also compete with mortgage banking and finance companies for real estate loans,
and we face competition for funds from investment products such as mutual funds,
short-term money funds and corporate and government securities. There are large
competitors operating throughout our market area, and we also face strong
competition from other community-based financial institutions.
Within the market areas for each of our five present locations (Erial,
Glassboro, Monroe Township, Pitman and Washington Township), our deposit share
as of June 30, 2006 (the most recent date for which deposit share information is
available) was 1.2%, 14.1%, 9.6%, 42.8% and 9.4%, respectively.
Lending Activities
In recent years, commercial real estate and commercial loans as a
percentage of total loans have decreased as we worked through problem loans and
charged off a significant amount of such loans. We had begun originating a large
amount of commercial real estate and commercial loans in the late 1990s, but
experienced problems with those loans. We anticipate that this segment of our
loan portfolio will, however, rebound as we seek to increase commercial real
estate loans and commercial loans. We have recently hired two commercial lenders
as part of our plan to diversify our loan portfolio and improve our interest
rate spread and margins.
59
Loan Portfolio Composition. The following table shows the composition
of our loan portfolio by loan category as of March 31, 2007 and at year end for
the last several years.
At December 31,
At March 31, -----------------------------------------------------------------------------------------
2007 2006 2005 2004 2003 2002
--------------- ---------------- --------------- --------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Type of Loans:
Real estate loans:
One-to-four
family......... $103,624 48.42% $102,755 48.08% $ 74,115 39.71% $ 56,736 32.44% $ 46,638 27.20% $ 50,489 25.78%
Home equity...... 58,595 27.38 59,327 27.76 49,657 26.6 41,112 23.51 40,920 23.86 32,158 16.42
Commercial....... 14,717 6.60 14,472 6.77 13,889 7.45 18,116 10.36 22,578 13.17 34,668 17.70
Construction..... 942 0.71 711 0.33 1,667 0.89 776 0.44 815 0.48 2,278 1.16
Commercial.......... 4,945 2.31 4,561 2.14 6,022 3.23 11,533 6.59 16,870 9.84 32,405 16.55
Consumer and
other loans:
Auto............. 18,656 8.72 21,136 9.89 33,591 18.00 40,890 23.38 41,832 24.39 41,677 21.28
Manufactured
housing........ 7,822 3.66 7,512 3.51 5,422 2.90 3,392 1.94 - - - -
Savings account.. 1,394 0.65 1,093 0.51 1,080 0.58 1,106 0.63 948 0.55 1,183 0.60
Other............ 3,309 1.55 2,155 1.01 1,203 0.64 1,248 0.71 878 0.51 1,001 0.51
------- ------ ------- ------ ------- ------ ------- ------ -------- ------ -------- ------
Total loans.... $214,004 100.00% $213,722 100.00% $186,646 100.00% $174,909 100.00% $171,479 100.00% $195,859 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Deferred loan
fees (costs)...... (176) (164) (156) (8) 200 347
Less: unearned
income............ 1,322 1,581 2,850 3,634 4,074 4,523
Less: allowance
for possible
loan losses....... 1,823 1,813 3,036 3,963 3,862 8,329
-------- -------- -------- -------- ------- --------
Total
loans, net.... $211,035 $210,492 $180,916 $167,320 $163,343 $182,660
======= ======= ======= ======= ======= =======
60
Loan Maturity Schedule. The following tables set forth the maturity of
our loan portfolio as of March 31, 2007. Demand loans, loans having no stated
maturity, and overdrafts are shown as due in one year or less. Loans are stated
in the following tables at contractual maturity and actual maturities could
differ due to prepayments.
At March 31, 2007
------------------------------------------------------------------------------------------------------------
Real estate
1-to-4 Home Real estate Manufactured Savings
family equity commercial Construction Commercial Auto Housing Account Other Total
------ ------ ---------- ------------ ---------- ---- ------- ------- ----- -----
(In thousands)
Amounts Due:
Within 1 Year ..... $ 104 $ 62 $ 727 $ - $ 2,875 $ 575 $ - $ 43 $ 7 $ 4,393
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
After 1 year:
1 to 3 years .... 728 1,671 812 942 256 8,084 - 86 22 12,601
3 to 5 years .... 237 3,911 4,310 - 1,060 9,295 - 239 117 19,169
5 to 10 years ... 5,121 18,414 1,859 - 754 663 138 1,014 292 28,255
10 to 15 years .. 17,755 32,865 2,623 - - 39 916 12 1,921 56,131
Over 15 years ... 79,679 1,672 4,386 - - - 6,768 - 950 93,455
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total due
after one year... 103,520 58,533 13,990 942 2,070 18,081 7,822 1,351 3,302 209,611
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total amount due .. $103,624 $ 58,595 $ 14,717 $ 942 $ 4,945 $ 18,656 $ 7,822 $ 1,394 $ 3,309 $214,004
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
61
The following table sets forth the dollar amount of all loans as of
March 31, 2007 that are due after March 31, 2008.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
Real estate loans:
One-to-four family...... $101,918 $1,602 $103,520
Home equity............. 58,533 - 58,533
Commercial.............. 12,933 1,057 13,990
Construction............ 942 - 942
Commercial.................. 1,413 657 2,070
Consumer:
Auto..................... 18,081 - 18,081
Manufactured housing..... 7,822 - 7,822
Savings account.......... 1,351 - 1,351
Other.................... 1,539 1,763 3,302
-------- ------ --------
Total................ $204,532 $5,079 $209,611
======== ====== ========
Residential Lending. Currently, our main lending activity consists of
the origination of residential real estate loans, including single family homes
and residences housing up to four families. Our primary lending territory is
Gloucester County and surrounding areas in southern New Jersey, however, to a
lesser degree, we do originate loans throughout the entire state. We are
currently exploring expanding lending into eastern Pennsylvania and northern
Delaware. Although we underwrite most loans to conform to secondary market
standards, we generally retain the loans we originate in our portfolio. We
purchase loans to supplement our own originations and will continue to purchase
loans if the rates are attractive. In 2006 and 2005 we purchased $13.7 million
and $7.1 million of one-to-four family first mortgage loans in our market area
from a national lender. The seller retains servicing on these loans.
Our underwriting policies permit the origination of single family
first mortgage loans, for primary residence, with a loan-to-value of up to 95%.
We also offer an affordable housing/first time home buyer program, which uses
the 95% loan-to-value limit but permits the borrower to have equity in the real
estate of only 3%. Loans in excess of 90% loan-to-value must have private
mortgage insurance. Our loan-to-value limit for non-single family first mortgage
loans (on one-to-four family properties) for primary residence is 80%. We offer
mortgage loans on non-owner occupied, investment properties with a 75%
loan-to-value limit.
Our fixed rate mortgage loans have terms of 10 to 30 years. Our
adjustable rate mortgages have 30 year terms.
We originate adjustable rate mortgages, or ARMs, at rates based upon
the U.S. Treasury One Year Constant Maturity as an index. We currently offer
either a 3/1 ARM or a 5/1 ARM. The rates on these loans reset on an annual
basis, beginning either the third or the fifth year, and have a two percent
annual adjustment cap, a five percent lifetime adjustment cap and a 3% floor.
Property appraisals on real estate securing one-to-four family
residential loans are made by state certified or licensed independent
appraisers.
62
Home Equity Lending. We offer home equity loans and home equity lines
of credit with loan-to- value amounts up to 90% of the appraised value less the
outstanding balance of the first mortgage, if the property securing the loan is
the borrower's primary or secondary residence. A 70% loan-to-value limit applies
otherwise. We include second mortgages within our home equity lending category.
Our home equity loans are generally originated for terms of up to 30
years. Our home equity line of credit has a five year draw period during which
the borrower may obtain advances on the line of credit, followed by a ten year
repayment period. The minimum periodic payment on the home equity line of credit
during the draw period is 0.56% of the outstanding principal balance plus
accrued interest. A variable rate with a 5% lifetime adjustment cap but no
annual adjustment cap applies to all home equity lines of credit.
Automated Valuation Models (AVM) are used for home equity loans and
lines of credit in amounts of $250,000 or less. Should the AVM not provide
sufficient value to support the request, a full appraisal may be requested by
the borrower at the borrower's expense.
We have recently introduced a CyberLoan home equity product, marketed
on a third party loan referral website. We pay a fee to advertise on this
website. These loans will be primarily located in New Jersey, but may also be
originated in eastern Pennsylvania and in northern Delaware. This program
commenced in the second quarter of 2007. These loans will be originated using
the services of remote closing agents.
Commercial Lending. Our primary commercial lending area is Gloucester,
Camden, Cumberland, Salem, Atlantic, Ocean, Cape May and Burlington Counties.
Loans outside of these counties are permitted (i) in order to allow the Bank to
follow existing customers when they may have borrowing needs outside of this
defined market area, or (ii) if we believe the loan to be a high quality credit.
We also will participate in loan originations with other financial institutions
on loans outside of our primary commercial lending area.
Our commercial underwriting standards require that borrowers have an
established history of legal and ethical financial dealings and that careful
consideration is given to the borrower's history, general background, management
experience and future plans, external environment, financial condition and
proposed collateral. We obtain as much specific information as possible about
the borrower's business and ability to manage its business in order to be
satisfied that the individuals have the capability to properly operate the
business. We generally require that borrowers who are not existing customers
should demonstrate at least two methods of repayment, one of which will be from
cash flow (or asset conversion) and the other will be from collateral of
determinable value or from a clear ability to liquidate other non-collateral
assets. We attempt to structure our commercial loans to meet the needs of our
customers with repayment over a period which shows a direct relationship to (i)
the purpose, (ii) the cash flow capabilities of the customer, and (iii) the
economic life of the collateral.
Our commercial real estate lending consists primarily of mortgage
loans for the acquisition or refinance of service/retail and mixed-use
properties, churches and non-profit properties, professional facilities and
other commercial real estate. The maximum loan-to-value ratio on most commercial
real estate loans we originate is 75%. The maximum term is normally no more than
ten years, with payments based on a twenty- five year amortization. We offer
fixed and adjustable rate commercial real estate mortgages but generally will
not offer a fixed rate period of more than seven years.
We will provide financing for the owner-occupied commercial building
as well as for real estate investment. We will underwrite non-recourse loans if
we believe they are sufficiently supported by long-term leases with strong
tenants. We offer bridge or swing loans to provide temporary financing which
transfers
63
equity from one or more parcels of real estate (present) to another (future).
The maximum loan amount for a bridge or swing loan will be 90% of the appraised
value of the property to be sold less all prior liens. Additional collateral may
be obtained to meet this loan-to-value requirement.
We offer non-real estate commercial loans consisting of regular lines
of credit and revolving lines of credit to businesses to finance short-term
working capital needs like accounts receivable and inventory. In general, lines
of credit allow for intermittent borrowings and repayments, and are not usually
accompanied by extensive loan agreements. They are generally priced on a
floating rate basis. Our policy is for all lines of credit to be secured and, if
possible, supported also by junior liens on real estate. Business assets such as
accounts receivable, inventory, equipment, furniture and fixtures may be used to
secure lines of credit. We generally provide regular lines of credit with a
maximum term of 18 months. Revolving lines of credit generally have a maximum
term of two years, but may be up to seven years if then converted to an
amortizing term loan.
We originate commercial term loans with maturities generally no longer
than 18 months. We also originate commercial term loans with a monthly or
quarterly amortization schedule to fund longer-term borrowing needs such as
purchasing equipment, property improvements or other fixed asset needs. We fix
the maturity of a term loan to correspond to the useful life of any equipment
purchased, if appropriate, and generally do not exceed a ten-year term, except
for certain real estate transactions. Term loans can be secured with a variety
of collateral, including business assets such as accounts receivable and
inventory or long-term assets such as equipment, furniture, fixtures or real
estate. When the purpose of a term loan is the purchase of new equipment that
will be pledged as collateral for the loan, the maximum advance is typically no
more than 90% of the purchase price. Used equipment may also be used as
collateral. The primary source of repayment for term loans is the global cash
flow of the borrowing entity.
Where a commercial loan is secured by "liquid collateral" (cash,
marketable securities, or cash surrender value of life insurance), we will offer
considerable flexibility with the repayment schedule or will underwrite these
loans with no maturity, on a demand basis. The loan to value limits for loans
secured by liquid collateral are:
o Cash - 100%
o United States Treasury Issues - 90%
o Common stocks actively traded on the New York and American
stock exchanges or listed on NASDAQ - 80%
o Municipal Bonds - 80%
o Mutual Funds - 70%
o Corporate Bonds - 75%
o Cash Surrender Value of Life Insurance - 90%
o Margin Stock - 50%.
Our commercial loan offerings also include overdrafts of demand
deposit accounts divided into four categories:
o Pure overdrafts
o Overdrafts that can be covered by available funds in other
deposit accounts (other than certificates of deposit) at the
Bank in the name of that depositor
o Overdrafts that can be covered by availability under
pre-established credit facilities of that depositor
o Overdrafts of a technical nature, caused internally.
64
We will also provide interim financing to commercial borrowers in
anticipation of a sale of an asset or closing of a long-term refinancing.
Unlike single-family residential mortgage loans, which generally are
made on the basis of the borrower's ability to make repayment from his or her
employment and other income, and which are secured by real property whose value
tends to be more easily ascertainable, commercial loans (including real estate
as well as non-real estate loans) typically are made on the basis of the
borrower's ability to make repayment from the cash flow of the borrower's
business or rental income produced by the property. As a result, the
availability of funds for the repayment of commercial loans may be substantially
dependent on the success of the business or rental property itself and the
general economic environment. Commercial loans, therefore, have greater credit
risk than one-to-four family residential mortgages or consumer loans. In
addition, commercial loans generally result in larger balances to single
borrowers, or related groups of borrowers, and also generally require
substantially greater evaluation and oversight efforts.
Construction Lending. We originate construction and land acquisition
loans for owner-occupied residences, and we also provide financing to builders
and real estate developers for land acquisition and development and residential
or commercial construction.
Construction funds are disbursed periodically upon inspections made by
our inspectors on the completion of each phase, usually in three draws.
Additional draws may be made at the borrower's request, however we generally
limit the funds disbursed to 80% of the appraised loan-to-value of the land and
improvements at any time during construction. Commercial construction loans are
limited to 75% of appraised value. Land acquisition and development loans are
limited to the lower of 90% of cost or 80% of the appraised value. Land
acquisition and development loans on properties with approved takeout financing
may be originated at up to 90% of the appraised value. Land loans are limited to
65% of the cost or appraised value.
Construction lending is generally considered to involve a higher
degree of credit risk than residential mortgage lending. If the estimate of
construction cost proves to be inaccurate, we may be compelled to advance
additional funds to complete the construction with repayment dependent, in part,
on the success of the ultimate project rather than the ability of a borrower or
guarantor to repay the loan. If we are forced to foreclose on a project prior to
completion, there is no assurance that we will be able to recover all of the
unpaid portion of the loan. In addition, we may be required to fund additional
amounts to complete a project and may have to hold the property for an
indeterminate period of time.
Consumer Lending. Our consumer lending products include loans for new
and used autos, boats, recreational vehicles (RVs) and aircraft and loans for
manufactured housing as well as secured and unsecured personal loans, account
loans and overdraft lines of credit.
The majority of the auto loans currently in our portfolio are indirect
auto loans the Bank purchased from one auto leasing company with which the Bank
maintained a relationship for over 20 years. Several years ago, we determined to
terminate the arrangement with that company because the average rate on these
loans due to the pass-through pricing resulted in a below market yield. We will
continue to originate direct auto loans to customers of the Bank and a limited
amount of indirect auto lending, but the overall size of the auto loan portfolio
is expected to decrease significantly as the indirect loans from that particular
relationship mature. We may resume a larger amount of indirect auto lending
through dealers if we find more profitable arrangements.
65
In 2004 we began originating loans for the purchase and refinance of
manufactured housing. The majority of these loans are indirect loans generated
by an independent outside source and purchased by the Bank with limited
recourse. The maximum loan amount is $200,000 and the loan-to-value limit is 80%
for homes on leased land (with a minimum cash deposit of 20%) and up to 90% for
loans that include the land the home occupies. We require a first lien on the
home and we record a first mortgage if it is a land/home loan. We currently
intend to limit this portfolio to approximately $30 million.
In 2007 we began providing financing for non-commercial use, personal
airplanes. As of March 31, 2007, the outstanding balance of aircraft loans
totaled $1.4 million. We anticipate growing this part of the consumer portfolio
significantly as a niche lending area, with the goal of growing the portfolio to
as much as $15 million in the first year. Our underwriting of these loans is
done with a 90% loan-to-value and the maximum loan amount is $1 million.
We also offer secured and unsecured personal loans with terms of up to
four years with a minimum and maximum balance of $1,000 and $15,000,
respectively.
Consumer lending is generally considered to involve a higher degree of
credit risk than residential mortgage lending. Consumer loan repayment is
dependent on the borrower's continuing financial stability and can be adversely
affected by job loss, divorce, illness or personal bankruptcy. The application
of various federal laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered on consumer loans in the event
of a default.
Loans to One Borrower. Under federal law, savings institutions have,
subject to certain exemptions, lending limits to one borrower in an amount equal
to the greater of $500,000 or 15% of the institution's unimpaired capital and
surplus. Accordingly, based on our financial condition as of March 31, 2007, our
loans to one borrower legal limit was approximately $4.6 million. Our largest
borrower at that date had one loan outstanding with a balance at that date of
$1.6 million, representing a mortgage on a vacation home on the New Jersey
shore. The Bank's loans to one borrower legal lending limit will be higher
following the stock offering because the stock offering proceeds will increase
the Bank's capital.
Loan Approval Procedures and Authority. Lending policies and loan
approval limits are approved and adopted by the Board of Directors. Lending
authority is vested primarily in a loan committee comprised of senior officers.
This committee may approve loans up to $750,000. Prior Board approval is
required for loans in excess of $750,000. Certain other Bank employees also have
limited lending authority and may authorize first mortgage loans up to $417,000
(the current conforming limit for sale in the secondary market as a non-jumbo
loan) and home equity and other secured loans up to $400,000. All loans require
the approval of at least two authorized employees.
Asset Quality
Loan Delinquencies and Collection Procedures. When a loan is 90 days
delinquent, the Board may determine to refer it to an attorney for repossession
or foreclosure. All reasonable attempts are made to collect from borrowers prior
to referral to an attorney for collection. In certain instances, we may modify
the loan or grant a limited moratorium on loan payments to enable the borrower
to reorganize his or her financial affairs, and we attempt to work with the
borrower to establish a repayment schedule to cure the delinquency.
With respect to mortgage loans, if a foreclosure action is taken and
the loan is not reinstated, paid in full or refinanced, the property is sold at
judicial sale at which we may be the buyer if there are no adequate offers to
satisfy the debt. Any property acquired as the result of foreclosure or by deed
in lieu of foreclosure
66
is classified as real estate owned until it is sold or otherwise disposed of.
When real estate owned is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair market value less estimated
selling costs. The initial writedown of the property is charged to the allowance
for loan losses. Adjustments to the carrying value of the property that result
from subsequent declines in value are charged to operations in the period in
which the declines occur.
Loans are generally placed on non-accrual status when they are more
than 90 days delinquent, however loans may be placed on a non-accrual status at
any time if, in the opinion of management, the collection of additional interest
is doubtful. Interest accrued and unpaid at the time a loan is placed on
non-accrual status is charged against interest income. Subsequent payments are
either applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the loan.
Non-Performing Assets. The following table provides information
regarding our non-performing loans and other non-performing assets. We did not
have any loans that would qualify as troubled debt restructurings at any of the
dates shown in the following table.
At December 31,
At March 31, ---------------------------------------------
2007 2006 2005 2004 2003 2002
------ ------ ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Real Estate:
One-to-four family ............................. $ 46 $ 103 $ 106 $ 452 $ 421 $ 349
Home equity .................................... 16 16 16 16 125 88
Commercial ..................................... 1,255 1,570 1,818 829 384 557
Construction ................................... - - - - 600 -
Commercial ......................................... 593 663 1,087 27 641 497
Consumer:
Auto ........................................... 31 42 24 38 231 62
Other .......................................... - 55 25 - 9 11
------ ------ ------ ------ ------ ------
Total non-accrual loans .......................... 1,941 2,449 3,076 1,362 2,411 1,564
------ ------ ------ ------ ------ ------
Accruing loans contractually past due 90 days or more:
Real Estate:
One-to-four family ............................. 32 32 122 - -
------ ------ ------ ------ ------ ------
Consumer:
Auto ........................................... - - - - 8 -
Other consumer ................................. - 2 16 - 14 31
------ ------ ------ ------ ------ ------
Total accruing loans past due 90 days or more .... 32 34 138 - 22 31
------ ------ ------ ------ ------ ------
Total non-performing loans ........................... $1,973 $2,483 $3,214 $1,362 $2,433 $1,595
====== ====== ====== ====== ====== ======
Real estate owned .................................... $ 532 $ 288 $ 288 $ 461 $ 448 $ -
====== ====== ====== ====== ====== ======
Other non-performing assets .......................... $ 98 $ 49 $ 11 - $ 14 $ -
====== ====== ====== ====== ====== ======
Total non-performing assets .......................... $2,603 $2,820 $3,513 $1,823 $2,895 $1,595
====== ====== ====== ====== ====== ======
Total non-performing loans to total loans ............ 0.92% 1.17% 1.75% 0.80% 1.46% 0.84%
====== ====== ====== ====== ====== ======
Total non-performing loans to total assets ........... 0.53% 0.71% 1.04% 0.43% 0.83% 0.51%
====== ====== ====== ====== ====== ======
Total non-performing assets to total assets .......... 0.70% 0.80% 1.14% 0.58% 0.99% 0.51%
====== ====== ====== ====== ====== ======
67
Classified Assets. Management, in compliance with federal guidelines,
has instituted an internal loan review program, whereby loans are classified as
special mention, substandard, doubtful or loss. It is our policy to review the
loan portfolio, in accordance with regulatory classification procedures, on at
least a quarterly basis. When a loan is classified as substandard or doubtful,
management is required to evaluate the loan for impairment. When management
classifies a portion of a loan as loss, a reserve equal to 100% of the loss
amount is required to be established or the loan is to be charged-off.
An asset that does not currently expose the Bank to a sufficient
degree of risk to warrant an adverse classification, but which possesses credit
deficiencies or potential weaknesses that deserve management's close attention
is classified as "special mention."
An asset classified as "substandard" is inadequately protected by the
current net worth and paying capacity of the obligor or the collateral pledged,
if any. Assets so classified have well-defined weaknesses and are characterized
by the distinct possibility that the Bank will sustain some loss if the
deficiencies are not corrected.
An asset classified as "doubtful" has all the weaknesses inherent in a
"substandard" asset with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable. The possibility of a
loss on a doubtful asset is high.
That portion of an asset classified as "loss" is considered
uncollectible and of such little value that its continuance as an asset, without
establishment of a specific valuation or charge-off, is not warranted. This
classification does not necessarily mean that an asset has absolutely no
recovery or salvage value; but rather, it is not practical or desirable to defer
writing off a basically worthless asset even though partial recovery may be
effected in the future.
As of March 31, 2007, all of the assets we had designated as special
mention, substandard, doubtful and loss were loans. Also, as of March 31, 2007,
none of the loans classified as "special mention," $1.6 million of loans
classified as "substandard" and $500,000 of the loans classified as "doubtful"
are included in the table of non-performing assets shown above.
The following table discloses our designation of loans as special
mention, substandard, doubtful and loss as of March 31, 2007 and at year end for
the last several years.
At March 31, At December 31,
------------------- -------------------------------------
2007 2006 2005 2004 2003 2002
------- ------- ------- ------- ------- -------
(In thousands)
Special Mention... $ 2,495 $ 1,954 $ 1,162 $ 3,412 $ 9,321 $15,979
Substandard ...... 4,100 3,414 6,124 12,334 11,503 6,228
Doubtful ......... 732 796 1,246 924 1,039 1,253
Loss ............. - - - - 251 6,158
------- ------- ------- ------- ------- -------
Total .......... $ 7,327 $ 6,164 $ 8,532 $16,670 $22,114 $29,618
======= ======= ======= ======= ======= =======
Allowance for Loan Losses. The allowance for loan losses is
established through provisions for loan losses charged against income. Loans
deemed to be uncollectible are charged against the allowance for loan losses,
and subsequent recoveries, if any, are credited to the allowance.
68
The allowance for loan losses is maintained at a level by management
which represents the evaluation of known and inherent losses in the loan
portfolio at the consolidated balance sheet date that are both probable and
reasonable to estimate. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience, known and inherent
losses in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, composition
of the loan portfolio, current economic conditions, and other relevant factors.
This evaluation is inherently subjective as it requires material estimates that
may be susceptible to significant change, including the amounts and timing of
future cash flows expected to be received on impaired loans.
The allowance consists of specific and general components. The
specific component related to loans that are classified as either doubtful,
substandard, or special mention. For such loans that are also classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower than
the carrying value of that loan. The general component covers nonclassified
loans and is based on historical loss experience adjusted for qualitative
factors.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan-by-loan basis for commercial and construction
loans by the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market price, or the fair
value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately identify
individual consumer and residential mortgage loans for impairment disclosures.
Although specific and general loan loss allowances are established in
accordance with management's best estimate, actual losses are dependent upon
future events and, as such, further provisions for loan losses may be necessary
in order to increase the level of the allowance for loan losses. For example,
our evaluation of the allowance includes consideration of current economic
conditions, and a change in economic conditions could reduce the ability of our
borrowers to make timely repayments of their loans. This could result in
increased delinquencies and increased non-performing loans, and thus a need to
make increased provisions to the allowance for loan losses, which would be a
charge to income during the period the provision is made, resulting in a
reduction to our earnings. A change in economic conditions could also adversely
affect the value of the properties collateralizing our real estate loans,
resulting in increased charge-offs against the allowance and reduced recoveries,
and thus a need to make increased provisions to the allowance for loan losses.
Furthermore, a change in the composition of our loan portfolio or growth of our
loan portfolio could result in the need for additional provisions.
In addition, as an integral part of its regulatory examination
process, the Office of Thrift Supervision periodically reviews our loan and
foreclosed real estate portfolios and the related allowance for loan losses and
valuation allowance for foreclosed real estate. The Office of Thrift Supervision
may
69
require the allowance for loan losses or the valuation allowance for foreclosed
real estate to be increased based on their review of information available at
the time of the examination, which would negatively affect our earnings.
70
The following table sets forth information with respect to our
provisions for loan losses, recoveries of provisions for loan losses, charge-off
of loans and recoveries of loans charged-off for recent periods.
For the Three Months
Ended March 31, For the Year Ended December 31,
--------------------- ---------------------------------------------------------
2007 2006 2006 2005 2004 2003 2002
--------- --------- --------- --------- --------- --------- ---------
Allowance balance at beginning of period ... $ 1,813 $ 3,036 $ 3,036 $ 3,963 $ 3,862 $ 8,329 $ 1,468
(Recovery of) provisions for loan losses ... - (200) (348) (917) (13) 4,342 7,550
Loans charged-off:
Real estate:
One-to-four family ..................... - - - (17) - (19) -
Commercial ............................. - (304) (531) - - (1,329) -
Commercial ............................... - - (373) (23) (337) (7,313) (544)
Consumer ................................. (10) (30) (84) (37) (82) (165) (157)
--------- --------- --------- --------- --------- --------- ---------
Total loans charged-off .............. (10) (334) (988) (77) (419) (8,826) (701)
--------- --------- --------- --------- --------- --------- ---------
Recoveries of loans charged-off:
Real estate:
One-to-four family ..................... - - 4 - 17 - -
Commercial ............................. - - 33 - 85 - -
Commercial ............................... 20 1 74 52 402 4 -
Consumer ................................. - 1 2 15 29 13 12
--------- --------- --------- --------- --------- --------- ---------
Total recoveries of loans
charged off ........................ 20 2 113 67 533 17 12
--------- --------- --------- --------- --------- --------- ---------
Net (loans charged-off)
recoveries of loans charged-off........... 10 (332) (875) (10) 114 (8,809) (689)
--------- --------- --------- --------- --------- --------- ---------
Allowance balance at end of period ......... $ 1,823 $ 2,504 $ 1,813 $ 3,036 $ 3,963 $ 3,862 $ 8,329
========= ========= ========= ========= ========= ========= =========
Total loans outstanding .................... $ 212,858 $ 189,968 $ 212,305 $ 183,952 $ 171,283 $ 167,205 $ 190,989
========= ========= ========= ========= ========= ========= =========
Average loans outstanding .................. $ 210,784 $ 185,945 $ 199,752 $ 171,130 $ 165,622 $ 175,412 $ 196,541
========= ========= ========= ========= ========= ========= =========
Allowance for loan losses as a
percentage of
total loans outstanding .................. 0.86% 1.32% 0.85% 1.65% 2.31% 2.31% 4.36%
========= ========= ========= ========= ========= ========= =========
Net loans charge-offs
(recoveries of loans charged-off)
as a percentage of average loans
outstanding .............................. (0.02)% 0.71% 0.44% 0.01% (0.07)% 5.02% 0.35%
========= ========= ========= ========= ========= ========= =========
71
Allocation of Allowance for Loan Losses. The following table sets
forth the allocation of our allowance for loan losses by loan category and the
percent of loans in each category to total loans receivable, net, as of March
31, 2007 and at year end for the last several years. The portion of the loan
loss allowance allocated to each loan category does not represent the total
amount available for losses within that category since the total loan loss
allowance is a valuation reserve applicable to the entire loan portfolio.
At December 31,
At March 31, -------------------------------------------------
2007 2006 2005
---------------------- ------------------------ ----------------------
Loan Loan Loan
Amount of Category Amount of Category Amount of Category
Allowance as a Allowance as a Allowance as a
Allocated to Percentage Allocated to Percentage Allocated to Percentage
Loan of Total Loan of Total Loan of Total
Category Loans Category Loans Category Loans
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
Real estate:
One-to-
four family.... $ 223 48.42% $ 245 48.08% $ 270 39.71%
Home equity...... 113 27.38 115 27.76 150 26.60
Commercial....... 805 6.60 800 6.77 940 7.12
Construction..... 4 0.71 4 0.33 17 1.21
Commercial.......... 394 2.31 425 2.14 1,230 3.23
Consumer:
Auto............. 70 8.72 108 9.89 250 18.00
Manufactured
housing........ 66 3.66 60 3.51 75 2.90
Savings
account........ - 0.65 - 0.51 - 0.58
Other............ 27 1.55 4 1.01 10 0.64
Unallocated......... 121 52 94
------ ------ ------ ------ ------ ------
Total.......... $1,823 100.00% $1,813 100.00% $3,036 100.00%
====== ====== ====== ====== ====== ======
At December 31,
-------------------------------------------------------------------------
2004 2003 2002
------------------------ ------------------------ -----------------------
Loan Loan Loan
Amount of Category Amount of Category Amount of Category
Allowance as a Allowance as a Allowance as a
Allocated to Percentage Allocated to Percentage Allocated to Percentage
Loan of Total Loan of Total Loan of Total
Category Loans Category Loans Category Loans
-------- ------- -------- ------- -------- ------
Real estate:
One-to-
four family.... $ 340 32.44% $ 259 27.20% $ 236 25.78%
Home equity...... 153 23.51 116 23.86 107 16.42
Commercial....... 948 10.36 897 13.17 1,397 17.70
Construction..... 40 0.44 4 0.48 7 1.16
Commercial.......... 1,824 6.59 2,050 9.84 6,250 16.55
Consumer:
Auto............. 248 23.38 243 24.39 309 21.28
Manufactured
housing........ 9 1.94 - - - -
Savings
account........ - 0.63 - 0.55 - 0.60
Other............ 2 0.71 2 0.51 2 0.51
Unallocated......... 399 291 21
------ ------ ------ ------ ------ ------
Total.......... $3,963 100.00% $3,862 100.00% $8,329 100.00%
====== ====== ====== ====== ====== ======
72
Securities Portfolio
Our investment policy is designed to foster earnings and manage cash
flows within prudent interest rate risk and credit risk guidelines. Generally,
our investment policy is to invest funds in various categories of securities and
maturities based upon our liquidity needs, asset/liability management policies,
pledging requirements, investment quality, marketability and performance
objectives.
All of our securities carry market risk insofar as increases in market
rates of interest may cause a decrease in their market value. Prior to
investing, consideration is given to the interest rate environment, tax
considerations, market volatility, yield, settlement date and maturity of the
security, our liquidity position, and anticipated cash needs and sources. The
effect that the proposed security would have on our credit and interest rate
risk and risk-based capital is also considered.
Federally chartered savings banks have the authority to invest in
various types of liquid assets. The investments authorized under the Bank's
investment policy include U.S. government and government agency securities,
municipal securities (consisting of bond obligations of state and local
governments), mortgage-backed securities, collateralized mortgage obligations
and corporate bonds. On a short-term basis, our investment policy authorizes
investment in federal funds, certificates of deposit and money market
investments with insured institutions and with brokerage firms.
Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities, requires that securities be
categorized as "held to maturity," "trading securities" or "available-for-sale,"
based on management's intent as to the ultimate disposition of each security.
Statement No. 115 allows debt securities to be classified as "held to maturity"
and reported in financial statements at amortized cost only if the reporting
entity has the positive intent and ability to hold these securities to maturity.
Securities that might be sold in response to changes in market interest rates,
changes in the security's prepayment risk, increases in loan demand, or other
similar factors cannot be classified as "held to maturity."
We do not currently use or maintain a trading account. Securities not
classified as "held to maturity" are classified as "available-for-sale." These
securities are reported at fair value, and unrealized gains and losses on the
securities are excluded from earnings and reported, net of deferred taxes, as a
separate component of stockholders' equity.
We do not currently participate in hedging programs, interest rate
caps, floors or swaps, or other activities involving the use of off-balance
sheet derivative financial instruments, however, we may in the future utilize
such instruments if we believe it would be beneficial for managing our interest
rate risk. Further, we do not purchase securities which are not rated investment
grade.
Actual maturities of the securities held by us may differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without prepayment penalties. Callable securities pose
reinvestment risk because we may not be able to reinvest the proceeds from
called securities at an equivalent or higher interest rate.
Mortgage-backed Securities and Collateralized Mortgage Obligations.
Mortgage-related securities represent a participation interest in a pool of one-
to four-family or multi-family mortgages. We primarily invest in mortgage-backed
securities secured by one- to four-family mortgages. Our mortgage-related
securities portfolio includes mortgage-backed securities issued by U.S.
government
73
agencies or government-sponsored entities, such as Freddie Mac, Ginnie Mae, and
Fannie Mae, and collateralized mortgage obligations issued by private,
non-government, corporate issuers.
The mortgage originators use intermediaries (generally government
agencies and government-sponsored enterprises, but also a variety of private
corporate issuers) to pool and repackage the participation interests in the form
of securities, with investors such as us receiving the principal and interest
payments on the mortgages. Securities issued or sponsored by U.S. government
agencies and government-sponsored entities are guaranteed as to the payment of
principal and interest to investors. Privately issued non-government, corporate
issuers' securities typically offer rates above those paid on government agency
issued or sponsored securities, but present higher risk than government agency
issued or sponsored securities because they lack the guaranty of those agencies
and are generally less liquid investments.
Mortgage-backed securities are pass-through securities typically
issued with stated principal amounts, and the securities are backed by pools of
mortgages that have loans with interest rates that are within a specific range
and have varying maturities. The life of a mortgage-backed security thus
approximates the life of the underlying mortgages. Mortgage-backed securities
generally yield less than the mortgage loans underlying the securities. The
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. Mortgage-backed securities are generally referred to as mortgage
participation certificates or pass-through certificates.
Collateralized mortgage obligations are mortgage-derivative products
that aggregate pools of mortgages and mortgage-backed securities and create
different classes of securities with varying maturities and amortization
schedules as well as a residual interest with each class having different risk
characteristics. The cash flows from the underlying collateral are usually
divided into "tranches" or classes whereby tranches have descending priorities
with respect to the distribution of principal and interest repayment of the
underlying mortgages and mortgage-backed securities as opposed to pass through
mortgage-backed securities where cash flows are distributed pro rata to all
security holders. Unlike mortgage-backed securities from which cash flow is
received and risk is shared pro rata by all securities holders, cash flows from
the mortgages and mortgage-backed securities underlying collateralized mortgage
obligations are paid in accordance with a predetermined priority to investors
holding various tranches of the securities or obligations.
74
The following table sets forth certain information regarding the
amortized cost, weighted average yields and maturities of our securities
portfolio at March 31, 2007. This table shows contractual maturities and does
not reflect repricing or the effect of prepayments. Actual maturities may
differ.
At March 31, 2007
-------------------------------------------------------------------------------------------------------
Maturing Maturing
Maturing Maturing 2012-2016 after 2016
Within 2007 2008-2011 (Five to (More than
(One Year) (One to Five Years) Ten Years) Ten Years) Total Investment Securities
------------------ -------------------- ----------------- ------------------ ----------------------------
Amortized Avg. Amortized Avg. Amortized Avg. Amortized Avg. Amortized Avg. Fair
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Value
----- ------- ------ ------- ------ ------- ------ ------- ------ ------- -----
(Dollars in thousands)
Corporate securities........ $ - -% $ 1,025 5.65% $ - -% $ - -% $ 1,025 5.65% $ 1,006
U.S. government agency
securities............... - - 15,814 4.11 6,486 5.88 34,882 6.14 57,182 5.55 56,975
Obligations of state and
political subdivisions... 6,071 3.87 406 4.27 - - 625 4.00 7,102 3.90 7,111
Government National
Mortgage Association..... - - - - 24 5.38 4,131 5.51 4,155 5.51 4,158
Federal Home Loan
Mortgage Corporation..... 309 4.50 1,216 4.50 - - 8,594 3.84 10,119 3.94 10,081
Federal National Mortgage
Association.............. - - 5,059 4.29 4,342 4.55 8,221 4.98 17,622 4.68 17,330
Collateralized mortgage
obligations.............. - - - - - - 32,300 4.91 32,300 4.91 31,879
------ ---- ------- ---- ------- ---- ------- ---- -------- ---- --------
Total..................... $6,380 3.90% $23,520 4.24% $10,852 5.34% $88,753 5.29% $129,505 4.98% $128,540
====== ==== ======= ==== ======= ==== ======= ==== ======== ==== ========
75
The following table sets forth the carrying value of our securities
portfolio as of March 31, 2007 and at year end for the last several years.
At December 31,
At March 31, ------------------------------------------------------------
2007 2006 2005 2004 2003 2002
-------- -------- ------- -------- ------- -------
(In thousands)
Investment Securities Available for Sale:
- ---------------------------------------
Equity securities.................................. $ 1,759 $ 1,718 $ 1,729 $ 1,689 $ 1,144 $ 1,148
U.S. government agency securities.................. 11,485 12,434 - - - -
Corporate securities............................... - - - - 3,208 3,303
-------- -------- ------- -------- ------- -------
Total investment securities
available for sale...................... 13,244 14,152 1,729 1,689 4,352 4,451
-------- -------- ------- -------- ------- -------
Mortgage-Backed Securities Available for Sale:
- ---------------------------------------------
Government National Mortgage Association........... 180 200 324 514 719 1,002
-------- -------- ------- -------- ------- -------
Investment Securities Held to Maturity:
- --------------------------------------
U.S. government agency securities.................. 45,696 32,067 35,351 33,364 16,998 13,910
Corporate securities............................... 1,025 1,028 3,059 12,846 28,460 38,959
Obligations of states and political subdivisions... 7,102 5,550 1,176 552 552 902
-------- -------- ------- -------- ------- -------
Total investment securities
held to maturity........................ 53,823 38,645 39,586 46,762 46,010 53,771
-------- -------- ------- -------- ------- -------
Mortgage-Backed Securities Held to Maturity:
- -------------------------------------------
Government National Mortgage Association........... 3,975 4,488 7,266 11,493 15,682 12,659
Federal Home Loan Mortgage Corporation............. 10,120 3,351 2,983 3,991 3,271 3,085
Federal National Mortgage Association.............. 17,622 16,793 18,810 21,493 19,777 6,489
Collateralized mortgage obligations................ 32,300 34,353 24,649 23,710 1,208 -
-------- -------- ------- -------- ------- -------
Total mortgage-backed securities
held to maturity........................ 64,017 58,985 53,708 60,687 39,938 22,233
-------- -------- ------- -------- ------- -------
Total.............................................. $131,264 $111,982 $95,348 $109,652 $91,019 $81,457
======== ======== ======= ======== ======= =======
Sources of Funds
General. Deposits are our major source of funds for lending and other
investment purposes. We also have the ability to borrow funds from the Federal
Home Loan Bank to supplement deposits as a source of funds.
In addition, we derive funds from loan and mortgage-backed securities
principal repayments, and proceeds from the maturity and call of investment
securities. Loan and securities payments are a relatively stable source of
funds, while deposit inflows and outflows are significantly influenced by
pricing strategies and money market conditions.
Deposits. Our current deposit products include checking and savings
accounts, certificates of deposit and fixed or variable rate individual
retirement accounts (IRAs). Deposit account terms vary, primarily as to the
required minimum balance amount, the amount of time, if any, that the funds must
remain on deposit and the applicable interest rate. The determination of deposit
and certificate interest rates is based upon a number of factors, including: (1)
need for funds based on loan demand, current maturities of deposits and other
cash flow needs; (2) a current survey of a selected group of competitors' rates
for similar products; (3) economic conditions; and (4) business plan
projections.
76
We traditionally have obtained deposits primarily from within New
Jersey. We recently introduced a new product, our CyberSavings account, which
has brought deposits into the Bank from throughout the United States. This
product is a high-yield, multi-tiered savings account that is accessible only
via the internet and is not marketed through our branches or locally. To grow
these deposits, we pay a fee to a third party referral website which advertises
financial products. We are currently promoting this product by offering the
highest tier rate for the first 90 days, regardless of the account balance. We
launched this product in December 2006 and CyberSavings accounts grew quickly,
totaling approximately $17 million by the end of the first quarter of 2007. We
have also recently created a CyberSaver Supreme account, which requires a
minimum balance of $100,000. Unlike regular CyberSavings, the Supreme account is
a money market product, as opposed to a savings account.
We do not at this time utilize the services of deposit brokers.
Premiums or incentives for opening accounts are offered. We periodically select
particular certificate of deposit maturities for promotion in connection with
asset/liability management and interest rate risk concerns.
The following table sets forth the distribution of deposits by account
type as of March 31, 2007 and at year end for the last several years. The
increase in money market accounts from 2005 to 2006 is attributable to our
introduction in 2005 of a multi-tiered money market account we call the "Money
Maker."
At December 31,
At March 31, ------------------------------
2007 2006 2005 2004
-------- -------- -------- --------
(In thousands)
Noninterest-bearing deposits $ 10,262 $ 9,532 $ 12,123 $ 8,634
Savings .................... 66,401 63,760 62,551 72,074
NOW checking ............... 32,708 35,926 34,560 38,641
Money market ............... 49,130 44,637 24,662 24,349
Certificates of deposit .... 161,497 162,107 143,648 142,913
-------- -------- -------- --------
Total .................... $319,998 $315,962 $277,544 $286,611
======== ======== ======== ========
As shown above, $161.5 million of our deposits as of March 31, 2007,
representing 50% of total deposits at that date, were certificates of deposit.
The inflow of certificates of deposit and the retention of such deposits upon
maturity are significantly influenced by general interest rates and money market
conditions, making certificates of deposit traditionally a more volatile source
of funding than core deposits. Our liquidity could be reduced if a significant
amount of certificates of deposit maturing within a short period of time were
not renewed. To the extent that such deposits do not remain with us, they may
need to be replaced with borrowings, which could increase our cost of funds and
negatively impact our net interest rate spread and our financial condition.
77
The following table sets forth certificates of deposit classified by
interest rate as of March 31, 2007 and at year end for the last several years.
At December 31,
At March 31, ------------------------------------------
2007 2006 2005 2004
---------- -------- --------- -------
(In thousands)
Interest Rate
- -------------
2.00% or less........... $ - $ - $ 3,328 $ 41,278
2.01-4.00%.............. 28,149 29,261 83,200 74,964
4.01-6.00%.............. 132,389 131,207 55,560 14,693
6.01-8.00%.............. 959 1,638 1,559 11,978
-------- -------- -------- --------
Total................. $161,497 $162,107 $143,648 $142,913
======== ======== ======== ========
As of March 31, 2007, the amount and maturities of our certificates of
deposit were as follows:
At March 31, 2007
Amount Due
------------------------------------------------------------------------------------------
Within After
1 year 1-2 years 2-3 years 3-4 years 4-5 years 5 years Total
------ --------- --------- --------- --------- ------- -----
(In thousands)
Interest Rate
- -------------
2.01-4.00%........ $ 17,292 $ 5,210 $3,912 $ 1,385 $ 349 $ - $ 28,148
4.01-6.00%........ 91,751 13,625 5,918 11,288 3,719 6,089 132,390
6.01-8.00%........ 959 - - - - - 959
-------- ------- ------ ------- ------ ------ --------
Total........... $110,002 $18,835 $9,830 $12,673 $4,068 $6,089 $161,497
======== ======= ====== ======= ====== ====== ========
As of March 31, 2007, our certificates of deposit of $100,000 or more were
scheduled to mature as follows:
At March 31, 2007
-----------------
(In thousands)
Maturity Period
- ---------------
Within three months................ $20,059
Three through six months........... 9,480
Six through twelve months.......... 10,764
Over twelve months................. 14,919
-------
$55,222
=======
Borrowings. We periodically borrow funds from the Federal Home Loan
Bank to supplement deposits as a source of funds. As of March 31, 2007, our
borrowings consisted of $21.0 million of Federal Home Loan Bank overnight
repurchase agreements.
Short-term Federal Home Loan Bank advances generally have original
maturities of less than one year. The details of our short-term advances
78
during recent periods are shown in the table below. During these periods, we did
not have any borrowings (short-term or long-term) other than as shown in the
following table.
At or For the Three At or For the
Months Ended March 31, Year Ended December 31,
---------------------- -----------------------------------
2007 2006 2006 2005 2004
---- ---- ---- ---- ----
(Dollars in thousands)
Federal Home Loan Bank Advances:
Balance outstanding at end of period........ $21,000 $6,900 $ 4,400 $ - $ -
Average balance outstanding................. 9,557 2,227 12,859 197 -
Maximum amount outstanding
at any month-end during the period....... 21,000 6,900 24,100 - -
Average interest rate during the year....... 5.42% 4.72% 5.36% 4.03% -
Weighted average rate at end of year........ 5.49% 5.17% 5.33% - -
Additional information regarding our borrowings is included under Note
10 to our consolidated financial statements beginning on page F-1.
Properties and Equipment
As of March 31, 2007, our investment in property and equipment, net of
depreciation and amortization, totaled $6.5 million. We currently operate from
five offices , plus an administrative center, and we own each of those
locations. We are in the process of renovating our Pitman branch office. The
total cost of that project is anticipated to be between $250,000 and $300,000.
Legal Proceedings
Gloucester County Federal Savings Bank, from time to time, is a party
to routine litigation which arises in the normal course of business, such as
claims to enforce liens, condemnation proceedings on properties in which it
holds security interests, claims involving the making and servicing of real
property loans, and other issues incident to its business. There were no
lawsuits pending or known to be contemplated against Gateway Community Financial
Corp. or Gloucester County Federal Savings Bank as of March 31, 2007 that were
expected to have a material effect on operations or income.
REGULATION
Gloucester County Federal Savings Bank and Gateway Community Financial
Corp. operate in a highly regulated industry. This regulation establishes a
comprehensive framework of activities in which a savings and loan holding
company and federal savings bank may engage and is intended primarily for the
protection of the deposit insurance fund and consumers. Set forth below is a
brief description of certain laws that relate to the regulation of Gloucester
County Federal Savings Bank and Gateway Community Financial Corp. The
description does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations.
Regulatory authorities have extensive discretion in connection with
their supervisory and enforcement activities, including the imposition of
restrictions on the operation of an institution and its holding company, the
classification of assets by the institution and the adequacy of an institution's
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allowance for loan losses. Any change in such regulation and oversight, whether
in the form of regulatory policy, regulations, or legislation, including changes
in the regulations governing mutual holding companies, could have a material
adverse impact on Gateway Community Financial Corp., Gloucester County Federal
Savings Bank, and their operations. The adoption of regulations or the enactment
of laws that restrict the operations of Gloucester County Federal Savings Bank
and/or Gateway Community Financial Corp. or impose burdensome requirements upon
one or both of them could reduce their profitability and could impair the value
of Gloucester County Federal Savings Bank's franchise, resulting in negative
effects on the trading price of Gateway Community Financial Corp. common stock.
Regulation of Gloucester County Federal Savings Bank
General. As a federally chartered, Federal Deposit Insurance
Corporation-insured savings bank, Gloucester County Federal Savings Bank is
subject to extensive regulation by the Office of Thrift Supervision and the
Federal Deposit Insurance Corporation. This regulatory structure gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies
regarding the classification of assets and the level of the allowance for loan
losses. The activities of federal savings banks are subject to extensive
regulation, including restrictions or requirements with respect to loans to one
borrower, the percentage of non-mortgage loans or investments to total assets,
capital distributions, permissible investments and lending activities,
liquidity, transactions with affiliates and community reinvestment. Federal
savings banks are also subject to reserve requirements imposed by the Federal
Reserve System. A federal savings bank's relationship with its depositors and
borrowers is regulated by both state and federal law, especially in such matters
as the ownership of savings accounts and the form and content of the bank's
mortgage documents.
Gloucester County Federal Savings Bank must file reports with the
Office of Thrift Supervision concerning its activities and financial condition,
and must obtain regulatory approvals prior to entering into certain
transactions, such as mergers with or acquisitions of other financial
institutions. The Office of Thrift Supervision regularly examines Gloucester
County Federal Savings Bank and prepares reports to the Bank's Board of
Directors on deficiencies, if any, found in its operations. The Office of Thrift
Supervision has substantial discretion to impose enforcement action on an
institution that fails to comply with applicable regulatory requirements,
particularly with respect to its capital requirements. In addition, the Federal
Deposit Insurance Corporation has the authority to recommend to the Director of
the Office of Thrift Supervision that enforcement action be taken with respect
to a particular federal savings bank and, if action is not taken by the
Director, the Federal Deposit Insurance Corporation has authority to take such
action under certain circumstances.
Insurance of Deposit Accounts. The Bank's deposits are insured to
applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
Although the FDIC is authorized to assess premiums under a risk-based system for
such deposit insurance, most insured depository institutions have not been
required to pay premiums for the last ten years. The Federal Deposit Insurance
Reform Act of 2005 (the "Reform Act") resulted in significant changes to the
federal deposit insurance program: (i) effective March 31, 2006, the Bank
Insurance Fund and the Savings Association Insurance Fund were merged into a new
combined fund, called the Deposit Insurance Fund; (ii) the current $100,000
deposit insurance coverage will be indexed for inflation (with adjustments every
five years, commencing January 1, 2011); and (iii) deposit insurance coverage
for retirement accounts was increased to $250,000 per participant subject to
adjustment for inflation. In addition, the Reform Act gave the FDIC greater
latitude in setting the assessment rates for insured depository institutions,
which could be used to impose minimum assessments.
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The FDIC is authorized to set the reserve ratio for the Deposit
Insurance Fund annually at between 1.15% and 1.5% of estimated insured deposits.
If the Deposit Insurance Fund's reserves exceed the designated reserve ratio,
the FDIC is required to pay out all or, if the reserve ratio is less than 1.5%,
a portion of the excess as a dividend to insured depository institutions based
on the percentage of insured deposits held on December 31, 1996 adjusted for
subsequently paid premiums. Insured depository institutions that were in
existence on December 31, 1996 and paid assessments prior to that date (or their
successors) are entitled to a one-time credit against future assessments based
on the amount of their assessable deposits on that date. The Bank anticipates
that it will be able to offset its deposit insurance premium for 2007 with the
$245,000 special one-time assessment credit it will receive during 2007.
Pursuant to the Reform Act, the FDIC has determined to maintain the
designated reserve ratio at 1.25%. The FDIC has also adopted a new risk-based
premium system that provides for quarterly assessments based on an insured
institution's ranking in one of four risk categories based on their examination
ratings and capital ratios. Beginning in 2007, well-capitalized institutions
with the CAMELS ratings of 1 or 2 will be grouped in Risk Category I and will be
assessed for deposit insurance at an annual rate of between five and seven basis
points, with the assessment rate for an individual institution to be determined
according to a formula based on a weighted average of the institution's
individual CAMEL component ratings plus either five financial ratios or the
average ratings of its long-term debt. Institutions in Risk Categories II, III
and IV will be assessed at annual rates of 10, 28 and 43 basis points,
respectively.
In addition, all FDIC-insured institutions are required to pay
assessments to the FDIC to fund interest payments on bonds issued by the
Financing Corporation ("FICO"), an agency of the Federal government established
to recapitalize the predecessor to the SAIF. The FICO assessment rates, which
are determined quarterly, averaged 0.013% of insured deposits in fiscal 2006.
These assessments will continue until the FICO bonds mature in 2017.
Regulatory Capital Requirements. Office of Thrift Supervision capital
regulations require savings institutions to meet three minimum capital
standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2)
"Tier 1" or "core" capital equal to at least 4% (3% if the institution has
received the highest possible rating on its most recent examination) of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets. At December 31, 2006, Gloucester County Federal Savings Bank was in
compliance with the minimum capital standards and qualified as "well
capitalized." For Gloucester County Federal Savings Bank's compliance with these
regulatory capital standards, see Historical and Pro Forma Capital Compliance as
well as Note 15 to the consolidated financial statements. In assessing an
institution's capital adequacy, the Office of Thrift Supervision takes into
consideration not only these numeric factors but also qualitative factors, and
has the authority to establish higher capital requirements for individual
institutions where necessary.
The Office of Thrift Supervision may require any savings institution
that has a risk-based capital ratio of less than 8%, a ratio of Tier 1 capital
to risk-weighted assets of less than 4% or a ratio of Tier 1 capital to total
adjusted assets of less than 4% (3% if the institution has received the highest
rating on its most recent examination) to take certain action to increase its
capital ratios. If the savings institution's capital is significantly below the
minimum required levels of capital or if it is unsuccessful in increasing its
capital ratios, the institution's activities may be restricted.
For purposes of the capital regulations, tangible capital is defined
as core capital less all intangible assets except for certain mortgage servicing
rights. Tier 1 or core capital is defined as common stockholders' equity,
non-cumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of consolidated subsidiaries, and certain
non-withdrawable accounts and pledged
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deposits of mutual savings banks. Gloucester County Federal Savings Bank does
not have any non-withdrawable accounts or pledged deposits. Tier 1 and core
capital are reduced by an institution's intangible assets, with limited
exceptions for certain mortgage and non-mortgage servicing rights and purchased
credit card relationships. Both core and tangible capital are further reduced by
an amount equal to the savings institution's debt and equity investments in
"non-includable" subsidiaries engaged in activities not permissible for national
banks other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies.
The risk-based capital standard for savings institutions requires the
maintenance of total capital of 8% of risk-weighted assets. Total capital equals
the sum of core and supplementary capital. The components of supplementary
capital include, among other items, cumulative perpetual preferred stock,
perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, the portion of the allowance for loan losses
not designated for specific loan losses and up to 45% of unrealized gains on
equity securities. The portion of the allowance for loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, supplementary capital is limited to 100% of core
capital. For purposes of determining total capital, a savings institution's
assets are reduced by the amount of capital instruments held by other depository
institutions pursuant to reciprocal arrangements and by the amount of the
institution's equity investments (other than those deducted from core and
tangible capital) and its high loan-to-value ratio land loans and
non-residential construction loans.
A savings institution's risk-based capital requirement is measured
against risk-weighted assets, which equal the sum of each on-balance-sheet asset
and the credit-equivalent amount of each off-balance-sheet item after being
multiplied by an assigned risk weight. These risk weights range from 0% for cash
to 100% for delinquent loans, property acquired through foreclosure, commercial
loans, and certain other assets.
Dividend and Other Capital Distribution Limitations. A savings
institution, like Gloucester County Federal Savings Bank, that is a subsidiary
of a savings and loan holding company must file an application or a notice with
the Office of Thrift Supervision at least thirty days before making a capital
distribution, such as paying a dividend to Gateway Community Financial Corp. The
Office of Thrift Supervision imposes various restrictions or requirements on the
ability of savings institutions to make capital distributions, including cash
dividends. A savings institution must file an application for prior approval of
a capital distribution if: (i) it is not eligible for expedited treatment under
the applications processing rules of the Office of Thrift Supervision; (ii) the
total amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings institution's net income for that year to date plus the
institution's retained net income for the preceding two years; (iii) it would
not adequately be capitalized after the capital distribution; or (iv) the
distribution would violate an agreement with the Office of Thrift Supervision or
applicable regulations. The Office of Thrift Supervision may disapprove a notice
or deny an application for a capital distribution if: (i) the savings
institution would be undercapitalized following the capital distribution; (ii)
the proposed capital distribution raises safety and soundness concerns; or (iii)
the capital distribution would violate a prohibition contained in any statute,
regulation or agreement.
Capital distributions by Gateway Community Financial Corp., as a
savings and loan holding company, are not subject to the Office of Thrift
Supervision capital distribution rules. Because Gateway Community Financial
Corp. will retain 50% of the net proceeds of the stock offering, the possibility
that Gloucester County Federal Savings Bank would need to file an
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application rather than a notice for capital distributions is not expected to
affect the payment of cash dividends by Gateway Community Financial Corp. to its
stockholders or the amount of such dividends.
Safety and Soundness Standards. As required by statute, the federal
banking agencies have adopted guidelines establishing general standards relating
to internal controls, information and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, asset
quality, earnings and compensation, fees and benefits. The guidelines require,
among other things, the implementation of appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines. If it
is determined that a savings institution has failed to meet any standard
prescribed by the guidelines, the institution may be required to submit an
acceptable plan to achieve compliance with the standard.
Qualified Thrift Lender Test. Savings institutions must meet a
qualified thrift lender test or they become subject to the business activity
restrictions and branching rules applicable to national banks. To qualify as a
qualified thrift lender, a savings institution must either (i) be deemed a
"domestic building and loan association" under the Internal Revenue Code by
maintaining at least 60% of its total assets in specified types of assets,
including cash, certain government securities, loans secured by and other assets
related to residential real property, educational loans and investments in
premises of the institution or (ii) satisfy the statutory qualified thrift
lender test set forth in the Home Owners' Loan Act by maintaining at least 65%
of its portfolio assets in qualified thrift investments (defined to include
residential mortgages and related equity investments, certain mortgage-related
securities, small business loans, student loans and credit card loans). For
purposes of the statutory qualified thrift lender test, portfolio assets are
defined as total assets minus goodwill and other intangible assets, the value of
property used by the institution in conducting its business, and specified
liquid assets up to 20% of total assets. A savings institution must maintain its
status as a qualified thrift lender on a monthly basis in at least nine out of
every twelve months. Gloucester County Federal Savings Bank met the qualified
thrift lender test as of December 31, 2006 and in each of the last twelve months
and, therefore, qualifies as a qualified thrift lender.
A savings bank that fails the qualified thrift lender test and does
not convert to a bank charter generally will be prohibited from: (1) engaging in
any new activity not permissible for a national bank, (2) paying dividends not
permissible under national bank regulations, and (3) establishing any new branch
office in a location not permissible for a national bank in the institution's
home state. In addition, if the institution does not requalify under the
qualified thrift lender test within three years after failing the test, the
institution would be prohibited from engaging in any activity not permissible
for a national bank and would have to repay any outstanding advances from the
Federal Home Loan Bank as promptly as possible.
Community Reinvestment Act. Under the Community Reinvestment Act,
every insured depository institution, including Gloucester County Federal
Savings Bank, has a continuing and affirmative obligation consistent with its
safe and sound operation to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The Community Reinvestment Act
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community. The Community Reinvestment Act requires the depository institution's
record of meeting the credit needs of its community to be assessed and taken
into account in the evaluation of certain applications by such institution, such
as a merger or the establishment of a branch office by Gloucester County Federal
Savings Bank. An unsatisfactory Community Reinvestment Act examination rating
may be used as the basis for
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the denial of an application. Gloucester County Federal Savings Bank received a
"satisfactory" rating in its most recent Community Reinvestment Act examination.
Federal Home Loan Bank System. Gloucester County Federal Savings Bank
is a member of the Federal Home Loan Bank of New York, which is one of twelve
regional federal home loan banks. Each federal home loan bank serves as a
reserve or central bank for its members within its assigned region. It is funded
primarily from funds deposited by financial institutions and proceeds derived
from the sale of consolidated obligations of the Federal Home Loan Bank System.
It makes loans to members pursuant to policies and procedures established by its
board of directors.
As a member, Gloucester County Federal Savings Bank is required to
purchase and maintain stock in the Federal Home Loan Bank of New York in an
amount equal to the greater of 1% of our aggregate unpaid residential mortgage
loans, home purchase contracts or similar obligations at the beginning of each
year or 5% of our outstanding Federal Home Loan Bank advances.
The Federal Home Loan Banks are required to provide funds for the
resolution of troubled savings institutions and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of Federal Home Loan Bank
dividends paid and could continue to do so in the future. In addition, these
requirements could result in the Federal Home Loan Banks imposing a higher rate
of interest on advances to their members.
The USA Patriot Act. Gloucester County Federal Savings Bank is subject
to regulations implementing the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or
the USA Patriot Act. The USA Patriot Act gives the federal government powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title III
of the USA Patriot Act takes measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act.
Among other requirements, Title III of the USA Patriot Act and the
related regulations impose the following requirements with respect to financial
institutions:
o Establishment of anti-money laundering programs that include,
at minimum: (i) internal policies, procedures, and controls;
(ii) specific designation of an anti-money laundering
compliance officer; (iii) ongoing employee training programs;
and (iv) an independent audit function to test the anti-money
laundering program.
o Establishment of a program specifying procedures for obtaining
identifying information from customers seeking to open new
accounts, including verifying the identity of customers within
a reasonable period of time.
o Establishment of appropriate, specific, and, where necessary,
enhanced due diligence policies, procedures, and controls
designed to detect and report money laundering.
o Prohibitions on establishing, maintaining, administering or
managing correspondent accounts for foreign shell banks
(foreign banks that do not have a physical presence in any
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country), and compliance with certain record keeping
obligations with respect to correspondent accounts of foreign
banks.
Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on applications under
the Federal Reserve Act and the Bank Merger Act.
Regulation of Gateway Community Financial Corp.
General. Gateway Community Financial Corp. is a savings and loan
holding company within the meaning of Section 10 of the Home Owners' Loan Act.
It is required to file reports with the Office of Thrift Supervision and is
subject to regulation and examination by the Office of Thrift Supervision.
Gateway Community Financial Corp. must also obtain regulatory approval from the
Office of Thrift Supervision before engaging in certain transactions, such as
mergers with or acquisitions of other financial institutions. In addition, the
Office of Thrift Supervision has enforcement authority over Gateway Community
Financial Corp. and any non-savings institution subsidiaries. This permits the
Office of Thrift Supervision to restrict or prohibit activities that it
determines to be a serious risk to Gloucester County Federal Savings Bank. This
regulation is intended primarily for the protection of the depositors and not
for the benefit of stockholders of Gateway Community Financial Corp.
Activities Restrictions. As a savings and loan holding company and a
subsidiary holding company of a mutual holding company, Gateway Community
Financial Corp. is subject to statutory and regulatory restrictions on its
business activities. The non-banking activities of Gateway Community Financial
Corp. and its non-savings institution subsidiaries are restricted to certain
activities specified by Office of Thrift Supervision regulation, which include
performing services and holding properties used by a savings institution
subsidiary, activities authorized for savings and loan holding companies as of
March 5, 1987, and non-banking activities permissible for bank holding companies
pursuant to the Bank Holding Company Act of 1956 or authorized for financial
holding companies pursuant to the Gramm-Leach-Bliley Act. Before engaging in any
non-banking activity or acquiring a company engaged in any such activities,
Gateway Community Financial Corp. must obtain prior Office of Thrift Supervision
approval of such planned activity or acquisition.
Mergers and Acquisitions. Gateway Community Financial Corp. must
obtain approval from the Office of Thrift Supervision before acquiring, directly
or indirectly, more than 5% of the voting stock of another savings institution
or savings and loan holding company or acquiring such an institution or holding
company by merger, consolidation or purchase of its assets. Federal law also
prohibits a savings and loan holding company from acquiring more than 5% of a
company engaged in activities other than those authorized for savings and loan
holding companies by federal law or acquiring or retaining control of a
depository institution that is not insured by the Federal Deposit Insurance
Corporation. In evaluating an application for Gateway Community Financial Corp.
to acquire control of a savings institution, the Office of Thrift Supervision
would consider the financial and managerial resources and future prospects of
Gateway Community Financial Corp. and the target institution, the effect of the
acquisition on the risk to the insurance funds, the convenience and the needs of
the community and competitive factors.
Waivers of Dividends by Gateway Community Financial, MHC. Gateway
Community Financial, MHC is required to provide prior notice to the Office of
Thrift Supervision of any proposed waiver of its receipt of dividends from
Gateway Community Financial Corp. The Office of Thrift Supervision reviews
dividend waiver notices on a case-by-case basis, and, in general, does not
object to any such waiver if: (i) the waiver would not be detrimental to the
safe and sound operations of the subsidiary savings association and (ii) the
mutual holding company's board of
85
directors determines that such waiver is consistent with such directors'
fiduciary duties to the mutual holding company's members. Subject to the
non-objection of the Office of Thrift Supervision, we anticipate that Gateway
Community Financial, MHC will waive the receipt of any dividends paid by Gateway
Community Financial Corp.
Conversion of Gateway Community Financial, MHC to Stock Form. Office
of Thrift Supervision regulations permit Gateway Community Financial, MHC to
convert from the mutual form of organization to the capital stock form of
organization, commonly referred to as a second step conversion. In a second step
conversion, a new holding company would be formed as the successor to Gateway
Community Financial Corp., Gateway Community Financial, MHC's corporate
existence would end, and certain depositors of Gloucester County Federal Savings
Bank would receive the right to subscribe for shares of the new holding company.
In a second step conversion, each share of common stock held by stockholders
other than Gateway Community Financial, MHC would be automatically converted
into shares of common stock of the new holding company.
Acquisition of Control. Under the federal Change in Bank Control Act,
a notice must be submitted to the Office of Thrift Supervision if any person
(including a company), or group acting in concert, seeks to acquire "control" of
a savings and loan holding company or savings association. An acquisition of
"control" can occur upon the acquisition of 10% or more of the voting stock of a
savings and loan holding company or savings institution or as otherwise defined
by the Office of Thrift Supervision. Under the Change in Bank Control Act, the
Office of Thrift Supervision has 60 days from the filing of a complete notice to
act, taking into consideration certain factors, including the financial and
managerial resources of the acquirer and the anti-trust effects of the
acquisition. Any company that so acquires control would then be subject to
regulation as a savings and loan holding company.
Federal Securities Laws
General. Gateway Community Financial Corp. has filed with the
Securities and Exchange Commission a registration statement under the Securities
Act of 1933 for the registration of the common stock to be issued pursuant to
the offering. Upon completion of the offering, Gateway Community Financial Corp.
common stock will continue to be registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934. Gateway Community
Financial Corp. will be subject to the information, proxy solicitation, insider
trading restrictions and other requirements under the Securities Exchange Act of
1934.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 implemented
various legislative reforms addressing, among other matters, corporate
governance, auditing and accounting, executive compensation, and enhanced and
timely disclosure of corporate information. As directed by Section 302(a) of
Sarbanes-Oxley Act and the implementing rules of the Securities and Exchange
Commission, Gateway Community Financial Corp.'s Chief Executive Officer and
Chief Financial Officer each will be required to certify that its quarterly and
annual reports do not contain any untrue statement of a material fact. The rules
have several requirements, including having these officers certify that: they
are responsible for establishing, maintaining and regularly evaluating the
effectiveness of our internal controls; they have made certain disclosures to
our auditors and the audit committee of the Board of Directors about our
internal controls; and they have included information in our quarterly and
annual reports about their evaluation and whether there have been significant
changes in our internal controls or in other factors that could significantly
affect internal controls.
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TAXATION
Federal Taxation
Savings institutions are subject to the Internal Revenue Code of 1986,
as amended, in the same general manner as other corporations.
All thrift institutions are now subject to the same provisions as
banks with respect to deductions for bad debts. Thrift institutions that are
treated as "small banks" (the average adjusted bases for all assets of such
institution equals $500 million or less) under the Internal Revenue Code may
account for bad debts by using the experience method for determining additions
to their bad debt reserve. Thrift institutions that are not treated as small
banks must now use the specific charge-off method.
Gateway Community Financial Corp. may exclude from its income 100% of
dividends received from Gloucester County Federal Savings Bank as a member of
the same affiliated group of corporations. A 70% dividends received deduction
generally applies with respect to dividends received from corporations that are
not members of such affiliated group.
Gateway Community Financial, MHC, Gateway Community Financial Corp.
and Gloucester County Federal Savings Bank file separate federal tax returns.
The Bank's income tax return was audited by the IRS in 2002.
State Taxation
Gateway Community Financial, MHC, Gateway Community Financial Corp.
and Gloucester County Federal Savings Bank file New Jersey income tax returns
and are subject to a 9% state income tax that is calculated based on federal
taxable income, subject to certain adjustments.
The state income tax returns of Gateway Community Financial, MHC,
Gateway Community Financial Corp. and Gloucester County Federal Savings Bank
have not been audited during the past five years. For additional information,
see Note 11 to the consolidated financial statements beginning on page F-1.
MANAGEMENT
General
Gateway Community Financial Corp.'s Board of Directors is currently
composed of seven members, with each director serving for a term of three years
in accordance with the requirement in Gateway Community Financial Corp.'s bylaws
that directors be divided into three classes, as nearly equal in number as
possible, with one class elected annually. Each director of Gateway Community
Financial Corp. also serves as a director of Gateway Community Financial, MHC
and Gloucester County Federal Savings Bank. Gateway Community Financial Corp.'s
and Gloucester County Federal Savings Bank's officers are appointed annually by
the Board of Directors and serve at the Board's discretion.
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Director Term
Directors: Age Position Since (1) Expires
- --------- --- -------- --------- -------
John S. Gligor, Sr. 66 Chairman of the Board 1996 2007
Walter N. Friedrich 57 Vice Chairman of the Board 1993 2008
Robert C. Ahrens 56 President, Chief Executive Officer and Director 1998 2009
Scott P. Newman 39 Director 2004 2009
Dennis L. King 60 Director 1988 2007
Frank D. Wilson 59 Director 2004 2007
Robert A. Jones 84 Director 1963 2009
- ----------------------
(1) Indicates the year the individual first became a director of Gloucester
County Federal Savings Bank. Upon the formation of Gateway Community
Financial Corp. in 2001, each person serving at that time as a director of
Gloucester County Federal Savings Bank became a director of Gateway
Community Financial Corp.
Senior Management: Age Position
- ------------------ --- --------
Timothy P. Hand 42 Executive Vice President and Chief Operating Officer
Bruce E. Haines 55 Senior Vice President and Chief Lending Officer
Francis J. Walsh 64 Vice President and Chief Financial Officer
Kristin T. McIlvaine 43 Vice President of Finance
Biographical Information
John S. Gligor, Sr. is Vice President and Partner of Concord Truss
Company in Woodbury Heights, New Jersey.
Walter N. Friedrich joined Friedrich Heating & Air Conditioning Inc. in
1972 and became president of the company in 1982.
Robert C. Ahrens joined Gloucester County Federal Savings Bank in June
1973. In March 1997, Mr. Ahrens was appointed president of the Bank and, in
January 1998, Mr. Ahrens also became a director of the Bank. Prior to becoming
president, Mr. Ahrens held numerous positions with the Bank, including Assistant
Treasurer, Treasurer, Chief Lending Officer, Senior Vice President and Executive
Vice President.
Scott P. Newman is Vice President of American Title Abstract Corp in
Turnersville, New Jersey.
Dennis L. King is currently an adjunct professor at Camden County
College. He was previously employed by the Bank as vice president and chief
financial officer from 1996 to 1999 and as senior vice president and chief
financial officer from 1999 to 2002. Prior to his employment with the Bank, Mr.
King was the owner and president of Far Horizons Travel in Blackwood, New Jersey
and an adjunct professor a Camden County College.
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Frank D. Wilson is owner and president of S.J. Graphics (t/a Kiva
Printing & Graphics), a small commercial printer on the cutting edge of modern
digital technology, located in Westville, New Jersey.
Robert A. Jones is retired from Campbell Soup Company where he was
employed from 1947 through 1986 in various positions, including fieldman,
purchasing agent and Director of Agricultural Purchasing.
Timothy P. Hand joined Gloucester County Federal Savings Bank in 1990.
Mr. Hand was appointed Assistant Vice President/Compliance Officer in 1998 and
Senior Vice President/Chief Lending Officer in 2002. In 2004, Mr. Hand was
appointed to his current position of Executive Vice President/Chief Operating
Officer. Prior to joining the Bank, Mr. Hand worked for Dun and Bradstreet.
Bruce E. Haines joined Gloucester County Federal Savings Bank in
January 2003 as Manager of Commercial Lending. In January 2004, he was promoted
to Vice President and Chief Lending Officer. In January 2006, he was promoted to
Senior Vice President and Chief Lending Officer. Prior to joining the Bank, Mr.
Haines served as Executive Vice President of Equity Bank in Marlton, New Jersey.
Francis J. Walsh joined Gloucester County Federal Savings Bank as
Comptroller in 1990. In 2004 he was promoted to Chief Financial Officer. Prior
to joining the Bank, Mr. Walsh was employed as the chief financial officer of
the Burlington County Bridge Commission in Palmyra, New Jersey.
Kristin T. McIlvaine joined Gloucester County Federal Savings Bank as
a member of the Board of Directors in 2004. In April 2007, she resigned her seat
as a director in order to join the Bank as an employee at that time. This
transition from a director to an employee is to allow for a transition period
while the Bank prepares for the anticipated third quarter 2007 retirement of its
current Chief Financial Officer, Francis Walsh. Ms. McIlvaine is a certified
public accountant. Prior to joining the Bank as an employee, Ms. McIlvaine was a
partner in the firm of Fitzpatrick & McIlvaine, CPA's, PC in Sewell, New Jersey.
She specialized in tax and financial planning for businesses and individuals.
Compensation Discussion and Analysis
The following section is intended to provide an understanding of our
overall compensation program for our senior management. Specific information
about the compensation paid to the executives for 2006 follows this section.
Our compensation program is designed to reward our executive officers'
contributions and the teamwork they instill throughout our employee divisions.
It is our core philosophy that the compensation of our executive officers should
reflect their success as a management team in attaining key operating
objectives. Our desire is to attract and retain highly qualified executives,
motivating them to achieve performance that is consistent with our corporate
goals and objectives and rewarding them for superior performance. Our goal is
for executive compensation to be competitive with those of our peers, with
additional compensation opportunities to reward attainment of higher levels of
performance results.
We do not intend, after the stock offering, to make our stock price a
significant factor in determining annual compensation because the price of our
stock is subject to a number of factors outside the control of our management.
Over time, we believe that good operational results will be reflected in our
stock price, but we do not wish to encourage or reward a short-term focus on our
stock price to the
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potential detriment of achieving longer-term corporate goals and objectives,
including enhancing long-term shareholder value.
A committee of independent directors, comprised of our Human Resources
Committee, oversees the establishment of the components and amount of
compensation paid to our senior management. The current elements of our
compensation program are not specifically tied to corporate performance, except
for the awards under the Executive Incentive Retirement Plan, but the committee
does of course consider measures of general corporate performance in making
decisions regarding compensation, such as whether business plan objectives for
the year were obtained and whether budget levels were met or exceeded.
Utilizing available market surveys, the committee reviews the market
competitiveness of our overall compensation program and makes changes as it
determines are appropriate from time to time. The committee also utilizes the
services of compensation consultants in analyzing the competitiveness of our
compensation programs. The committee looks at various factors in evaluating
senior management compensation, including:
o How much experience does the executive have?
o How has the executive's performance been for both the current
year and prior years?
o What is the executive's potential for future development?
o What is the executive's immediate level of responsibility?
o How does the executive contribute to the effectiveness of the
management team?
The compensation programs for our executive officers currently
consists of the following material elements:
1. Base Salary
Base salaries are established by the committee by comparing our
executives' qualifications, experience and responsibilities with similar
positions at similarly sized financial companies and industrial companies in the
market areas from which we attract our senior management personnel. We review
available market survey information and seek to establish and maintain our base
salaries at market competitive levels. Internal equity is also a consideration.
Annual increases in base salary reflect the committee's overall assessment of
the competitive labor market conditions as well as the committee's assessment of
the individual's job performance and the individual's contribution to overall
corporate performance.
2. Retirement Plan
We sponsor a trusteed, defined benefit pension plan covering
substantially all employees and officers. The plan calls for benefits to be paid
to eligible employees at retirement based primarily upon the number of years of
service and compensation rates near retirement. This pension plans currently
serves as the primary form of retirement income for our longer service
employees.
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3. 401(k) Match
We offer a 401K plan which encourages employees to supplement their
retirement income with tax-deferred savings. We offer an employer match of $0.50
for each $1 of employee savings to a maximum matching contribution of 3% of
employee salary to encourage individual savings for retirement.
4. Executive Incentive Retirement Plan
We also provide long term savings and retirement benefits to executive
officers under the Executive Incentive Retirement Plan. The annual awards made
to the executives under this plan are based upon a deferred bonus award. The
amount of such annual deferred bonus award is determined each year by the
committee as a percentage of base salary for senior management based upon
attainment of year-end net income targets. The higher the actual net income
amount for the year, the higher the deferred bonus award as a percentage of base
salary. The committee determines the target bonus percentages at the beginning
of each year based upon net income targets, and such deferred bonus awards are
made at the end of the year based upon actual net income results. The committee
retains the authority to modify the bonus awards at the end of the period within
its discretion based upon its evaluation of unanticipated events or occurrences
impacting overall corporate performance during the year or unique individual job
performance or contribution during the year. Such deferred bonus awards are held
under the Executive Incentive Retirement Plan until the retirement or
termination of the executive.
We have recently implemented Employment Agreements for Robert C.
Ahrens, President and CEO, Timothy P. Hand, EVP and COO, and Bruce E. Haines,
SVP and CLO. The purpose of such agreements is to encourage the long term
retention of members of our senior management team by giving them assurances
that their long term retention is desired by the Board, and to insure that these
senior executives will receive appropriate severance payments in the event of
job elimination, including any such job elimination following a future change of
control transaction.
We do not currently have stock-based compensation available to us as a
component of our compensation program, and officers and directors do not
currently have an equity ownership interest in us. Upon completion of the stock
offering, our compensation program will include an employee stock ownership
plan, which serves as a means of increasing ownership of Gateway Community
Financial Corp.'s common stock by our employees, including our senior
management. This employee stock ownership plan will supplement our existing
retirement program comprised of the pension plan and the 401(k) plan with an
employer matching contribution. Implementation of the employee stock ownership
plan may increase the long-term retirement benefits for all employees. The
financial reporting expense associated with the benefits that may be provided to
employees under the employee stock ownership plan will be based upon (1) the
fair market value of the stock benefits allocated to participant accounts each
year and (2) the interest expense associated with the employee stock ownership
plan debt incurred in the acquisition of the stock held by the employee stock
ownership plan. The financial reporting expense for the employee stock ownership
plan is not determinable with certainty at this time, however, like any expense,
it will reduce our net income. Periodically, we will review the benefits that
will be provided to our employees under the employee stock ownership plan and
make adjustments in benefits under the employee stock ownership plan, or changes
in benefits provided under our other retirement programs, as we deem appropriate
from time to time. We do not at this point anticipate specifically tying the
allocation of benefits under the employee stock ownership plan to corporate
performance, but we would expect to consider corporate performance in making
decisions regarding the amount of benefits allocated from time to time.
Furthermore, the additional compensation expense that will result from the
employee stock ownership plan may result in a modification of other compensation
and benefit programs in order to mitigate increases in overall operating
expenses.
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We also anticipate implementing a stock option plan and a restricted
stock bonus plan in the future (not sooner than six months from the closing of
the stock offering ) which will help us maintain the market competitiveness of
our compensation programs. Providing compensation programs that will increase
the stock ownership of our senior management will supplement the stock purchased
by our directors and officers in this offering and will further align the
interests of our senior management with the stockholders' interests, motivating
our executives to continue building long-term stockholder value by guiding
corporate performance to achieve our annual and long term strategic planning
goals. The financial reporting expense associated with the stock option plan and
the restricted stock plan will be based upon a number of factors including the
amount of awards granted, the timing of such awards, the vesting schedule and
other terms of such awards, and the market price of the stock at the time of
each award or the vesting of certain awards. No determinations have been made
yet which respect to such matters. The financial reporting expense for the stock
option plan and restricted stock plan is not determinable with certainty at this
time, however, like any expense, it will reduce our net income. Periodically, we
will review the benefits that will be provided to our directors and officers
under the stock option plan and restricted stock plan and make adjustments in
such plan benefits or expenses, or changes in the benefits provided under other
retirement programs of the company as we deem appropriate from time to time. We
do not at this point anticipate specifically tying the allocation of benefits
under the stock option plan or restricted stock plan to corporate performance,
but we would expect to consider corporate performance in making decisions
regarding the amount of benefits allocated from time to time. Furthermore, the
additional compensation expenses that will result from the anticipated future
implementation of the stock option plan and the restricted stock plan may also
result in a modification of other compensation and benefit programs in order to
mitigate increases in overall operating expenses.
The compensation actions by the committee include input from Robert C.
Ahrens, President and CEO, however, Mr. Ahrens is not a member of the committee.
The committee also has access to the annual performance reviews conducted by Mr.
Ahrens with the other senior managers. We do not set compensation for positions
specifically based upon benchmarking and do not have a fixed list of component
companies. We do not currently have any guidelines or policies regarding stock
ownership by executive officers or directors. We anticipate that all of our
current compensation is deductible for tax purposes when actually paid, but we
may determine at a future time that non-deductible compensation may be
appropriate based upon the circumstances.
Compensation of Executive Officers
The following table summarizes all compensation during 2006 for our
principal executive officer, Robert C. Ahrens, our principal financial officer,
Francis J. Walsh, and certain other senior executive officers.
Compensation for the Year Ended December 31, 2006
-------------------------------------------------
Change
Non-Equity in All
Incentive Plan Pension Other
Salary Compensation(1) Value(2) Compensation(3) Total
------ --------------- -------- ------------ -----
Robert C. Ahrens $200,000 $7,071 $75,000 $6,998 $289,069
President and CEO
Timothy P. Hand $125,000 $4,365 $20,000 $4,510 $153,875
EVP and COO
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Compensation for the Year Ended December 31, 2006
-------------------------------------------------
Change
Non-Equity in All
Incentive Plan Pension Other
Salary Compensation(1) Value(2) Compensation(3) Total
------ --------------- -------- ------------ -----
Bruce E. Haines $105,000 $3,680 $18,000 $3,788 $130,468
SVP and CLO
Francis J. Walsh $100,000 $3,570 $82,000 $3,610 $189,180
VP and CFO
- -----------------
(1) Represents the award made to the individual for 2006 under the Bank's
Executive Incentive Retirement Plan as well as the interest earned during
2006 on the individual's account balance under the plan.
(2) Represents the increase in the present value of the individual's
accumulated benefit between December 31, 2005 and December 31, 2006.
(3) Represents the Bank's matching contributions to the 401(k) Plan and life
insurance premiums paid on behalf of the individuals.
Executive Incentive Retirement Plan. The Bank's Executive Incentive
Retirement Plan provides for either a lump sum payment or equal annual
installments for a period of 15 years commencing on the first day of the
calendar month following the termination of employment due to retirement,
resignation, disability or death. All payments under the plan are in accordance
with Code Section 409A. The amount payable is based on the vested balance of the
executive's accumulated awards plus interest at the prime rate published in The
Wall Street Journal, credited annually. The annual awards are based upon a
deferred bonus award as a percentage of base salary calculated based upon
attainment of targeted annual Bank net income amounts. Such deferred bonus
awards vest at the rate of 20% per full year of employment from the date of each
award. The participant becomes fully vested in plan awards at age 65 or upon a
change in control. Upon the death of the participant, the beneficiary shall
receive the remaining balance paid in a lump sum.
Interest Earned Account
2006 on Account Balance Balance at
Awards During 2006 December 31, 2006
------ ----------- -----------------
Robert C. Ahrens $4,000 $3,071 $45,748
Timothy P. Hand $2,500 $1,865 $27,849
Bruce E. Haines $2,100 $1,580 $23,585
Francis J. Walsh $2,000 $1,570 $23,339
401(k) Savings and Profit Sharing Plan. The Gloucester County Federal
Savings Bank 401(k) Savings and Profit Sharing Plan is a tax-qualified defined
contribution savings plan with a profit sharing component for the benefit of all
eligible employees. In addition, employees may also voluntarily elect to defer
between 1% and 50% of their compensation as 401(k) savings under the plan, not
to exceed applicable limits under federal tax laws. In calendar year 2007, an
employee could defer up to the lower of $15,500 or 50% of his salary. Employees
age 50 and over may make catch-up contributions ($5,000 in 2007). The plan also
provides for matching contributions up to a maximum of 50% of the first 6% of a
person's salary for each participant. Employee contributions are immediately
fully vested. Matching contributions are immediately vested.
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The Bank's employees may use their account balances in the 401(k)
Savings and Profit Sharing Plan to pay for shares of stock in the stock
offering. Employees do not have special rights, however, to subscribe for stock
in the offering. Their orders will be allocated under the normal order of
subscription rights priority in the same manner as all other eligible
depositors. Following the stock offering, Bank employees may purchase additional
shares of Gateway Community Financial Corp. common stock through the plan using
funds in their Gloucester County Federal Savings Bank 401(k) Savings and Profit
Sharing Plan accounts. The plan trustee will purchase such shares in regular
open market stock transactions at market prices.
Pension Plan. The Bank maintains a qualified noncontributory defined
benefit plan ("Retirement Plan") for employees. All employees who have worked
for a period of six month of service and attainment of age 21 are eligible to
accrue benefits under the Retirement Plan. Annual contributions to the
Retirement Plan are made in order to satisfy the actuarially determined minimum
funding requirements in accordance with the Employee Retirement Income Security
Act of 1974, as amended ("ERISA").
At the normal retirement age of 65, the plan is designed to provide a
single life annuity with no ancillary benefits. For a married participant, the
normal form of benefit is an actuarially reduced joint and survivor annuity
where, upon the participant's death, the participant's spouse is entitled to
receive a benefit equal to 50% of the amount paid during the participant's
lifetime. The joint and survivor annuity will be actuarially equivalent to the
single life annuity. If a member dies in active service, after having become
fully or partially vested, his beneficiary would be entitled to a lump sum death
benefit equal to the commuted value of 84 monthly retirement allowance
installments, which would have been payable had his allowance commenced as of
the first day of the month in which he died. The regular form of all retirement
benefits (normal, early or disability) is guaranteed for the life of the retiree
but not less than 84 monthly installments. If a retiree dies before 84 monthly
installments have been paid, his beneficiary would be entitled to the commuted
value of such unpaid installments paid in a lump sum. Either the member or
beneficiary may elect to have this benefit paid in the form of installments.
The annual retirement benefit provided is an amount equal to the sum
of 2.75% times years of benefit service (not to exceed 25) times the average
annual salary for five consecutive years of highest salary. Retirement benefits
are also payable upon retirement due to early and late retirement, disability or
death. An early retirement benefit is available beginning at age 55 for a
benefit of 2.75% times years of benefit service (not to exceed 25) times the
average annual salary for five consecutive years of highest salary. This early
retirement benefit is reduced if payments begin before age 65. A reduced benefit
is payable upon early retirement at or after age 55. Benefits are payable in
various annuity forms.
The following table provides information with respect payments or
other benefits at, following, or in connection with retirement under the Pension
Plan.
Number of Present value of Payments During
Years Credited Accumulated Last Fiscal
Service Benefit(1) Year
------- ---------- ----
Robert C. Ahrens 33 $539,000 $0
Timothy P. Hand 16 $ 87,000 $0
Bruce E. Haines 3 $ 49,000 $0
Francis J. Walsh 16 $403,000 $0
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- ----------------
(1) Assumptions used: half of the qualified benefits valued at 7.75% and the
other half valued at 5.00%, discounted to current age at 7.75%, no
pre-retirement decrements.
Employment Agreements and Potential Payments Upon Termination or Change
in Control. The Bank has entered into employment agreements with Messrs. Ahrens,
Hand and Haines. Mr. Ahrens', Mr Hand's and Mr. Haines' current base salaries
are $225,000, $145,000 and $120,000, respectively. Mr. Ahrens' employment
agreements has a term of three years while Mr. Hand's and Mr. Haines' agreements
have terms of one year. Each of the agreements provides for an annual one-year
extension of the term of the agreement upon determination of the Board of
Directors that the executive's performance has met the requirements and
standards of the Board, so that the remaining term of the agreement continues to
be three years, in the case of Mr. Ahrens, and one year, in the case of Messrs.
Hand and Haines. If the Bank terminates Messrs. Ahrens, Hand or Haines without
"just cause" as defined in the agreement, they will be entitled to a
continuation of their salary from the date of termination through the remaining
term of their agreement, but in no event for a period of less than 12 months and
during the same period, the cost of obtaining all health, life, disability, and
other benefits at levels substantially equal to those being provided on the date
of termination of employment. Messrs. Ahrens', Hand's and Haines' employment
agreements provide that if their employment is terminated without just cause
within one year of a change in control, they will be paid an amount equal to
approximately three times their base salary for Mr. Ahrens and one year in the
case of Messrs. Hand and Haines.
Compensation of Directors
The following table summarizes compensation to our directors during
2006. Currently each director of the Bank also serves on the Boards of Gateway
Community Financial Corp. or Gateway Community Financial, MHC. At this time, no
additional compensation is paid for service on those Boards; the directors are
compensated only by the Bank. Mr. Ahrens, who is the only director at this time
who is also an employee, is not compensated for serving as a director.
Total Director Compensation
for the Year Ended December 31, 2006
---------------------------------------------
Cash Fees for
Board and
Committee Change in
Meeting Pension
Attendance Value(1) Total
---------- ----- -------
John S. Gligor, Sr. $37,350 $15,624 $52,974
Walter N. Friedrich $29,950 $4,468 $34,418
Robert A. Jones $23,750 $7,736 $31,486
Dennis L. King $25,050 $4,752 $29,802
Scott P. Newman $23,350 $783 $24,133
Frank D. Wilson $23,850 $1,623 $25,473
Kristin T. McIlvaine(2) $25,900 $930 $26,830
- ----------------
(1) Represents increase in the aggregate present value of the accrued benefit
under the Director Fee Continuation Plan for between December 31, 2005 and
December 31, 2006.
(2) Ms. McIlvaine served as a director during 2006. In April 2007, she resigned
from the Board and became an employee of the Bank.
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As shown in the above table, there was no compensation to the
directors during 2006 other than (i) the cash fees paid for board meeting and
committee meeting attendance and (ii) accruals under our Director Fee
Continuation Plan. Directors currently are paid a fee of $1,200 per board
meeting attended. The higher amount of 2006 cash fees for Board and committee
meeting attendance shown in the above table for Messrs. Gligor and Friedrich is
because they served as Chairman and Vice Chairman, respectively, of the Board of
Directors during 2006 and the Chairman and Vice Chairman currently are paid a
fee of $2,100 and $1,600, respectively, per board meeting attended, as compared
to $1,200 paid to the other directors. The aggregate amount of cash fees for
Board and committee meeting attendance varies from year to year and varies among
the individual directors because fees are only paid for meetings attended and
some directors may attend more meetings than others. Also, the directors
generally rotate committee assignments and the committees do not all meet the
same number of times each year. Committee chairman and directors are currently
paid $300 and $250, respectively, per committee meeting attended.
Director Fee Continuation Plan. Gloucester County Federal Savings
Bank's Director Fee Continuation Plan provides retirement benefits to the
directors of Gloucester County Federal Savings Bank. The retirement benefit is
calculated as 50% of the average of the three years highest years of the
director's total compensation. The benefit is payable upon normal retirement age
of 80 or upon attainment of age 65 and ten years of service as a director. Such
benefit is payable annually for 10 years. If the director dies prior to
receiving the 10 annual payments, the remaining payments may be made in a lump
sum or annual installments to his beneficiary. If the director dies prior to
normal retirement age, the benefit is payable in either a lump sum or 10 annual
installments to his beneficiary.
Vesting in this plan is 10% for each full year of service. If the
director terminates service prior to normal retirement date, the director will
receive the accrued balance of the account multiplied by the vested percentage.
This severance compensation shall be paid in 10 equal annual payments.
Upon a change in control, if the director suffers a termination of
service, then the director shall receive the normal retirement benefits, as if
the director had been serving the Bank until the normal retirement age.
Future Stock Benefit Plans
Employee Stock Ownership Plan. The Bank intends to establish the
Gloucester County Federal Savings Bank Employee Stock Ownership Plan for the
exclusive benefit of participating employees of Gloucester County Federal
Savings Bank, to be implemented prior to the completion of the offering.
Participating employees are salaried, full-time employees who have completed at
least one year of service and have attained the age of 21. An application for a
letter of determination as to the tax-qualified status of the Gloucester County
Federal Savings Bank Employee Stock Ownership Plan will be submitted to the IRS.
Although no assurances can be given, we expect that a favorable letter of
determination will be received from the IRS.
The Gloucester County Federal Savings Bank Employee Stock Ownership
Plan is to be funded by contributions made by Gloucester County Federal Savings
Bank in cash or common stock. Benefits may be paid either in shares of the
common stock or in cash. The Gloucester County Federal Savings Bank Employee
Stock Ownership Plan will borrow funds with which to acquire up to 8% of the
shares sold in the offering.
The Gloucester County Federal Savings Bank Employee Stock Ownership
Plan may elect, in whole or in part, to fill its order through open market
purchases subsequent to the closing of the offering, subject
96
to any required regulatory approval. It intends to borrow funds from Gateway
Community Financial Corp. The loan is expected to be for a term of ten years at
an annual interest rate equal to the prime rate published in The Wall Street
Journal. Presently it is anticipated that the Gloucester County Federal Savings
Bank Employee Stock Ownership Plan will purchase up to 8% of the shares sold in
the offering. The loan will be secured by the shares purchased and earnings of
employee stock ownership plan assets. Shares purchased with loan proceeds will
be held in a suspense account for allocation among participants as the loan is
repaid. It is anticipated that all contributions will be tax-deductible.
Contributions to the Gloucester County Federal Savings Bank Employee
Stock Ownership Plan and shares released from the suspense account will be
allocated annually among participants on the basis of total taxable cash
compensation. All participants must have completed a year of service during the
plan year, or have terminated employment following death, disability or
retirement, in order to receive an allocation. Employment service before the
adoption of the Gloucester County Federal Savings Bank Employee Stock Ownership
Plan shall be credited for the purposes of vesting. Contributions to the
Gloucester County Federal Savings Bank Employee Stock Ownership Plan by
Gloucester County Federal Savings Bank are discretionary and as a result
benefits payable under the Gloucester County Federal Savings Bank Employee Stock
Ownership Plan cannot be estimated.
The Board of Directors has appointed the non-employee directors to a
committee that will administer the Gloucester County Federal Savings Bank
Employee Stock Ownership Plan and serve as its trustees. The trustees must vote
all allocated shares as directed by plan participants. Unallocated shares and
allocated shares for which no timely direction is received will be voted as
directed by the Board of Directors or the Gloucester County Federal Savings Bank
Employee Stock Ownership Plan's committee, subject to the trustees' fiduciary
duties.
Stock Option Plan. We intend to adopt a stock option plan for the
benefit of directors and officers after the passage of at least six months
following the completion of the offering. Up to 4.9% of the total number of
shares of common stock outstanding after the offering, including shares held by
Gateway Community Financial, MHC, will be reserved for issuance under the stock
option plan. No determinations have been made as to any specific grants to be
made under the stock option plan or the terms thereof.
The purpose of the stock option plan will be to attract and retain
qualified personnel in key positions, provide officers and directors with a
proprietary interest in Gateway Community Financial Corp. as an incentive to
contribute to our success and reward directors and officers for outstanding
performance. Although the terms of the stock option plan have not yet been
determined, it is expected that the stock option plan will provide for the grant
of: (1) options to purchase the common stock intended to qualify as incentive
stock options under the Internal Revenue Code (incentive stock options); and (2)
options that do not so qualify (non-incentive stock options). The exercise price
of any options will be not less than the fair market value of the common stock
on the date of grant. Any stock option plan would be in effect for up to 10
years following the earlier of adoption by the Board of Directors or approval by
the stockholders. Options would expire no later than 10 years following the date
granted and would expire earlier if the option committee so determines or in the
event of termination of employment. Options would be granted based upon several
factors, including seniority, job duties and responsibilities and job
performance.
Restricted Stock Plan. We also intend to establish a restricted stock
plan to provide our officers and directors with a proprietary interest in
Gateway Community Financial Corp. after the passage of at least six months
following the completion of the offering. The restricted stock plan is expected
to provide for the award of common stock, subject to vesting restrictions, to
eligible officers and directors.
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We expect to contribute funds to the restricted stock plan to acquire,
in the aggregate, up to 1.96% of the total number of shares of common stock
outstanding after the offering, including shares held by Gateway Community
Financial, MHC. Shares used to fund the restricted stock plan may be acquired
through open market purchases or provided from authorized but unissued shares.
No determinations have been made as to the specific terms of the restricted
stock plan.
If we implement the restricted stock plan within one year of the
offering and Gloucester Count Federal Savings Bank's tangible capital following
the stock offering is less than 10%, then the number of shares that may be
awarded under the restricted stock plan will be reduced and may not exceed 1.47%
of the total shares outstanding rather than 1.96%. If, at our discretion, we
further reduce the restricted stock plan to 1.3%, we may keep the number of
shares in the employee stock ownership plan at 3.6%. If we reduce the restricted
stock plan to only 1.47% of the outstanding shares, however, then the employee
stock ownership plan would also be reduced, to 3.4%.
Dilution. While our intention is to fund the stock option plan and
restricted stock plan through open market purchases, stockholders will
experience a reduction or dilution in ownership interest if the plans are
instead funded with newly-issued shares.
The issuance of authorized but unissued shares of stock to the
restricted stock plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 1.9%.
The issuance of authorized but unissued shares of stock to the stock
option plan instead of open market purchases would dilute the voting interests
of existing stockholders by approximately 4.7%.
Stockholder Approval of Stock Options and Restricted Stock. The stock
option plan and restricted stock plan will comply with all applicable Office of
Thrift Supervision regulations in effect at the time the plans are adopted.
Those regulations are subject to change. We will submit the stock options plan
and restricted stock plan to stockholders for their approval, at which time we
will provide stockholders with detailed information about the plans and the
required approval. Under current Office of Thrift Supervision Regulations, the
plans must be approved by a majority of the total votes eligible to be cast by
our stockholders, other than Gateway Community Financial, MHC. The Office of
Thrift Supervision has proposed changes to its regulations regarding equity
incentive plans that would eliminate the requirement to obtain the separate vote
of minority stockholders for the plans if they are implemented more than one
year after completion of a minority stock offering. In the event that the
proposed Office of Thrift Supervision regulations are adopted in final form,
Gateway Community Financial, MHC, as the holder of a majority of the shares of
Gateway Community Financial Corp. would control the outcome of any vote to
approve an equity incentive plan that occurs more than one year after the
completion of the offering.
Transactions with Management and Others
No directors, executive officers or their immediate family members
were engaged, directly or indirectly, in transactions with Gateway Community
Financial Corp. or Gloucester County Federal Savings Bank during 2006, 2005 or
2004 that exceeded $120,000 (excluding loans with the Bank).
Gloucester County Federal Savings Bank makes loans to its officers,
directors and employees in the ordinary course of business. Such loans do not
include more than the normal risk of collectibility or present other unfavorable
features. Such loans are made on substantially the same terms, including
interest
98
rate and collateral, as those prevailing at the time for comparable loans with
persons not related to Gloucester County Federal Savings Bank.
Director Independence
Other than Mr. Robert C. Ahrens, who is our President and Chief
Executive Officer, each member of our Board of Directors is an outside director
independent of management, Gateway Community Financial Corp. and Gloucester
County Federal Savings Bank. Each is free of any relationship that would
interfere with the exercise of independent judgment in carrying out their duties
as directors. The Board of Directors carefully monitors any situation that could
cause a member to cease to be independent under the requirements of the NASDAQ
Stock Market. Each director, other than Mr. Ahrens, currently qualifies as
independent under the rules of the NASDAQ Stock Market.
Proposed Stock Purchases by Management
Preliminary indications from our directors and executive officers and
their associates are that they will subscribe for an aggregate of approximately
215,000 shares in the stock offering. If 2,700,000 shares are sold (the midpoint
of the offering range), their anticipated purchases would represent 8.0% of the
shares sold in the offering and 3.6% of the 6,000,000 total shares outstanding
after the offering, including shares issued to Gateway Community Financial, MHC.
At the maximum of the offering range, these percentages decrease to 6.9% and
3.1%.
The following table sets forth the amount of stock that our directors
and executive officers have indicated that they intend to purchase in the
offering. The intended purchases of each director's or officer's associates are
included in that director's or officer's total. Employees of Gloucester County
Federal Savings Bank will be able to use their account balances in the Bank's
401(k) Savings and Profit Sharing Plan to pay for shares of stock purchased in
the offering, and shares that the executive officers intend to purchase through
this plan are included in the amounts shown below. Directors do not participate
in the Bank's 401(k) plan.
Number of
Name Shares
---- ------
John S. Gligor, Sr....................... 25,000
Walter N. Friedrich...................... 20,000
Robert C. Ahrens......................... 15,000
Scott P. Newman.......................... 25,000
Dennis L. King........................... 25,000
Frank D. Wilson.......................... 25,000
Robert A. Jones.......................... 10,000
Timothy P. Hand.......................... 20,000
Bruce E. Haines.......................... 15,000
Francis J. Walsh......................... 20,000
Kristin T. McIlvaine..................... 15,000
-------
Total............................... 215,000
=======
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The purchases by the Gloucester County Federal Savings Bank Employee
Stock Ownership Plan and any stock benefit plans to be adopted following the
stock offering will increase the insiders' ownership of shares.
Purchases of common stock in the offering by directors and executive
officers and their associates will be counted toward the minimum of 2,295,000
shares required to be sold to public stockholders to complete the offering.
Management may, but is not required to, purchase additional shares in the
offering to satisfy this minimum, subject to the limitation on the individual
maximum share purchase limitations and the requirement that directors, executive
officers and their associates may not purchase, in the aggregate, more than 30%
of the shares sold in the offering.
THE OFFERING
The Board of Directors adopted the plan authorizing the stock offering
on January 29, 2007, subject to the approval of the Office of Thrift
Supervision. We received authorization from the Office of Thrift Supervision to
conduct the stock offering on ___________, 2007. Office of Thrift Supervision
authorization does not constitute a recommendation or endorsement of an
investment in our stock by the Office of Thrift Supervision.
General
Gateway Community Financial Corp. will sell its common stock to
eligible depositors of Gloucester County Federal Savings Bank in a subscription
offering and, if shares are available, to the general public in a community
offering and/or a syndicated community offering. The stock offering will be
accomplished in accordance with the procedures set forth in the plan, the
requirements of applicable laws and regulations, and the policies of the Office
of Thrift Supervision.
We are offering for sale between 2,295,000 shares at the minimum and
3,105,000 shares at the maximum of the offering range (3,570,750 shares at the
adjusted maximum. The minimum purchase is 25 shares of common stock (minimum
investment of $250). Our common stock is being offered at a fixed price of
$10.00 per share in the offering. Interest will be paid on subscription funds
from the date the payment is received until the offering is either completed or
terminated.
We may cancel the offering at any time prior to completion. If we do,
orders for common stock already submitted will be canceled and subscribers'
funds will be returned with interest.
In accordance with Rule 15c2-4 of the Securities Exchange Act of 1934,
pending completion or termination of the offering, subscription funds received
by us will be invested only in investments permissible under Rule 15c2-4.
Purposes of the Stock Offering
The proceeds from the sale of common stock of Gateway Community
Financial Corp. will provide Gloucester County Federal Savings Bank with new
equity capital, which will support future growth and expanded operations. While
Gloucester County Federal Savings Bank currently exceeds all regulatory capital
requirements to be considered well capitalized, the sale of stock, coupled with
the accumulation of earnings, less dividends or other reductions in capital,
from year to year, provides a means for the orderly preservation and expansion
of Gloucester County Federal Savings Bank's capital base.
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The offering will afford our directors, officers and employees the
opportunity to become stockholders, which we believe to be an effective
performance incentive and an effective means of attracting and retaining
qualified personnel. The offering also will provide our customers and local
community members with an opportunity to acquire our stock.
Conduct of the Offering
Subject to the limitations of the plan of stock issuance adopted by
our Board of Directors, shares of common stock are being offered in descending
order of priority in the subscription offering to:
o Eligible Account Holders (depositors at the close of business on
December 31, 2005 with deposits of at least $50.00);
o the Gloucester County Federal Savings Bank Employee Stock Ownership
Plan;
o Supplemental Eligible Account Holders (depositors at the close of
business on March 31, 2007 with deposits of at least $50.00); and
o Other Eligible Account Holders (depositors at the close of business on
_________, 2007 with deposits of at least $50.00).
To the extent that shares remain available and depending on market
conditions at or near the completion of the subscription offering, we may
conduct a community offering and possibly a syndicated community offering. The
community offering, if any, may commence at any time during or subsequent to the
completion of the subscription offering. A syndicated community offering, if we
conduct one, would commence just prior to, or as soon as practicable after, the
termination of the subscription offering. In any community offering or
syndicated community offering, we will fill orders for our common stock in an
equitable manner as determined by the Board of Directors in order to achieve a
wide distribution of the stock.
Any shares sold above the maximum of the offering range may be sold to
the Gloucester County Federal Savings Bank Employee Stock Ownership Plan before
satisfying remaining unfilled orders of Eligible Account Holders to fill the
plan's subscription, or the plan may purchase some or all of the shares covered
by its subscription after the offering in the open market, subject to any
required regulatory approval.
Subscription Offering
Subscription Rights. Non-transferable subscription rights to subscribe
for the purchase of common stock have been granted under the plan of stock
issuance to the following persons in the following order of priority:
Priority 1: Eligible Account Holders. Each Eligible Account Holder
shall be given the opportunity to purchase, subject to the overall limitations
described under Limitations on Purchases of Common Stock, up to the greater of
(i) the maximum purchase limitation in the community offering (i.e., 15,000
shares), (ii) one-tenth of 1% of the total shares of common stock offered in the
subscription and community offering, and (iii) 15 times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of common stock offered in the subscription and community offering by a
fraction, of which the numerator is the total amount of the qualifying deposits
of the Eligible Account Holder and the denominator is the total amount of all
qualifying deposits of all Eligible Account Holders.
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If there are insufficient shares available to satisfy all subscriptions of
Eligible Account Holders, shares will be allocated to Eligible Account Holders
so as to permit each subscribing Eligible Account Holder to purchase a number of
shares sufficient to make his total allocation equal to the lesser of 100 shares
or the number of shares ordered. Thereafter, unallocated shares will be
allocated to remaining subscribing Eligible Account Holders whose subscriptions
remain unfilled in the same proportion that each subscriber's qualifying deposit
bears to the total amount of qualifying deposits of all subscribing Eligible
Account Holders, in each case measured as of December 31, 2005, whose
subscriptions remain unfilled. Subscription rights received by officers and
directors of Gateway Community Financial Corp. or Gloucester County Federal
Savings Bank, and such persons' associates, based on their increased deposits in
Gloucester County Federal Savings Bank in the one year preceding December 31,
2005 will be subordinated to the subscription rights of the Eligible Account
Holders. To ensure proper allocation of stock, each Eligible Account Holder must
list on his order form all accounts in which he had an ownership interest as of
the Eligibility Record Date. Failure to list an account, or providing incorrect
information, could result in the loss of all or a part of the subscriber's
allocation.
Priority 2: The Employee Stock Ownership Plan. If there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account
Holders, the Gloucester County Federal Savings Bank Employee Stock Ownership
Plan may be given the opportunity to purchase in the aggregate up to but less
than 5% of the total number of shares of common stock issued in the offering to
public stockholders and to Gateway Community Financial, MHC. It is expected that
the Gloucester County Federal Savings Bank Employee Stock Ownership Plan will
purchase up to 8% of the shares sold in the offering. To the extent that it does
not purchase shares in the offering, it intends to purchase shares in the open
market purchases subsequent to the closing of the offering, subject to any
required regulatory approval.
Priority 3: Supplemental Eligible Account Holders. If there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the employee stock ownership plan, each Supplemental
Eligible Account Holder shall be given the opportunity to purchase, subject to
the overall limitations described under Limitations on Purchases of Common
Stock, up to the greater of (i) the maximum purchase limitation in the community
offering (i.e., 15,000 shares), (ii) one-tenth of 1% of the total shares of
common stock offered in the subscription and community offering, and (iii) 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of common stock offered in the
subscription and community offering by a fraction, of which the numerator is the
amount of the qualifying deposits of the Supplemental Eligible Account Holder
and the denominator is the total amount of all qualifying deposits of all
Supplemental Eligible Account Holders. If Supplemental Eligible Account Holders
subscribe for a number of shares which, when added to the shares subscribed for
by Eligible Account Holders and the employee stock ownership plan, is in excess
of the total number of shares offered in the offering, the shares of common
stock will be allocated among subscribing Supplemental Eligible Account Holders
first so as to permit each subscribing Supplemental Eligible Account Holder to
purchase a number of shares sufficient to make his total allocation equal to the
lesser of 100 shares or the number of shares ordered. Thereafter, unallocated
shares will be allocated to each subscribing Supplemental Eligible Account
Holder whose subscription remains unfilled in the same proportion that each
subscriber's qualifying deposit bear to the total amount of qualifying deposits
of all subscribing Supplemental Eligible Account Holders, in each case measured
as of March 31, 2007, whose subscriptions remain unfilled. To ensure proper
allocation of stock, each Supplemental Eligible Account Holder must list on his
order form all accounts in which he had an ownership interest as of the
Supplemental Eligibility Record Date. Failure to list an account, or providing
incorrect information, could result in the loss of all or a part of the
subscriber's allocation.
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Priority 4: Other Eligible Account Holders. If there are sufficient
shares remaining after satisfaction of subscriptions by Eligible Account
Holders, the employee stock ownership plan and Supplemental Eligible Account
Holders, each Other Eligible Account Holder shall be given the opportunity to
purchase, subject to the overall limitations described under Limitations on
Purchases of Common Stock, up to the greater of (i) the maximum purchase
limitation in the community offering (i.e., 15,000 shares), (ii) one-tenth of 1%
of the total shares of common stock offered in the subscription and community
offering, and (iii) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of common stock offered in
the subscription and community offering by a fraction, of which the numerator is
the amount of the qualifying deposits of the Other Eligible Account Holder and
the denominator is the total amount of all qualifying deposits of all Other
Eligible Account Holders. If Other Eligible Account Holders subscribe for a
number of shares which, when added to the shares subscribed for by Eligible
Account Holders, the employee stock ownership plan and Supplemental Eligible
Account Holders, is in excess of the total number of shares offered in the
offering, the shares of common stock will be allocated among subscribing Other
Eligible Account Holders first so as to permit each subscribing Other Eligible
Account Holder to purchase a number of shares sufficient to make his total
allocation equal to the lesser of 100 shares or the number of shares ordered.
Thereafter, unallocated shares will be allocated to each subscribing Other
Eligible Account Holder whose subscription remains unfilled in the same
proportion that each subscriber's qualifying deposit bear to the total amount of
qualifying deposits of all subscribing Other Eligible Account Holders, in each
case measured as of _________, 2007, whose subscriptions remain unfilled. To
ensure proper allocation of stock, each Other Eligible Account Holder must list
on his order form all accounts in which he had an ownership interest as of
_________, 2007. Failure to list an account, or providing incorrect information,
could result in the loss of all or a part of the subscriber's allocation.
Joint Accounts. Subscription rights in connection with a joint account
must be shared with the other persons on the joint account; a joint account
entitles the holders thereof to submit orders for up to an aggregate of 15,000
shares if that is the only account under which they have subscription rights.
Joint account holders are not entitled to place multiple orders that would in
the aggregate exceed 15,000 shares. If, however, persons with a joint account
have one or more other accounts at Gloucester County Federal Savings Bank
(including a second joint account that is identical to the first joint account),
they may place orders using those accounts in order to exceed the 15,000
individual purchase limit, subject to the overall limitations described under
Limitations on Purchases of Common Stock.
Restrictions on Transfer of Subscription Rights and Shares. Applicable
regulations and the plan of stock issuance prohibits any person with
subscription rights, including Eligible Account Holders, Supplemental Eligible
Account Holders and Other Eligible Account Holders, from transferring or
entering into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights or the shares of common stock to be issued
when subscription rights are exercised. Subscription rights may be exercised
only by the person to whom they are granted. Each person subscribing for shares
will be required to certify that such person is purchasing shares solely for his
own account and that he has no agreement or understanding regarding the sale or
transfer of the shares. The regulations also prohibit any person from offering
or making an announcement of an offer or intent to make an offer to purchase
subscription rights or shares of common stock before the completion of the
offering.
We will pursue any and all legal and equitable remedies in the event
we become aware of the transfer of subscription rights and will not honor orders
which we determine involve the transfer of subscription rights.
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Deadlines for Purchasing Stock
The subscription offering will terminate at __:__ _.m., Eastern time,
on ____________, 2007. We may extend this expiration date without notice to you
for up to 45 days, until ____________, 2007. Once submitted, your order is
irrevocable unless the offering is extended beyond ____________, 2007. We may
request permission from the Office of Thrift Supervision to extend the offering
beyond ____________, 2007, and the Office of Thrift Supervision may grant one or
more extensions of the offering of up to 90 days per extension, but in no event
may the offering be extended beyond ____________, 2009. If the offering is
extended beyond ____________, 2007, we will notify each subscriber and
subscribers will have the right to confirm, modify or rescind their
subscriptions. If an affirmative response is not received prior to the
expiration of the resolicitation period, a subscriber's subscription will be
canceled and funds will be returned with interest.
A community offering and a syndicated community offering, if such
offerings are conducted, may terminate at any time without notice but no later
than ____________, 2007.
Community Offering
If less than the total number of shares of common stock to be
subscribed for in the offering are sold in the subscription offering then shares
remaining unsubscribed may be made available for purchase in the community
offering to certain members of the general public. The maximum amount of common
stock that any one person may purchase in the community offering is 15,000
shares, or $150,000.
Preference in the community shall be given first to natural persons
and trusts of natural persons residing in Gloucester and Camden Counties, New
Jersey and second to other natural persons and trusts of natural persons
residing in New Jersey. If shares are available for these "preferred purchasers"
in the community offering but there are insufficient shares to satisfy all
orders, the available shares will be allocated first to each preferred
purchasers whose order we accept in an amount equal to the lesser of 100 shares
or the number of shares ordered by each such subscriber, if possible. After
that, unallocated shares will be allocated among the remaining preferred
purchasers whose orders remain unsatisfied in the same proportion that the
unfilled order of each such subscriber bears to the total unfilled orders of all
such subscribers. If, after filling the orders of the first group of preferred
purchasers (natural persons and trusts of natural persons residing in Gloucester
and Camden Counties, New Jersey) and then the orders of the second group of
preferred purchasers (natural persons and trusts of natural persons residing in
New Jersey), shares are available for other subscribers in the community
offering but there are insufficient shares to satisfy all orders, shares will be
allocated in the same manner as for preferred purchasers.
We will consider persons residing in one of the specified counties if
they occupy a dwelling in the county and establish an ongoing physical presence
in the county that is not merely transitory in nature. We may utilize depositor
or loan records or other evidence provided to us to make a determination as to
whether a person is a resident in one of the specified counties. In all cases,
the determination of residence status will be made by us in our sole discretion.
The community offering, if any, may commence at any time during or
subsequent to the completion of the subscription offering. The community
offering, if any, must be completed within 45 days after the completion of the
subscription offering unless otherwise extended by the Office of Thrift
Supervision.
If we receive regulatory approval for an extension, all subscribers
will be notified of the extension and of the duration of any extension that has
been granted, and will have the right to confirm, increase,
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decrease or rescind their orders. If we do not receive an affirmative response
from a subscriber to any resolicitation, the subscriber's order will be
rescinded and all funds received will be promptly returned with interest.
The opportunity to subscribe for shares of common stock in the
community offering is subject to our right to reject orders, in whole or part,
either at the time of receipt of an order or as soon as practicable following
the expiration date of the offering. If your order is rejected in part, you will
not have the right to cancel the remainder of your order.
Syndicated Community Offering
The plan of stock issuance provides that, if necessary, all shares of
common stock not purchased in the subscription offering and community offering
may be offered for sale to the general public in a syndicated community offering
to be managed by Sandler O'Neill & Partners, L.P., acting as our agent. In such
capacity, Sandler O'Neill may form a syndicate of other broker-dealers.
Alternatively, we may sell any remaining shares in an underwritten public
offering. Neither Sandler O'Neill nor any registered broker- dealer will have
any obligation to take or purchase any shares of the common stock in the
syndicated community offering; however, Sandler O'Neill has agreed to use its
best efforts in the sale of shares in any syndicated community offering. The
syndicated community offering would terminate no later than 45 days after the
expiration of the subscription offering, unless extended by us, with approval of
the Office of Thrift Supervision. See - Community Offering above for a
discussion of rights of subscribers in the event an extension is granted.
The opportunity to subscribe for shares of common stock in the
syndicated community offering is subject to our right to reject orders, in whole
or part, either at the time of receipt of an order or as soon as practicable
following the expiration date of the offering. If your order is rejected in
part, you will not have the right to cancel the remainder of your order.
The maximum amount of common stock that any one person may purchase in
the syndicated community offering is 15,000 shares, or $150,000. We may begin
the syndicated community offering or underwritten public offering at any time
following the commencement of the subscription offering.
If we are unable to find purchasers from the general public for all
unsubscribed shares, we will make other purchase arrangements, if feasible.
Other purchase arrangements must be approved by the Office of Thrift Supervision
and may provide for purchases by directors, officers, their associates and other
persons in excess of the limitations provided in the plan of stock issuance and
in excess of the proposed director purchases discussed earlier, although no
purchases are currently intended. If other purchase arrangements cannot be made,
we may do any of the following: terminate the stock offering and promptly return
all funds; return all funds, then set a new offering range and notify all
subscribers to give them the opportunity to confirm, cancel or change their
orders; or take such other actions as may be permitted by the Office of Thrift
Supervision.
Limitations on Purchases of Common Stock
The following additional limitations have been imposed on purchases of
shares of common stock:
1. The maximum purchase of common stock by an individual is
$150,000. This limit applies to stock purchases in total in the
subscription, community and/or syndicated community offerings. A
joint account entitles the holders thereof to submit orders for
up to an
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aggregate of 15,000 shares; they may not exceed 15,000 shares if
that is the only account under which they have subscription
rights. Persons with a joint account must have one or more other
accounts at Gloucester County Federal Savings Bank (including a
second joint account that is identical to the first joint
account) in order to exceed the 15,000 share individual purchase
limit.
2. The purchases of individuals who are considered to be associates
of each other or who are deemed to be acting in concert with each
other will be limited so that no more than 25,000 shares in
aggregate are purchased by such individuals. Persons with joint
account relationships are presumed to be acting in concert with
each other. Persons or entities having the same address on any
account or stock order form will be considered to be acting in
concert. This limit applies to stock purchases in total in the
subscription, community and syndicated community offerings. This
limit does not apply to the Gloucester County Federal Savings
Bank Employee Stock Ownership Plan which may subscribe for up to
but less than 5% of the total number of shares of common stock
issued in the offering to public stockholders and to Gateway
Community Financial, MHC.
3. The maximum number of shares which may be purchased in all
categories in the offering by our officers and directors and
their associates in the aggregate shall not exceed 30% of the
total number of shares sold in the offering.
4. The minimum order is 25 shares, or $250.
5. If the number of shares otherwise allocable to any person or that
person's associates would be in excess of the maximum number of
shares permitted as set forth above, the number of shares
allocated to that person shall be reduced to the lowest
limitation applicable to that person, and then the number of
shares allocated to each group consisting of a person and that
person's associates shall be reduced so that the aggregate
allocation to that person and his associates complies with the
above maximums, and the maximum number of shares shall be
reallocated among that person and his associates in proportion to
the shares subscribed by each (after first applying the maximums
applicable to each person, separately).
6. Depending upon market or financial conditions, with the approval
of the Office of Thrift Supervision and without notice to
subscribers, we may decrease or increase the purchase and
ownership limitations. If a purchase limitation is increased,
subscribers in the subscription offering who ordered the maximum
amount will be given the opportunity to increase their
subscriptions up to the then applicable limit. We also may, in
our sole discretion, contact other large subscribers to give them
the same opportunity. The effect of this type of resolicitation
will be an increase in the number of shares owned by subscribers
who increase their subscriptions.
7. If the total number of shares offered increases in the offering
due to an increase in the maximum of the estimated valuation
range of up to 15% (the adjusted maximum) the additional shares
will generally be issued in the following order of priority: (a)
to fill the employee stock ownership plan's subscription; (b) if
there is an oversubscription at the Eligible Account Holder
level, to fill unfilled subscriptions of Eligible Account
Holders; (c) if there is an oversubscription at the Supplemental
Eligible Account Holder level, to fill unfilled subscriptions of
Supplemental Eligible Account Holders; (d) if there is an
oversubscription at the Other Eligible Account Holder level, to
fill unfilled subscriptions of Other Eligible Account Holders;
(e) to fill orders received in a community offering, with
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preference given to persons who live in the local community; and
(f) to fill orders received in the syndicated community offering.
The Gloucester County Federal Savings Bank Employee Stock
Ownership Plan may, however, elect to fill part or all of its
stock order in the open market, after completion of the stock
offering.
8. No person will be allowed to purchase any stock if that purchase
would be illegal under any federal or state law or regulation or
would violate regulations or policies of the National Association
of Securities Dealers. We and/or our representatives may ask for
an acceptable legal opinion from any purchaser regarding the
legality of the purchase and may refuse to honor any purchase
order if that opinion is not timely furnished.
9. We have the right to reject any order submitted by a person whose
representations we believe are untrue or who we believe is
violating, circumventing or intends to violate, evade or
circumvent the terms and conditions of the plan of stock
issuance, either alone or acting in concert with others.
10. The above restrictions also apply to purchases by persons acting
in concert under applicable regulations of the Office of Thrift
Supervision. Under regulations of the Office of Thrift
Supervision, our directors are not considered to be affiliates or
a group acting in concert with other directors solely as a result
of membership on our Board of Directors.
11. In addition, in any community offering or syndicated community
offering, we must first fill orders for our common stock up to a
maximum of 2% of the total shares issued in the offering in a
manner that will achieve a wide distribution of the stock, and
thereafter any remaining shares will be allocated on an equal
number of shares per order basis, until all orders have been
filled or the shares have been exhausted.
The term "associate" of a person is defined in the plan of stock
issuance pursuant to the regulations of the Office of Thrift Supervision to
mean:
(1) any corporation or organization of which that person is a senior
officer or partner or is, directly or indirectly, the beneficial
owner of 10% or more of any class of equity securities;
(2) any trust or other estate in which that person has a substantial
beneficial interest or as to which that person serves as trustee
or in a similar fiduciary capacity; or
(3) an individual who is related by blood or marriage to that person
if they live in the same home as that person.
For example, a corporation for which a person serves as an officer
would be an associate of that person and all shares purchased by that
corporation would be included with the number of shares which that person
individually could purchase under the above limitations.
In addition, pursuant to the regulations of the Office of Thrift
Supervision, directors or senior officers of Gloucester County Federal Savings
Bank and Gateway Community Financial Corp. who are related by blood or marriage
will be considered associates of each other.
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The term "acting in concert" means:
(1) knowing participation in a joint activity or interdependent
conscious parallel action towards a common goal whether or not
pursuant to an express agreement; or
(2) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any
contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise.
A person or company which acts in concert with another person or
company ("other party") shall also be deemed to be acting in concert with any
person or company who is also acting in concert with that other party. We will
presume that certain persons are acting in concert based upon various facts,
including the fact that persons have joint account relationships or the fact
that such persons have filed joint Schedules 13D with the Securities and
Exchange Commission with respect to other companies. We reserve the right to
make an independent investigation of any facts or circumstances brought to our
attention that indicate that one or more persons acting independently or as a
group acting in concert may be attempting to violate or circumvent the
regulatory prohibition on the transferability of subscription rights.
We have the right, in our sole discretion, to determine whether
prospective purchasers are "associates" or "acting in concert." These
determinations are in our sole discretion and may be based on whatever evidence
we believe to be relevant, including joint account relationships or shared
addresses on the records of Gloucester County Federal Savings Bank.
Each person purchasing shares of the common stock in the offering will
be considered to have confirmed that his purchase does not conflict with the
maximum purchase limitation. If the purchase limitation is violated by any
person or any associate or group of persons affiliated or otherwise acting in
concert with that person, we will have the right to purchase from that person at
the $10.00 purchase price per share all shares acquired by that person in excess
of that purchase limitation or, if the excess shares have been sold by that
person, to receive the difference between the purchase price per share paid for
the excess shares and the price at which the excess shares were sold by that
person. Our right to purchase the excess shares will be assignable.
Common stock purchased pursuant to the offering will be freely
transferable, except for shares purchased by our directors and executive
officers. For certain restrictions on the common stock purchased by our
directors and executive officers, see The Offering - Restrictions on
Transferability by Directors and Executive Officers.
Ordering and Receiving Common Stock
Use of Order Forms. Rights to subscribe may only be exercised by
completion of an order form. Any person receiving an order form who desires to
subscribe for shares of common stock must do so prior to the applicable
expiration date by delivering by mail or in person a properly executed and
completed order form, together with full payment of the purchase price for all
shares for which subscription is made or include appropriate authorization in
the space provided on the order form for withdrawal of full payment from a
deposit account at Gloucester County Federal Savings Bank; provided, however,
that if the Gloucester County Federal Savings Bank Employee Stock Ownership Plan
subscribes for shares during the subscription offering, it will not be required
to pay for the shares at the time it subscribes but rather may pay for the
shares upon completion of the offering. All subscription rights will expire on
the expiration date, whether or not we have been able to locate each person
entitled to subscription rights. To place an order
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in the community offering, an investor must complete an order form and return it
prior to the applicable expiration date. Once submitted, subscription orders
cannot be revoked without our consent.
We may, in our sole discretion, permit institutional investors to
submit irrevocable orders together with the legally binding commitment for
payment and to thereafter pay for such shares of common stock for which they
subscribe in the community offering at any time before the 48 hours prior to the
completion of the offering. This payment may be made by wire transfer. Our
interpretation of the terms and conditions of the plan of stock issuance and of
the acceptability of the order forms will be final.
To ensure that your stock purchase eligibility and priority are
properly identified, you must list all accounts on the order form, giving all
names in each account and the account number as of the appropriate eligibility
date. We will strive to identify your ownership in all accounts, but cannot
guarantee we will identify all accounts in which you have an ownership interest.
If a stock order form:
o is not delivered to a subscriber and is returned to us by the United
States Postal Service or we are unable to locate the addressee;
o is not received by us or is received after the applicable expiration
date;
o is not completed correctly or executed; or
o is not accompanied by the full required payment for the shares
subscribed for, including instances where a savings account or
certificate balance from which withdrawal is authorized is
unavailable, uncollected or insufficient to fund the required payment,
but excluding subscriptions by the employee stock ownership plan;
then the subscription rights for that person will lapse as though that person
failed to return the completed order form within the time period specified.
However, we may, but will not be required to, waive any irregularity
on any order form or require the submission of corrected order forms or the
remittance of full payment for subscribed shares by a date that we may specify.
The waiver of an irregularity on an order form in no way obligates us to waive
any other irregularity on any other order form. Waivers will be considered on a
case by case basis. We are not required to accept orders received on photocopies
or facsimile order forms, or for which payment is to be made by wire transfer or
payment from private third parties. Our interpretation of the terms and
conditions of the plan of stock issuance and of the acceptability of the order
forms will be final, subject to the authority of the Office of Thrift
Supervision.
The reverse side of the order form contains a certification form
mandated by regulation. We will not accept order forms where the certification
form is not executed. By executing and returning the certification form, you
will be certifying that you received this prospectus and acknowledging that the
common stock is not a deposit account and is not insured or guaranteed by the
federal government. You also will be acknowledging that you received disclosure
concerning the risks involved in this offering. The certification form could be
used as support to show that you understand the nature of this investment.
To ensure that each purchaser receives a prospectus at least 48 hours
before the applicable expiration date, in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, no prospectus will
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be mailed any later than five days prior to the expiration date or hand
delivered any later than two days prior to the expiration date. Execution of the
order form will confirm receipt or delivery in accordance with Rule 15c2-8.
Order forms will only be distributed with a prospectus.
Payment for Shares. For subscriptions to be valid, payment for all
subscribed shares will be required to accompany all properly completed order
forms, on or prior to the expiration date specified on the order form unless we
extend the date. The Gloucester County Federal Savings Bank Employee Stock
Ownership Plan may pay for the shares it subscribes for upon completion of the
offering. Payment for shares of common stock may be made:
o in cash, if delivered in person;
o by check or money order made payable to Gateway Community Financial
Corp.; or
o for shares subscribed for in the subscription offering, by
authorization of withdrawal from deposit accounts maintained with
Gloucester County Federal Savings Bank.
If you choose to pay by cash, you must deliver the stock order and
certification form and payment in person to any branch office of Gloucester
County Federal Savings Bank and it will be exchanged for a bank check or money
order. Please do not send cash in the mail.
In accordance with Rule 15c2-4 of the Securities Exchange Act of 1934,
subscribers' checks must be made payable to Gateway Community Financial Corp.,
and checks received by the stock information center will be deposited directly
to the segregated deposit account at Gloucester County Federal Savings Bank
established to hold funds received as payment for shares. Interest will be paid
on payments made by cash, check or money order at Gloucester County Federal
Savings Bank's regular passbook savings rate of interest from the date payment
is received until the offering is completed or terminated. We may decide during
the offering also to hold funds received with orders in a deposit account at
another insured depository institution. In either case, we will pay interest on
all funds received at a rate equal to Gloucester County Federal Savings Bank's
regular passbook savings rate.
The Gloucester County Federal Savings Bank Employee Stock Ownership
Plan will not be required to pay for the shares subscribed for at the time it
subscribes, but rather may pay for shares of common stock subscribed for upon
the completion of the offering; provided that there is in force from the time of
its subscription until the completion of the offering a loan commitment from an
unrelated financial institution or from us to lend to the employee stock
ownership plan, at that time, the aggregate purchase price of the shares for
which it subscribed.
Appropriate means by which account withdrawals may be authorized are
provided on the order form. If a subscriber authorizes us to withdraw the amount
of the purchase price from his or her deposit account, we will do so as of the
completion of the offering, though the account must contain the full amount
necessary for payment at the time the subscription is received. Once a
withdrawal has been authorized, none of the designated withdrawal amount may be
used by a subscriber for any purpose other than to purchase the common stock for
which a subscription has been made until the offering has been completed or
terminated. In the case of payments authorized to be made through withdrawal
from savings accounts, all sums authorized for withdrawal will continue to earn
interest at the applicable account rate until the offering has been completed or
terminated. Sums authorized for withdrawal from a certificate of deposit will
continue to earn interest at the contract rate on the certificate until the
offering has been completed or terminated. Interest penalties for early
withdrawal applicable to certificate accounts will not apply to
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withdrawals authorized for the purchase of shares. However, if a partial
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate shall be canceled at the
time of withdrawal, without penalty, and the remaining balance will be converted
into a savings account and will earn interest at the regular passbook savings
rate subsequent to the withdrawal. In the case of payments made in cash or by
check or money order, funds will be placed in a segregated account and interest
will be paid by Gloucester County Federal Savings Bank at the regular passbook
savings rate from the date payment is received until the offering is completed
or terminated. An executed order form, once we receive it, may not be modified,
amended, or rescinded without our consent, unless the offering is not completed
within 45 days after the conclusion of the subscription offering, in which event
subscribers may be given the opportunity to increase, decrease, or rescind their
subscription for a specified period of time. If the offering is not completed
for any reason, all funds submitted pursuant to the offerings will be promptly
refunded with interest as described above.
A subscriber interested in using funds in an individual retirement
account to purchase common stock must do so through a self-directed IRA account.
Gloucester County Federal Savings Bank IRA accounts are not self-directed
accounts. To use funds in an IRA account at Gloucester County Federal Savings
Bank, a subscriber must make a trustee-to-trustee transfer of the IRA funds held
at Gloucester County Federal Savings Bank to a trustee offering a self-directed
IRA program with the agreement that the funds will be used to purchase shares in
the offering. There will be no early withdrawal or Internal Revenue Service
interest penalties for transfers. The new trustee would hold the common stock in
a self-directed account in the same manner as we now hold the depositor's IRA
funds. An annual administrative fee may be payable to the new trustee.
Subscribers interested in using funds in a Gloucester County Federal Savings
Bank IRA account to purchase common stock should contact the stock information
center as soon as possible so that the necessary forms may be forwarded for
execution and returned before the subscription offering ends. In addition,
federal laws and regulations require that officers, directors and 10%
stockholders who use self-directed IRA funds to purchase shares of common stock
in the subscription offering, make purchases for the exclusive benefit of IRA
accounts.
Federal regulations prohibit Gloucester County Federal Savings Bank
from lending funds or extending credit to any person to purchase the common
stock in the offering.
Stock Information Center. Our stock information center is located at
___________________, New Jersey. The phone number is (___) ___-____. The stock
information center's hours of operation are __:__ a.m. to __:__ p.m., Eastern
time, Monday through Friday.
Delivery of Stock Certificates. Certificates representing common stock
issued in the offering will be mailed by our transfer agent to the persons
entitled thereto at the address noted on the order form, as soon as practicable
following completion of the offering. Any certificates returned as undeliverable
will be held until claimed by persons legally entitled thereto or otherwise
disposed of in accordance with applicable law. Until certificates for the common
stock are available and delivered to subscribers, subscribers may not be able to
sell the shares of stock for which they subscribed, even though trading of our
common stock may have commenced.
Restrictions on Repurchase of Shares
Under Office of Thrift Supervision regulations, we may not, for a
period of one year from the date of the completion of the offering, repurchase
any of our common stock from any person, except (1) in an offer made to all
stockholders to repurchase the common stock on a pro rata basis, approved by the
Office of Thrift Supervision, (2) the repurchase of qualifying shares of a
director, or (3) repurchases to fund
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restricted stock plans or tax-qualified employee stock benefit plans, including
the employee stock ownership plan. Where extraordinary circumstances exist, the
Office of Thrift Supervision may approve the open market repurchase of up to 5%
of our common stock during the first year following the offering. To receive
such approval, we must establish compelling and valid business purposes for the
repurchase to the satisfaction of the Office of Thrift Supervision. Furthermore,
repurchases of any common stock are prohibited if they would cause Gloucester
County Federal Savings Bank's regulatory capital to be reduced below the amount
required under the regulatory capital requirements imposed by the Office of
Thrift Supervision. If, in the future, the rules and regulations regarding the
repurchase of stock are liberalized, we may utilize the rules and regulations
then in effect.
The Offering Range
The plan of stock issuance requires that the amount of stock offered
must be based on the estimated pro forma market value of Gateway Community
Financial Corp. as determined by an independent appraisal. Our independent
appraiser, Feldman Financial Advisors, based its appraisal on the following
factors, among others:
o the present and projected operating results and financial condition of
Gloucester County Federal Savings Bank ;
o the economic and demographic conditions in Gloucester County Federal
Savings Bank's existing market area;
o certain historical and financial information relating to Gloucester
County Federal Savings Bank ;
o the estimated impact of the stock offering as well as the estimated
expense of the stock benefit plans on our net worth and earnings
potential.
Feldman Financial Advisors advised in its opinion, dated May 25, 2007,
that the estimated pro forma market value of Gateway Community Financial Corp.
on a fully- converted basis ranged from a minimum of $51 million to a maximum of
$69 million with a midpoint of $60 million. The Board of Directors determined
that 45% of the total shares of common stock to be outstanding upon completion
of the offering should be sold. Based on the estimated valuation and the $10.00
per share price, the total number of shares of common stock that Gateway
Community Financial Corp. will issue, including shares issued to Gateway
Community Financial, MHC, will range from a minimum of 2,295,000 shares to a
maximum of 3,105,000 shares, with a midpoint of 2,700,000 shares. The shares of
Gateway Community Financial Corp. stock that are not offered for sale in the
offering will be issued to Gateway Community Financial, MHC, which will own 55%
of the total outstanding common stock upon completion of the offering.
Feldman Financial Advisors' valuation is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
Gateway Community Financial Corp.'s shares. Feldman Financial Advisors did not
independently verify the consolidated financial statements and other information
provided by us, nor did Feldman Financial Advisors value independently our
assets or liabilities. The valuation considers us as a going concern and should
not be considered as an indication of our liquidation value. Moreover, because
this valuation is necessarily based upon estimates and projections of a number
of matters, all of which are subject to change from time to time, no assurance
can be given that persons purchasing common stock in the offerings will
thereafter be able to sell such shares at prices at or above the purchase price
or in the range of the valuation described above.
No sale of shares of common stock in the stock offering may be
completed unless Feldman Financial Advisors confirms that nothing of a material
nature has occurred which would cause it to conclude that the aggregate value of
the common stock to be issued is materially incompatible with the estimate of
the aggregate consolidated pro forma market value of Gateway Community Financial
Corp. and Gloucester County Federal Savings Bank. If this confirmation is not
received, we may cancel the stock offering, extend the offering period and
establish a new estimated valuation and offering range and/or estimated price
range, extend, reopen or hold a new offering or take any other action the Office
of Thrift Supervision may permit.
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Depending upon market or financial conditions following the start of
the subscription offering, the total number of shares of common stock to be
issued may be increased or decreased without a resolicitation of subscribers,
provided that the product of the total number of shares issued times the
purchase price is not below the minimum or more than 15% above the maximum of
the estimated valuation range. If market or financial conditions change so as to
cause the aggregate value of the common stock to be issued to be below the
minimum of the estimated valuation range or more than 15% above the maximum of
this range, purchasers will be resolicited and be permitted to continue their
orders, in which case they will need to reconfirm their subscriptions prior to
the expiration of the resolicitation offering or their subscription funds will
be promptly refunded with interest, or be permitted to modify or rescind their
subscriptions. Any change in the estimated valuation range must be approved by
the Office of Thrift Supervision.
An increase in the number of shares of common stock to be issued as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and Gateway Community Financial Corp.'s
pro forma net income and stockholders' equity on a per share basis while
increasing pro forma net income and stockholders' equity on an aggregate basis.
A decrease in the number of shares of common stock to be issued would increase
both a subscriber's ownership interest and Gateway Community Financial Corp.'s
pro forma net income and stockholders' equity on a per share basis while
decreasing pro forma net income and stockholders' equity on an aggregate basis.
Copies of the appraisal report of Feldman Financial Advisors,
including any amendments, and the detailed report of the appraiser setting forth
the method and assumptions for the appraisal are available for inspection at the
Bank's main office and the other locations specified under Where You Can Find
More Information. The appraisal report is an exhibit to the registration
statement filed with the Securities and Exchange Commission.
For its services in making this appraisal, Feldman Financial Advisors'
fees and out-of-pocket expenses are estimated to total approximately $47,500. We
have agreed to indemnify Feldman Financial Advisors and any employees of Feldman
Financial Advisors who act for or on behalf of Feldman Financial Advisors in
connection with the appraisal against any and all loss, cost, damage, claim,
liability or expense of any kind, including claims under federal and state
securities laws, arising out of any misstatement, untrue statement of a material
fact or omission to state a material fact in the information supplied by us to
Feldman Financial Advisors, unless Feldman Financial Advisors is determined to
be negligent or otherwise at fault.
Methodology of the Appraisal. Consistent with Office of Thrift
Supervision appraisal guidelines, Feldman Financial Advisors relied primarily on
the comparative market value methodology in determining the pro forma market
value. In applying this methodology, Feldman Financial Advisors analyzed
financial and operational comparisons of Gloucester County Federal Savings Bank
with a selected peer group of publicly traded mutual holding companies.
Consistent with Office of Thrift Supervision appraisal guidelines, Feldman
Financial Advisors selected the peer group companies on the basis of their
comparability to Gateway Community Financial Corp. using the following criteria:
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o Publicly traded thrift - stock-form thrift whose shares are
traded on a major stock exchange or listed on NASDAQ.
o Non-acquisition target - company is not subject to a pending
acquisition.
o Mutual holding company - company's stock ownership interest is
held in whole or in part by a mutual holding company, and is not
currently undertaking a "second-step" conversion offering.
o Current financial data - publicly reported financial data
available for the most recent last twelve months ("LTM") ending
March 31, 2007.
o Asset size - total assets of between $250 million and $750
million.
o Geographic location - emphasis on institutions located in the
Northeast and Mid-Atlantic.
o Capitalization - equity to assets ratio greater than or equal to
6.5%.
o Profitability measure - net income above 0.00% but less than
0.75% relative to average assets for the LTM period ending March
31, 2007.
Utilizing the criteria listed above, a peer group of 10 companies was
established. The peer group companies that were selected were all publicly
traded, non-acquisition targets in mutual holding company form, located in New
Jersey, Connecticut, Illinois, Pennsylvania, New York and Massachusetts. The
peer group companies conducted their initial public offerings over a wide time
range, with the first being November 1995 and the most recent being April 2006.
Those companies in the peer group that conducted their initial public offering
as early as 1995, 1998 or 2001 were chosen to be in the peer group on the basis
of their comparability to Gateway Community Financial Corp. with regard to the
criteria listed above. Consistent with Office of Thrift Supervision appraisal
guidelines, the initial public offering date was not considered in selecting the
peer group companies as it does not have any bearing on determining whether a
company would provide a suitable comparison in terms of market value.
As of March 31, 2007, the peer group companies had:
o assets ranging from a low of $268.5 million to a high of $574.5
million;
o non-performing assets to total assets ratios ranging from a low
of 0.05% to a high of 0.90%;
o loans to total assets ratios ranging from a low of 48.9% to a
high of 81.0%;
o equity to assets ratios ranging from a low of 6.6% to a high of
16.2%; and
o net interest margin ratios ranging from a low of 2.35% to a high
of 3.54%.
The following table shows the names of the peer group companies as
well as their locations, initial public offering date, asset size as of March
31, 2007 and market value data, based on market prices as of May 25, 2007.
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Headquarters Total Market
Company (Market/Symbol/IPO Date) Location Assets Value
- -------------------------------- -------- ------ -----
(In millions)
Lake Shore Bancorp, Inc. (Nasdaq: LSBK 04/04/06) Dunkirk, NY $352.0 $81.7
Magyar Bancorp, Inc. (Nasdaq: MGYR 01/24/06) New Brunswick, NJ $468.1 $87.0
Colonial Bankshares, Inc. (Nasdaq: COBK 06/30/05) Bridgeton, NJ $412.4 $67.6
FedFirst Financial Corp. (Nasdaq: FFCO 04/07/05) Monessen, PA $285.1 $62.0
Ocean Shore Holding Co. (Nasdaq: OSHC 12/22/04) Ocean City, NJ $574.5 $113.7
PSB Holdings, Inc. (Nasdaq: PSBH 10/05/04) Putnam, CT $483.0 $72.8
Naugatuck Valley Financial (Nasdaq: NVSL 10/01/04) Naugatuck, CT $424.1 $88.8
AJS Bancorp, Inc. (OTCBB: AJSB 12/17/01) Midlothian, IL $268.5 $53.2
Service Bancorp, Inc. (OTCBB: SERC 10/08/98) Medway, MA $409.7 $54.0
Pathfinder Bancorp, Inc. (Nasdaq: PBHC 11/16/95) Oswego, NY $317.2 $29.7
Average - peer group $399.5 $71.1
Median - peer group $411.0 $70.2
Pricing Ratios. Consistent with Office of Thrift Supervision appraisal
guidelines, Feldman Financial Advisors utilized the average and median
price-to-earnings and price-to-book value ratios of the peer group companies,
based on their current stock trading prices, to establish appropriate pro forma
pricing ratios for Gateway Community Financial Corp. The estimated pro forma
market value was established by working backwards from the pro forma pricing
ratios once Feldman Financial Advisors determined appropriate ratios for Gateway
Community Financial Corp. based on how Gloucester County Federal Savings Bank
compares to the peer group companies on a financial and operational basis. In
that comparison, Feldman Financial Advisors made a downward adjustment to our
pro forma pricing based on their belief that our profitability after the
offering is expected to trail behind the performance of the peer group. Feldman
Financial Advisors also made an upward adjustment to our pro forma pricing based
on the recent after-market performance of mutual holding company stock
offerings, particularly those of New Jersey companies, such as us.
The ratio of "price-to-earnings" measures the stock's cost relative to
the company's earnings. It is the price of one share of stock divided by the
earnings per share. It represents how much an investor is paying for a company's
earnings ability; a high ratio means the stock is priced high relative to how
much the company earns. To illustrate: at the maximum of the offering range,
there will be 6,900,000 shares of Gateway Community Financial Corp. common stock
outstanding (this includes 3,105,000 shares sold in the offering and 3,795,000
shares held by the mutual holding company parent Gateway Community Financial,
MHC). Gateway Community Financial Corp. reported earnings for 2006 of $379,000.
That is the historical net income amount. On a pro forma fully converted basis,
the estimated earnings are $977,000 at the maximum of the offering range. "Pro
forma fully converted" means we assume that all 6,900,000 shares were sold in
the offering, so that the company is fully converted without a mutual holding
company parent, and it also means that we add to the historical net income
amount ($379,000) an estimate of the additional income we would have earned on
the net proceeds of the sale of 6,900,000 shares ($1.8 million) and subtract the
estimated costs of the employee stock ownership plan ($331,000), restricted
stock plan ($331,000) and stock option plan ($524,000). On a per share basis,
the pro forma fully converted earnings per share are approximately $0.15 at the
maximum of the offering range. The price per share in the offering is $10.00.
Divided by $0.15, that results in a pro forma fully converted price-to-earnings
ratio of 66.7x at the maximum of the offering range. In other words, the $10.00
per share price for the stock is over sixty-six times the estimated pro forma
$0.15 per share earnings for the stock. See Pro Forma Data for a full discussion
of these projections. For each peer group company, the price-to-earnings ratio
is calculated using the trading price of the company's stock divided by the
company's per share earnings for the last twelve months.
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The ratio of "price-to-book value" measures the stock's cost relative
to the company's equity. Book value per share is another way of saying equity
per share. The company's total equity divided by the number of shares
outstanding is the equity per share. The price-to-book value ratio represents
how much an investor is paying for the stock relative to the net worth of the
company. To illustrate: at the maximum of the offering range, there will be
6,900,000 shares of Gateway Community Financial Corp. common stock outstanding
(this includes 3,105,000 shares sold in the offering and 3,795,000 shares held
by the mutual holding company parent Gateway Community Financial, MHC). Gateway
Community Financial Corp. had total equity at December 31, 2006 of $28.9
million. That is the historical net worth of the company. On a pro forma fully
converted basis, the estimated total equity at the maximum of the offering range
is $88.4 million. "Pro forma fully converted" means we assume that all 6,900,000
shares were sold in the offering, so that the company is fully converted without
a mutual holding company parent, thus we add to the historical equity of $28.9
million the estimated net proceeds of the sale of 6,900,000 shares ($67.8
million) and subtract the estimated costs of purchasing shares for the employee
stock ownership plan ($5.5 million) and the restricted stock plan ($2.8
million). No adjustment to equity is made for the stock option plan because the
accounting rules are different for grants of options compared to grants of
stock. On a per share basis, the pro forma fully converted equity per share is
approximately $12.81 at the maximum of the offering range. Thus, the pro forma
fully converted price-to-book value ratio is 78.1% because the $10.00 per share
price for the stock is 78.1% of the estimated pro forma book value per share.
See Pro Forma Data for a full discussion of these projections. For each peer
group company, the price-to-book value ratio is calculated using the trading
price of the company's stock divided by the company's current equity per share.
The following table presents the pricing ratios for the peer group
companies on a fully-converted basis and the pro forma fully-converted pricing
ratios for Gateway Community Financial Corp. The calculations of the
fully-converted pricing ratios for the peer group companies assume the pro forma
impact of selling the mutual holding company shares of each of the peer group
companies at their respective trading prices as of May 25, 2007.
Price-to-earnings Price-to-book
multiple value ratio
-------- -----------
Pricing ratios for peer group on a fully-converted basis:
Average........................................................ 33.6x 91.6%
Median......................................................... 30.5x 95.3%
High........................................................... 52.1x 98.2%
Low............................................................ 23.4x 79.8%
Price-to-earnings Price-to-book
multiple value ratio
-------- -----------
Pro forma pricing ratios for Gateway Community
Financial Corp. on a fully-converted basis:
Minimum...................................................... 58.8x 70.1%
Midpoint....................................................... 62.5x 74.5%
Maximum..................................................... 66.7x 78.1%
Maximum, as adjusted...................................... 66.7x 81.5%
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The estimated pro forma market values for mutual holding company stock
offerings as well as full conversion stock offerings are generally set at a
level that results in the company's pro forma price-to-book ratio being less
than the price-to-book ratio of the peer group. The converting company's value
is discounted relative to the peer group because the company's return on equity
(which is a measure of how much the company earns relative to its amount of
capital) following the offering is generally expected to be lower than the peer
group's return on equity until the company is able to profitably deploy the new
capital from the offering. Mutual holding company offerings during 2006 had a
median pro forma price-to- book ratio that was 43.6% lower than the
price-to-book ratio for the thrift industry during that time. The practice of
setting the estimated pro forma market value to reflect the uncertainty about
the company's ability to profitably deploy its new capital is called the "new
issue discount." Feldman Financial Advisors determined on the basis of the
after-market performance of recent mutual holding company offerings,
particularly offerings by companies that operate in the same market area as
Gloucester County Federal Savings Bank, that the pro forma estimated market
value of Gateway Community Financial Corp. should reflect a smaller than normal
new issue discount. Thus, Gateway Community Financial Corp.'s pro forma
estimated market value was adjusted upward so that at the maximum of the range
Gateway Community Financial Corp.'s pro forma price-to-book ratio of 78.1% is
only 15% lower than the average price-to-book ratio for the peer group of 91.6%.
Gateway Community Financial Corp.'s pro forma estimated market value
was adjusted downward slightly because of the lower profitability of Gloucester
County Federal Savings Bank versus the comparative group. Its lower than average
earnings are reflected in its high price-to-earnings ratios and are the reason
that at the maximum of the range Gateway Community Financial Corp.'s pro forma
price-to-earnings ratio of 66.7x is 96% higher than the average
price-to-earnings ratio for the peer group of 33.6x.
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Plan of Distribution and Marketing Arrangements
We have engaged Sandler O'Neill & Partners, L.P., a broker-dealer
registered with the National Association of Securities Dealers, as a financial
and marketing advisor in connection with the offering of our common stock. In
its role as financial and marketing advisor, Sandler O'Neill will assist us in
the offering as follows:
o consulting as to the securities marketing implications of any aspect
of the plan of stock issuance;
o reviewing with our Board of Directors the financial impact of the
offering based upon the independent appraiser's appraisal of the
common stock;
o reviewing all offering documents, including the prospectus, stock
order forms and related offering materials (we are responsible for the
preparation and filing of such documents);
o assisting in the design and implementation of a marketing strategy for
the offering;
o assisting us in scheduling and preparing for meetings with potential
investors and broker-dealers; and
o providing such other general advice and assistance we may request to
promote the successful completion of the offering.
For these services, Sandler O'Neill will receive a fee of 1.0% of the
aggregate dollar amount of the common stock sold in the subscription and
community offerings if the stock issuance is consummated, excluding in each case
shares purchased by the Gloucester County Federal Savings Bank Employee Stock
Ownership Plan and shares purchased by our directors, officers and employees and
their immediate families. We have made an advance payment of $25,000 to Sandler
O'Neill for expenses. Any unused portion of this advance will be refunded if the
offering is not consummated.
The plan of stock issuance provides that, if necessary, all shares of
common stock not purchased in the subscription offering and community offering
may be offered for sale to the general public in a syndicated community offering
to be managed by Sandler O'Neill. In such capacity, Sandler O'Neill may form a
syndicate of other broker-dealers. Neither Sandler O'Neill nor any registered
broker-dealer will have any obligation to take or purchase any shares of the
common stock in the syndicated community offering; however, Sandler O'Neill has
agreed to use its best efforts in the sale of shares in any syndicated community
offering. If there is a syndicated community offering, Sandler O'Neill will
receive a management fee of 1.0% of the aggregate dollar amount of the common
stock sold in the syndicated community offering. The total fees payable to
Sandler O'Neill and other National Association of Securities Dealers member
firms in the syndicated community offering shall not exceed 6.5% of the
aggregate dollar amount of the common stock sold in the syndicated community
offering.
We also will reimburse Sandler O'Neill for its reasonable out-of-pocket
expenses (including legal fees and expenses) associated with its marketing
effort, up to a maximum of $60,000. If the plan of stock issuance is terminated
or if Sandler O'Neill terminates its agreement with us in accordance with the
provisions of the agreement, Sandler O'Neill will only receive reimbursement of
its reasonable out-of-pocket expenses. We will indemnify Sandler O'Neill against
liabilities and expenses (including legal fees) incurred in connection with
certain claims or litigation arising out of or based upon untrue statements or
omissions
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contained in the offering material for the common stock, including liabilities
under the Securities Act of 1933.
We have also engaged Sandler O'Neill to act as our records management
agent in connection with the offering. In its role as records management agent,
Sandler O'Neill will assist us in the offering as follows: (1) consolidation of
accounts and development of a central file; (2) preparation of order forms; (3)
organization and supervision of the stock information center; and (4)
subscription services. For these services, Sandler O'Neill will receive a fee of
$24,000 and reimbursement for its reasonable out-of-pocket expenses, up to a
maximum of $26,000. We have made an advance payment of $5,000 to Sandler O'Neill
for these services.
Sandler O'Neill has not prepared any report or opinion constituting a
recommendation or advice to us or to persons who subscribe for our common stock,
nor has it prepared an opinion as to the fairness to us of the purchase price or
the terms of the common stock offered for sale. Sandler O'Neill expresses no
opinion as to the prices at which the common stock, once issued, may trade.
Our directors and executive officers may participate in the
solicitation of offers to purchase common stock. Other trained employees may
participate in the offering in ministerial capacities, providing clerical work
in effecting a sales transaction or answering questions of a ministerial nature.
Other questions of prospective purchasers will be directed to executive officers
or registered representatives of Sandler O'Neill. We will rely on Rule 3a4-1 of
the Securities Exchange Act of 1934 so as to permit officers, directors and
employees to participate in the sale of our common stock. No officer, director
or employee will be compensated for his or her participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the common stock.
Restrictions on Transferability by Directors and Executive Officers
Shares of the common stock purchased by our directors or executive
officers cannot be sold for a period of one year following completion of the
offering, except for a disposition of shares after death. To ensure this
restriction is upheld, shares of the common stock issued to directors and
executive officers will bear a legend restricting their sale. Appropriate
instructions will be issued to the transfer agent with respect to applicable
restrictions on transfer of such stock. Any shares issued to directors and
executive officers as a stock dividend, stock split or otherwise with respect to
restricted stock will be subject to the same restriction.
For a period of three years following the offering, our directors and
executive officers and their associates may not, without the prior approval of
the Office of Thrift Supervision, purchase our common stock except from a broker
or dealer registered with the SEC. This prohibition does not apply to negotiated
transactions including more than 1% of our common stock or purchases made by tax
qualified or non-tax qualified employee stock benefit plans which may be
attributable to individual directors or executive officers.
We have filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933 for the registration of
the common stock to be issued in the offering. This registration does not cover
the resale of the shares. Shares of common stock purchased by persons who are
not affiliates of us may be resold without registration. Shares purchased by an
affiliate of us will have resale restrictions under Rule 144 of the Securities
Act. If we meet the current public information requirements of Rule 144, each
affiliate of ours who complies with the other conditions of Rule 144, including
those that require the affiliate's sale to be aggregated with those of certain
other persons, would be able to sell in the public market, without registration,
a number of shares not to exceed, in any three-month period, the greater of
119
1% of our outstanding shares or the average weekly volume of trading in the
shares during the preceding four calendar weeks. We may make future provisions
to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
Restrictions on Agreements or Understandings Regarding Transfer of Common Stock
to be Purchased in the Offering
Before the completion of the offering, no depositor may transfer or
enter into an agreement or understanding to transfer any subscription rights or
the legal or beneficial ownership of the shares of common stock to be purchased
in the offering. Depositors who submit an order form will be required to certify
that their purchase of common stock is solely for their own account and there is
no agreement or understanding regarding the sale or transfer of their shares. We
intend to pursue any and all legal and equitable remedies after we become aware
of any agreement or understanding, and will not honor orders we reasonably
believe to involve an agreement or understanding regarding the sale or transfer
of shares.
Effects of the Stock Offering
General. The stock offering will not have any effect on Gloucester
County Federal Savings Bank's present business of accepting deposits and
investing its funds in loans and other investments permitted by law. The stock
offering will not result in any change in the existing services provided to
depositors and borrowers, or in existing offices, management, and staff. After
the stock offering, Gloucester County Federal Savings Bank will continue to be
subject to regulation, supervision, and examination by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation.
Deposits and Loans. Each holder of a deposit account in Gloucester
County Federal Savings Bank at the time of the stock offering will continue as
an account holder in Gloucester County Federal Savings Bank after the stock
offering, and the stock offering will not affect the deposit balance, interest
rate or other terms. Each deposit account will be insured by the Federal Deposit
Insurance Corporation to the same extent as before the stock offering.
Depositors will continue to hold their existing certificates, savings records,
checkbooks and other evidence of their accounts. The stock offering will not
affect the loans of any borrower from Gloucester County Federal Savings Bank.
The amount, interest rate, maturity, security for, and obligations under each
loan will remain contractually fixed as they existed prior to the stock
offering.
Voting Rights. As a stock savings bank, all voting rights of Gloucester
County Federal Savings Bank are held solely by its sole stockholder, Gateway
Community Financial Corp. All voting rights of Gateway Community Financial Corp.
are held solely by its sole stockholder, Gateway Community Financial, MHC. All
voting rights of Gateway Community Financial, MHC are held by the Board of
Directors of Gateway Community Financial, MHC. After the stock offering, the
voting rights of Gateway Community Financial Corp. will be held by its
stockholders. Gateway Community Financial, MHC will own a majority of the
outstanding common stock of Gateway Community Financial Corp., and thus the
Board of Directors of Gateway Community Financial, MHC, which is comprised of
the same individuals who are directors of Gateway Community Financial Corp.,
will control the affairs of Gateway Community Financial Corp., including the
election of directors of Gateway Community Financial Corp.
Material Federal and State Tax Consequences of the Offering. We have
received an opinion from Malizia Spidi & Fisch, PC on the material federal tax
consequences of the stock offering to Gateway Community Financial Corp., the
purchasers of its common stock and the recipients of subscription rights to
purchase such common stock. The opinion has been filed as an exhibit to the
registration statement of
120
which this prospectus is a part and covers those federal tax matters that are
material to the transaction. Such opinion is made in reliance upon various
statements, representations and declarations as to matters of fact made by us,
as detailed in the opinion. The opinion provides that:
o we will recognize no gain or loss upon the receipt of money in
exchange for shares of common stock; and
o no gain or loss will be recognized by Eligible Account Holders,
Supplemental Eligible Account Holders or Other Eligible Account Holders upon the
distribution to them of the nontransferable subscription rights to purchase
shares of common stock.
The opinion in the second bullet above is predicated on representations
from Gloucester County Federal Savings Bank, Gateway Community Financial Corp.
and Gateway Community Financial, MHC that no person shall receive any payment,
whether in money or property, in lieu of the issuance of subscription rights.
The opinion in the second bullet above is also based on the position that the
subscription rights to purchase shares of common stock received by Eligible
Account Holders, Supplemental Eligible Account Holders and Other Eligible
Account Holders have a fair market value of zero. In reaching their opinion
stated in the second bullet above, Malizia Spidi & Fisch, PC has noted that the
subscription rights will be granted at no cost to the recipients, will be
legally non-transferable and of short duration, and will provide the recipients
with the right only to purchase shares of common stock at the same price to be
paid by members of the general public in any community offering. Malizia Spidi &
Fisch, PC believes that it is more likely than not that the fair market value of
the subscription rights to purchase common stock is zero. Malizia Spidi & Fisch,
PC has noted in its opinion that they are not aware of the Internal Revenue
Service claiming in any similar transaction that subscription rights have any
market value. In that there are no judicial opinions or official Internal
Revenue Service positions on this issue, however, such position related to
subscription rights comes to a reasoned conclusion instead of an absolute
conclusion on these issues. Such conclusion of counsel is supported by a letter
from Feldman Financial Advisors furnished to us which states that the
subscription rights do not have any value when they are distributed or
exercised. If the Internal Revenue Service disagrees with this valuation of
subscription rights and determines that such subscription rights have value,
income may be recognized by recipients of these rights, in certain cases whether
or not the rights are exercised. This income may be capital gain or ordinary
income, and Gateway Community Financial Corp. could recognize gain on the
distribution of these rights. Based on the foregoing, Malizia Spidi & Fisch, PC
believes that it is more likely than not that the nontransferable subscription
rights to purchase our common stock have no value.
We are also subject to New Jersey income taxes and have received an
opinion from S.R. Snodgrass, A.C. that the stock offering will be treated for
New Jersey state tax purposes similar to the treatment of the stock offering for
federal tax purposes.
Unlike a private letter ruling from the IRS, the federal and state tax
opinions have no binding effect or official status, and no assurance can be
given that the conclusions reached in any of those opinions would be sustained
by a court if contested by the IRS or the New Jersey tax authorities. Eligible
Account Holders, Supplemental Eligible Account Holders and Other Eligible
Account Holders are encouraged to consult with their own tax advisers as to the
tax consequences in the event the subscription rights are determined to have any
market value.
121
Interpretation, Amendment or Termination of the Plan of Stock Offering
If determined to be necessary or desirable by the Board of Directors,
the plan may be amended by a two-thirds vote of the full Board, with the
concurrence of the Office of Thrift Supervision. To the extent permitted by law,
all interpretations by us of the plan of stock issuance will be final; however,
such interpretations have no binding effect on the Office of Thrift Supervision.
The plan of stock issuance provides that, if deemed necessary or desirable, we
may substantively amend the plan of stock issuance as a result of comments from
regulatory authorities or otherwise.
Completion of the offering requires the sale of all shares of the
common stock within ninety days following approval of the plan of stock issuance
by the Office of Thrift Supervision, unless an extension is granted by the
Office of Thrift Supervision. If this condition is not satisfied, the plan of
stock issuance will be terminated and we will continue our business. We may
terminate the plan of stock issuance at any time.
Conditions to the Offering
Completion of the offering is subject to several factors, including:
1. the receipt of all the required approvals of the Office of Thrift
Supervision for the issuance of common stock in the offering, and
2. the sale of 2,295,000 shares of common stock.
If such conditions are not met before we complete the offering, all
funds received will be promptly returned with interest and all withdrawal
authorizations will be canceled. The stock purchases of our officers and
directors will be counted for purposes of meeting the minimum number of shares.
RESTRICTIONS ON ACQUISITION OF GATEWAY COMMUNITY FINANCIAL CORP.
General
The principal federal regulatory restrictions which affect the ability
of any person, firm or entity to acquire Gateway Community Financial Corp.,
Gloucester County Federal Savings Bank or their respective capital stock are
described below. Also discussed are certain provisions in Gateway Community
Financial Corp.'s charter and bylaws which may be deemed to affect the ability
of a person, firm or entity to acquire Gateway Community Financial Corp.
Statutory and Regulatory Restrictions on Acquisition
The Change in Bank Control Act provides that no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire control of a savings institution unless the Office of Thrift Supervision
has been given 60 days prior written notice. The Home Owners' Loan Act provides
that no company may acquire "control" of a savings institution without the prior
approval of the Office of Thrift Supervision. Any company that acquires such
control becomes a savings and loan holding company subject to registration,
examination and regulation by the Office of Thrift Supervision. Pursuant to
federal regulations, control of a savings institution is conclusively deemed to
have been acquired by, among other things, the acquisition of more than 25% of
any class of voting stock of the institution or the ability to control the
election of a majority of the directors of an institution. Moreover, control is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock, or
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of more than 25% of any class of stock of a savings institution, where certain
enumerated "control factors" are also present in the acquisition.
The Office of Thrift Supervision may prohibit an acquisition of control
if:
o it would result in a monopoly or substantially lessen competition;
o the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
o the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or of
the public to permit the acquisition of control by such person.
These restrictions do not apply to the acquisition of a savings
institution's capital stock by one or more tax-qualified employee stock benefit
plans, provided that the plans do not have beneficial ownership of more than 25%
of any class of equity security of the savings institution.
For a period of three years following completion of the stock issuance,
Office of Thrift Supervision regulations generally prohibit any person from
acquiring or making an offer to acquire beneficial ownership of more than 10% of
the stock of Gateway Community Financial Corp. or Gloucester County Federal
Savings Bank without Office of Thrift Supervision approval.
Current Office of Thrift Supervision regulations permit a mutual
holding company to be acquired by a mutual institution or in a remutualization
transaction. However, the Office of Thrift Supervision has issued a policy
statement indicating that it views remutualization transactions as raising
significant issues concerning disparate treatment of minority stockholders and
mutual members of the target entity and raising issues concerning the effect on
the mutual members of the acquiring entity. Under certain circumstances, the
Office of Thrift Supervision intends to give these issues special scrutiny and
reject applications providing for the remutualization of a mutual holding
company unless the applicant can clearly demonstrate that the Office of Thrift
Supervision's concerns are not warranted.
Charter and Bylaws of Gateway Community Financial Corp.
The following discussion is a summary of certain provisions of the
charter and bylaws of Gateway Community Financial Corp. that relate to corporate
governance. The description is necessarily general and qualified by reference to
the charter and bylaws.
Classified Board of Directors. The Board of Directors of Gateway
Community Financial Corp. is required by the bylaws to be divided into three
staggered classes as equal in size as is possible, with one class elected
annually by stockholders for three-year terms. A classified Board promotes
continuity and stability of management of Gateway Community Financial Corp., but
makes it more difficult for stockholders to change a majority of the directors
because it generally takes at least two annual elections of directors for this
to occur. Directors are elected by a plurality of votes cast, and because
Gateway Community Financial, MHC will own a majority of the common stock, it
will control the election of directors.
Limitation of Beneficial Ownership and Voting. For a period of three
years following the offering, Office of Thrift Supervision regulations generally
prohibit any person from acquiring or making an offer to
123
acquire beneficial ownership of more than 10% of the then-outstanding shares of
Gateway Community Financial Corp. common stock without Office of Thrift
Supervision prior approval.
Additionally, our charter includes a provision that limits the voting
rights of a single stockholder to no more than 10% of the then-outstanding
shares, including shares held by Gateway Community Financial, MHC, for a period
of five years from the date this stock offering is completed.
Authorized but Unissued Shares of Capital Stock. Following the stock
offering, Gateway Community Financial Corp. will have authorized but unissued
shares of preferred stock and common stock. See Description of Capital Stock.
Although these shares could be used by the Board of Directors of Gateway
Community Financial Corp. to make it more difficult or to discourage an attempt
to obtain control of Gateway Community Financial Corp. through a merger, tender
offer, proxy contest or otherwise, it is unlikely that we would use or need to
use shares for these purposes because Gateway Community Financial, MHC will own
a majority of the common stock.
Special Meetings of Stockholders. Gateway Community Financial Corp.'s
bylaws provide that special meetings of stockholders may be called only by the
chairman of the Board, the president, or a majority of the Board of Directors,
or upon the written request of the holders of not less than one-tenth of all of
the outstanding stock of Gateway Community Financial Corp.
How Shares are Voted. Gateway Community Financial Corp.'s bylaws
provide that there will not be cumulative voting by stockholders for the
election of Gateway Community Financial Corp.'s directors. No cumulative voting
rights means that Gateway Community Financial, MHC, as the holder of a majority
of the shares eligible to be voted at a meeting of stockholders, may elect all
directors of Gateway Community Financial Corp. to be elected at that meeting.
This could prevent minority stockholder representation on Gateway Community
Financial Corp.'s Board of Directors.
Procedures for Stockholder Nominations. Gateway Community Financial
Corp.'s bylaws provide that any stockholder wanting to make a nomination for the
election of directors or a proposal for new business at a meeting of
stockholders must send written notice to the Secretary of Gateway Community
Financial Corp. at least five days before the date of the annual meeting. The
bylaws further provide that if a stockholder wanting to make a nomination or a
proposal for new business does not follow the prescribed procedures, the
proposal will not be considered until an adjourned, special, or annual meeting
of the stockholders taking place thirty days or more thereafter. Management
believes that it is in the best interests of Gateway Community Financial Corp.
and its stockholders to provide enough time for management to disclose to
stockholders information about a dissident slate of nominations for directors.
This advance notice requirement may also give management time to solicit its own
proxies in an attempt to defeat any dissident slate of nominations if management
thinks it is in the best interest of stockholders generally. Similarly, adequate
advance notice of stockholder proposals will give management time to study such
proposals and to determine whether to recommend to the stockholders that such
proposals be adopted.
Indemnification. Gateway Community Financial Corp.'s bylaws provide for
indemnification of its officers, directors and employees to the fullest extent
authorized by the regulations of the Office of Thrift Supervision.
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DESCRIPTION OF CAPITAL STOCK
General
Gateway Community Financial Corp. is authorized to issue 25,000,000
shares of common stock, par value $0.10 per share and 5,000,000 shares of serial
preferred stock, no par value. Upon completion of the stock offering, we will
have between 2,295,000 shares of common stock at the minimum and 3,105,000
shares of common stock at the maximum of the offering range outstanding
(3,570,750 shares at the adjusted maximum), including shares that will be held
by Gateway Community Financial, MHC. Upon payment of the purchase price shares
of common stock issued in the offering will be fully paid and non- assessable.
Each share of common stock will have the same relative rights as, and will be
identical in all respects with, each other share of common stock. The common
stock will represent non-withdrawable capital, will not be an account of
insurable type and will not be insured by the Federal Deposit Insurance
Corporation or any other governmental agency. The Board of Directors can,
without stockholder approval, issue additional shares of common stock, although
Gateway Community Financial, MHC, so long as it is in existence, must own a
majority of Gateway Community Financial Corp.'s outstanding shares of common
stock.
Common Stock
Distributions. Gateway Community Financial Corp. can pay dividends if,
as and when declared by its Board of Directors, subject to compliance with
limitations which are imposed by law. See Our Policy Regarding Dividends. The
holders of common stock of Gateway Community Financial Corp. will be entitled to
receive and share equally in such dividends as may be declared by the Board of
Directors of Gateway Community Financial Corp. out of funds legally available
therefor. If Gateway Community Financial Corp. issues preferred stock, the
holders thereof may have a priority over the holders of the common stock with
respect to dividends.
Voting Rights. The holders of common stock will possess exclusive
voting rights in Gateway Community Financial Corp. The holder of shares of
common stock will be entitled to one vote for each share held on all matters
subject to stockholder vote and will not have any right to cumulate votes in the
election of directors.
Liquidation Rights. In the event of any liquidation, dissolution, or
winding-up of Gateway Community Financial Corp., the holders of the common stock
generally would be entitled to receive, after payment of all debts and
liabilities of Gateway Community Financial Corp. (including all debts and
liabilities of Gloucester County Federal Savings Bank), all assets of Gateway
Community Financial Corp. available for distribution. If preferred stock is
issued, the holders thereof may have a priority over the holders of the common
stock in the event of liquidation or dissolution.
Preemptive Rights; Redemption. Because the holders of the common stock
do not have any preemptive rights with respect to any shares Gateway Community
Financial Corp. may issue, the Board of Directors may sell shares of capital
stock of Gateway Community Financial Corp. without first offering such shares to
existing stockholders. The common stock will not be subject to any redemption
provisions.
Preferred Stock
We are authorized to issue up to 5,000,000 shares of serial preferred
stock and to fix and state voting powers, designations, preferences, or other
special rights of preferred stock and the qualifications,
125
limitations and restrictions of those shares as the Board of Directors may
determine in its discretion. Preferred stock may be issued in distinctly
designated series, may be convertible into common stock and may rank prior to
the common stock as to dividends rights, liquidation preferences, or both, and
may have full or limited voting rights. The issuance of preferred stock could
adversely affect the voting and other rights of holders of common stock.
The authorized but unissued shares of preferred stock and the
authorized but unissued and unreserved shares of common stock will be available
for issuance in future mergers or acquisitions, in future public offerings or
private placements. Except as otherwise required to approve the transaction in
which the additional authorized shares of preferred stock would be issued, no
stockholder approval generally would be required for the issuance of these
shares.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Gateway Community Financial
Corp.'s common stock will be Registrar and Transfer Company, Cranford, New
Jersey.
LEGAL AND TAX OPINIONS
The legality of the issuance of the common stock being offered and
certain matters relating to the stock offering and federal taxation will be
passed upon for us by Malizia Spidi & Fisch, PC, Washington, D.C. Matters
relating to state taxation will be passed upon for us by S.R. Snodgrass, A.C.,
Wexford, Pennsylvania. Certain legal matters will be passed upon for Sandler
O'Neill & Partners, L.P. by Muldoon Murphy & Aguggia LLP, Washington, D.C.
EXPERTS
The consolidated financial statements of Gateway Community Financial
Corp. at December 31, 2006 and 2005 and for each of the years in the three year
period ended December 31, 2006 have been included in this prospectus in reliance
upon the report of S.R. Snodgrass, A.C., appearing elsewhere in this prospectus,
and upon the authority of said firm as experts in accounting and auditing.
Feldman Financial Advisors, Inc. has consented to the publication in
this document of a summary of its letter to Gateway Community Financial Corp.
setting forth its conclusion as to the estimated pro forma market value of the
common stock and has also consented to the use of its name and statements with
respect to it appearing in this document.
126
REGISTRATION REQUIREMENTS
Prior to completion of the offering, we will register our common stock
with the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934,
as amended. We will be subject to the information, proxy solicitation, insider
trading restrictions, tender offer rules, periodic reporting and other
requirements of the SEC under the Securities Exchange Act of 1934. We will not
deregister the common stock under the Securities Exchange Act of 1934 for a
period of at least three years following the stock offering.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under
the Securities Act of 1933, as amended, with respect to the common stock offered
in this document. As permitted by the rules and regulations of the SEC, this
document does not contain all the information set forth in the registration
statement. The statements contained in this document as to the contents of any
contract or other document filed as an exhibit to the Form S-1 are, of
necessity, brief descriptions. The registration statement and exhibits can be
examined without charge at the public reference facilities of the SEC located at
100 F Street, N.E., Washington, D.C. You may obtain information on the operation
of the Public Reference Room by calling 1-800-SEC-0330. The SEC also maintains a
web site that contains reports, proxy and information statements and other
information regarding registrants, including Gateway Community Financial Corp.,
that file electronically with the SEC. The address for this web site is
http://www.sec.gov.
We have filed an application for approval of the stock issuance with
the Office of Thrift Supervision. This prospectus omits certain information
contained in that application. That information can be examined without charge
at the public reference facilities of the Office of Thrift Supervision located
at 1700 G Street, N.W., Washington, D.C. 20552.
A copy of our charter and bylaws, filed as exhibits to the registration
statement as well as those of Gloucester County Federal Savings Bank and Gateway
Community Financial, MHC, are available without charge from Gateway Community
Financial Corp. Copies of the plan of stock issuance are also available without
charge.
127
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm.....................F-1
Consolidated Balance Sheet
as of December 31, 2006 and 2005 ................................. F-2
Consolidated Statement of Income
for the Years Ended December 31, 2006, 2005 and 2004...............F-3
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 2006, 2005 and 2004...............F-4
Consolidated Statement of Cash Flows
for the Years Ended December 31, 2006, 2005 and 2004.............. F-5
Notes to Consolidated Financial Statements................................. F-7
All schedules are omitted as the required information either is not
applicable or is included in the consolidated financial statements or related
notes.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors
Gateway Community Financial Corp.
We have audited the consolidated balance sheet of Gateway Community Financial
Corp. and subsidiary as of December 31, 2006 and 2005, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2006. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gateway Community
Financial Corp. and subsidiary as of December 31, 2006 and 2005, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles.
/s/S.R. Sndograss, A.C.
Wexford, PA
March 20, 2007
F-1
GATEWAY COMMUNITY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
March 31, December 31,
2007 2006 2005
------------- ------------- -------------
(Unaudited)
ASSETS
Cash and due from banks $ 8,447,634 $ 9,792,977 $ 7,094,534
Interest-bearing deposits in other banks 578,653 825,203 1,636,118
Federal funds sold - - 5,300,000
------------- ------------- -------------
Cash and cash equivalents 9,026,287 10,618,180 14,030,652
Investment securities available for sale 13,244,385 14,151,943 1,729,053
Investment securities held to maturity
(fair value $53,605,953, $38,404,079, and $38,955,768) 53,823,006 38,645,234 39,586,162
Mortgage-backed securities available for sale 179,861 200,059 324,314
Mortgage-backed securities held to maturity
(fair value $63,268,159, $58,002,971, and $52,771,675) 64,016,994 58,984,533 53,708,105
Loans receivable 212,858,113 212,305,275 183,951,358
Less allowance for loan losses 1,822,637 1,813,469 3,035,676
------------- ------------- -------------
Net loans 211,035,476 210,491,806 180,915,682
Accrued interest receivable 1,887,134 1,733,571 1,106,854
Real estate owned 532,431 287,592 287,592
Premises and equipment 6,465,734 6,468,933 6,549,886
Federal Home Loan Bank stock 1,328,600 581,600 355,000
Bank-owned life insurance 7,532,530 7,462,020 7,205,131
Other assets 3,008,146 2,238,354 2,212,379
------------- ------------- -------------
TOTAL ASSETS $ 372,080,584 $ 351,863,825 $ 308,010,810
============= ============= =============
LIABILITIES
Deposits $ 319,997,667 $ 315,962,427 $ 277,544,217
Short-term borrowings 21,000,000 4,400,000
Advances by borrowers for taxes and insurance 592,593 514,511 474,957
Accrued interest payable and other liabilities 1,742,135 2,083,690 1,445,686
------------- ------------- -------------
TOTAL LIABILITIES 343,332,395 322,960,628 279,464,860
------------- ------------- -------------
Commitments and Contingencies (Note 14) - - -
STOCKHOLDERS' EQUITY
Preferred stock, par value $.10; 5,000,000 shares authorized
no shares issued and outstanding - - -
Common stock, par value $.10; 25,000,000 shares authorized;
10,000 shares issued and outstanding 1,000 1,000 1,000
Additional paid-in capital 249,000 249,000 249,000
Retained earnings 28,486,093 28,685,843 28,306,369
Accumulated other comprehensive income (loss) 12,096 (32,646) (10,419)
------------- ------------- -------------
TOTAL STOCKHOLDERS' EQUITY 28,748,189 28,903,197 28,545,950
------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 372,080,584 $ 351,863,825 $ 308,010,810
============= ============= =============
See accompanying notes to the consolidated financial statements.
F-2
GATEWAY COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended March 31, Year Ended December 31,
2007 2006 2006 2005 2004
---------- ---------- ----------- ----------- ----------
(Unaudited)
INTEREST AND DIVIDEND INCOME
Loans receivable 3,064,170 $2,607,677 $11,474,291 $ 9,940,497 $ 9,800,017
Interest-bearing deposits in other banks 7,796 30,754 97,856 196,997 142,910
and federal funds sold
Investment securities
Taxable 753,141 396,347 2,149,634 1,621,073 1,837,680
Exempt from federal income tax 66,984 12,347 135,502 38,799 24,388
Mortgage-backed securities 729,155 597,451 2,416,192 2,423,423 2,108,277
---------- ---------- ----------- ----------- ----------
Total interest and dividend income 4,621,246 3,644,576 16,273,475 14,220,789 13,913,272
---------- ---------- ----------- ----------- ----------
INTEREST EXPENSE
Deposits 2,829,976 1,760,427 8,688,512 5,863,428 5,203,667
Short-term borrowings 127,797 25,924 688,692 7,937 -
---------- ---------- ----------- ----------- ----------
Total interest expense 2,957,773 1,786,351 9,377,204 5,871,365 5,203,667
---------- ---------- ----------- ----------- ----------
NET INTEREST INCOME 1,663,473 1,858,225 6,896,271 8,349,424 8,709,605
Recovery of loan losses - (199,640) (348,444) (916,695) (12,766)
---------- ---------- ----------- ----------- ----------
NET INTEREST INCOME AFTER
RECOVERY OF LOAN LOSSES 1,663,473 2,057,865 7,244,715 9,266,119 8,722,371
----------- ----------- ------------ ------------ -----------
NONINTEREST INCOME
Service charges and other fees 98,955 109,673 445,954 375,439 390,570
Investment securities gains (losses), net - - (30,145) - 22,788
Earnings on bank-owned life insurance 70,510 61,594 256,889 245,689 211,060
Other 20,978 30,480 182,953 262,031 251,155
---------- ---------- ----------- ----------- ----------
Total noninterest income 190,443 201,747 855,651 883,159 875,573
---------- ---------- ----------- ----------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 1,237,980 1,149,738 4,427,176 4,336,167 4,265,410
Occupancy and equipment 351,871 270,771 1,247,148 1,292,666 1,253,504
Data processing 171,362 150,615 608,416 586,478 560,825
Federal insurance premiums 8,951 8,833 35,228 80,828 121,071
Professional fees 77,758 71,109 235,151 238,834 321,988
Other 330,744 269,856 1,077,773 1,099,110 1,166,343
---------- ---------- ----------- ----------- ----------
Total noninterest expense 2,178,666 1,920,924 7,630,892 7,634,083 7,689,141
---------- ---------- ----------- ----------- ----------
Income (loss) before income tax expense (324,750) 338,688 469,474 2,515,195 1,908,803
Income tax expense (benefit) (125,000) 116,617 90,000 892,597 258,570
---------- ---------- ----------- ----------- ----------
NET INCOME (LOSS) $ (199,750) $ 222,071 $ 379,474 $ 1,622,598 $1,650,233
========== ========== =========== =========== ==========
See accompanying notes to the consolidated financial statements.
F-3
GATEWAY COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders' Comprehensive
Stock Capital Earnings Income (Loss) Equity Income (Loss)
------ -------- ----------- -------- ----------- ------------
Balance, December 31, 2003 $1,000 $249,000 $25,033,538 $ 48,018 $25,331,556
Net income 1,650,233 1,650,233 $1,650,233
Other comprehensive loss:
Unrealized loss on available-
for-sale securities, net of
reclassification adjustment,
net of tax benefit of $24,427 (47,418) (47,418) (47,418)
----------
Comprehensive income $1,602,815
------ -------- ----------- -------- ----------- ==========
Balance, December 31, 2004 1,000 249,000 26,683,771 600 26,934,371
Net income 1,622,598 1,622,598 $1,622,598
Other comprehensive loss:
Unrealized loss on available-
for-sale securities, net of
reclassification adjustment,
net of tax benefit of $5,676 (11,019) (11,019) (11,019)
----------
Comprehensive income $1,611,579
------ -------- ----------- -------- ----------- ==========
Balance, December 31, 2005 1,000 249,000 28,306,369 (10,419) 8,545,950
Net income 379,474 379,474 $ 379,474
Other comprehensive loss:
Unrealized loss on available-
for-sale securities, net of
reclassification adjustment,
net of tax benefit of $11,450 (22,227) (22,227) (22,227)
----------
Comprehensive income $ 357,247
------ -------- ----------- -------- ----------- ==========
Balance, December 31, 2006 $1,000 $249,000 $28,685,843 $(32,646) $28,903,197
====== ======== =========== ======== ===========
Balance, December 31, 2005 $1,000 $249,000 $28,306,369 $(10,419) $28,545,950
Net income (unaudited) 222,071 222,071 $ 222,071
Other comprehensive loss:
Unrealized loss on available-
for-sale securities,
net of tax benefit of $19,138 (37,150) (37,150) (37,150)
----------
Comprehensive income (unaudited) $ 184,921
------ -------- ----------- -------- ----------- ==========
Balance, March 31, 2006 (unaudited) $1,000 $249,000 $28,528,440 $(47,569) $28,730,871
====== ======== =========== ======== ===========
Balance, December 31, 2006 $1,000 $249,000 $28,685,843 $(32,646) $28,903,197
Net loss (unaudited) (199,750) (199,750) $ (199,750)
Other comprehensive loss:
Unrealized gain on available-
for-sale securities,
net of taxes of $23,049 44,742 44,742 44,742
------ -------- ----------- -------- ----------- ----------
Comprehensive loss (unaudited) $ (155,008)
==========
Balance, March 31, 2007 (unaudited) $1,000 $249,000 $28,486,093 $ 12,096 $28,748,189
====== ======== =========== ======== ===========
Three Months Ended March 31, Year Ended December 31,
2007 2006 2006 2005 2004
------- -------- -------- -------- --------
(Unaudited)
Components of other comprehensive income (loss):
Changes in net unrealized gain (loss) on
investment securities available for sale $44,742 $(37,150) $(42,123) $(11,019) $(32,378)
Realized losses (gains) included in net income,
net of tax (expense) benefit of $0, $0, $10,249,
$0, and $(7,748) - - 19,896 - (15,040)
------- -------- -------- -------- --------
Total $44,742 $(37,150) $(22,227) $(11,019) $(47,418)
======= ======== ======== ======== ========
See accompanying notes to the consolidated financial statements.
F-4
GATEWAY COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31, Year Ended December 31,
2007 2006 2006 2005 2004
------------ ------------ ------------ ------------ ------------
(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ (199,750) $ 222,071 $ 379,474 $ 1,622,598 $ 1,650,233
Adjustments to reconcile net income (loss) to
net cash provided by (used for)
operating activities:
Depreciation 113,285 119,679 457,255 508,915 502,102
Provision (recovery) of loan losses 426 (199,640) (348,444) (916,695) (12,766)
Amortization of discounts, premiums,
and loan origination fees, net 11,322 30,883 42,925 303,788 85,503
Deferred income taxes 61,372 60,329 329,257 341,072 (236,453)
Earnings on bank-owned life insurance (70,510) (61,594) (256,889) (245,689) (211,060)
Gain on sale of premises and equipment - - (6,000) (88,086) -
Gain on sale of other assets, net - - (74,994) - -
Loss (gain) on sales of real estate owned - - - 10,233 (91,344)
Investment securities (gains) losses, net - - 30,145 - (22,788)
Decrease (increase) in accrued interest
receivable (153,563) (209,812) (626,717) 87,851 157,014
Increase (decrease) in accrued interest
payable (204,609) 140,235 453,063 48,381 42,221
Decrease (increase) in prepaid income taxes 248,478 55,622 (53,871) (589,922) 1,294,808
Increase (decrease) in accounts payable (194,924) (79,595) 151,663 34,804 (19,124)
Decrease (increase) in investment principal
receivable (264,996) (14,806) (16,744) 1,323 65,067
Other, net (779,717) (216,205) (257,973) 363,239 312,904
------------ ------------ ------------ ------------ ------------
Net cash provided by (used for)
operating activities (1,433,186) (152,833) 202,150 1,481,812 3,516,317
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases - (5,500,000) (13,391,659) - (571,271)
Maturities and repayments 976,697 - 992,332 - 3,168,374
Investment securities held to maturity:
Purchases (26,559,000) (1,976,406) (16,602,852) (5,604,188) (25,430,000)
Maturities and repayments 11,374,000 1,000,000 13,527,685 12,603,000 24,451,993
Proceeds from sales - - 3,969,812 - -
Mortgage-backed securities available for sale:
Maturities and repayments 20,116 33,935 123,083 188,325 198,147
Mortgage-backed securities held to maturity:
Purchases (9,155,134) (3,513,860) (18,482,000) (15,121,550) (39,634,113)
Maturities and repayments 4,113,927 3,015,664 13,104,583 21,881,669 19,008,580
Net increase in loans receivable (785,549) (2,432,773) (15,517,336) (5,542,077) (4,431,856)
Purchase of loans - (3,921,386) (13,741,460) (7,100,406) -
Purchase of premises and equipment (110,086) (54,102) (383,302) (452,670) (234,674)
Proceeds from sale of premises and equipment - - 13,000 184,478 -
Purchase of Federal Home Loan Bank stock 1,570,500 567,000 (4,897,600) (304,100) (210,500)
Redemption of Federal Home Loan Bank stock (2,317,500) (877,500) 4,671,000 1,227,700 -
Proceeds from sales of real estate owned - - 142,328 163,011 606,137
------------ ------------ ------------ ------------ ------------
Net cash provided by (used for)
investing activities (20,872,029) (13,659,428) (46,472,386) 2,123,192 (23,079,183)
------------ ------------ ------------ ------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 4,035,240 (351,212) 38,418,210 (9,310,154) 19,776,004
Net increase in short-term borrowings 16,600,000 6,900,000 4,400,000 - -
Net increase (decrease) in advances by
borrowers for taxes and insurance 78,082 59,888 39,554 (24,379) 99,308
------------ ------------ ------------ ------------ ------------
Net cash provided by (used for)
financing activities 20,713,322 6,608,676 42,857,764 (9,334,533) 19,875,312
------------ ------------ ------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents (1,591,893) (7,203,585) (3,412,472) (5,729,529) 312,446
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,618,180 14,030,652 14,030,652 19,760,181 19,447,735
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,026,287 $ 6,827,067 $ 10,618,180 $ 14,030,652 $ 19,760,181
============ ============ ============ ============ ============
See accompanying notes to the consolidated financial statements.
F-5
GATEWAY COMMUNITY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All information relating to March 31, 2007 and 2006, and the
three-month periods then ended are unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying consolidated financial statements follows:
Nature of Operations and Basis of Presentation
----------------------------------------------
Gateway Community Financial Corp. (the "Company"), a federally chartered
corporation whose principal activity is the ownership and management of its
wholly owned subsidiary, Gloucester County Federal Savings Bank (the
"Bank"). The Bank generates commercial, residential, and consumer loans and
receives deposits from customers located primarily in Gloucester County,
New Jersey, and surrounding areas. The Bank operates under a federal bank
charter and provides full banking services. The Company and the Bank are
subject to regulations by the Office of Thrift Supervision.
The consolidated financial statements of the Company include the accounts
of the Bank. All intercompany transactions have been eliminated in
consolidation.
The accounting principles followed by the Company and the methods of
applying these principles conform to U.S. generally accepted accounting
principles and to general practice within the banking industry. In
preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the balance sheet date and related revenues and
expenses for the period. Actual results could differ significantly from
those estimates.
Investment and Mortgage-Backed Securities
-----------------------------------------
Investment and mortgage-backed securities are classified at the time of
purchase, based on management's intention and ability, as securities held
to maturity or securities available for sale. Debt securities, acquired
with the intent and ability to hold to maturity are stated at cost and
adjusted for amortization of premium and accretion of discount, which are
computed using a level yield method and are recognized as adjustments of
interest income over the period to maturity. Certain other debt and equity
securities have been classified as available for sale to serve principally
as a source of liquidity. Unrealized holding gains and losses for
available-for-sale securities are reported as a separate component of
stockholders' equity, net of tax, until realized. Realized securities gains
and losses are computed using the specific identification method. Interest
and dividends on investment securities are recognized as income when
earned.
Common stock of the Federal Home Loan Bank of New York ("FHLB") represents
ownership in an institution which is wholly owned by other financial
institutions. This equity security is accounted for at cost and classified
separately on the accompanying Consolidated Balance Sheet.
F-6
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Receivable
----------------
Loans receivable are stated at their unpaid principal amounts net of any
unearned income, deferred loan fees, and the allowance for loan losses.
Interest on consumer loans is credited to operations over the term of each
loan using the interest method. Interest on all other loans is recognized
as income when earned on the accrual method. Interest accrued on loans more
than 90 days delinquent is generally offset by a reserve for uncollected
interest and is not recognized as income.
The accrual of interest is generally discontinued when management has
serious doubts about further collectibility of principal or interest, even
though the loan may be currently performing. A loan may remain on accrual
status if it is in the process of collection and is either guaranteed or
well secured. When a loan is placed on nonaccrual status, unpaid interest
is charged against income. Interest received on nonaccrual loans is either
applied to principal or reported as interest income, according to
management's judgment as to the collectibility of principal.
Loan origination fees and certain direct loan origination costs are being
deferred and the net amount amortized as an adjustment of the related
loan's yield. The Company is amortizing these amounts over the contractual
life of the related loans using the interest method.
Allowance for Loan Losses
-------------------------
The allowance for loan losses is established through provisions for loan
losses charged against income. Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any,
are credited to the allowance.
The allowance for loan losses is maintained at a level by management which
represents the evaluation of known and inherent losses in the loan
portfolio at the consolidated balance sheet date. Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent losses in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of any underlying collateral, composition of the loan portfolio,
current economic conditions, and other relevant factors. This evaluation is
inherently subjective as it requires material estimates that may be
susceptible to significant change, including the amounts and timing of
future cash flows expected to be received on impaired loans.
The allowance consists of specific and general components. The specific
component related to loans that are classified as either doubtful,
substandard, or special mention. For such loans that are also classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower
than the carrying value of that loan. The general component covers
nonclassfied loans and is based on historical loss experience adjusted for
qualitative factors.
F-7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
-------------------------
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan-by-loan basis for commercial and construction loans by
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair
value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer and residential mortgage loans for impairment
disclosures.
Premises and Equipment
----------------------
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is principally computed on the straight-line method over the
estimated useful lives of the related assets, which range from 3 to 10
years for furniture and equipment and 25 to 50 years for building premises.
Expenditures for maintenance and repairs are charged against income as
incurred. Costs of major additions and improvements are capitalized.
Real Estate Owned
-----------------
Real estate owned acquired in settlement of foreclosed loans is carried at
the lower of cost or fair value minus estimated cost to sell. Valuation
allowances for estimated losses are provided when the carrying value
exceeds the fair value. Direct costs incurred on such properties are
recorded as expenses of current operations.
Income Taxes
------------
The Company and the Bank file separate federal income tax returns. Deferred
tax assets or liabilities are computed based on the difference between the
financial statement and income tax basis of assets and liabilities using
the enacted marginal tax rates. Deferred income tax expenses or benefits
are based on the changes in the deferred tax asset or liability from period
to period.
Bank-Owned Life Insurance
-------------------------
The Bank owns insurance on the lives of a certain group of key employees.
The policies were purchased to help offset the increase in the costs of
various fringe benefit plans including healthcare. The cash surrender value
of these policies is included as an asset on the Consolidated Balance
Sheet, and any increases in the cash surrender value is recorded as
noninterest income on the Consolidated Statement of Income. In the event of
the death of an insured individual under these policies, the Bank would
receive a death benefit, which would be recorded as noninterest income.
Defined Benefit Plan
--------------------
The Bank sponsors a trusteed, defined benefit pension plan covering all
eligible employees. The Bank's funding policy is to make annual
contributions, as needed, based upon the funding formula developed by the
plan's actuary.
F-8
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income (Loss)
---------------------------
The Company is required to present comprehensive income (loss) and its
components in a full set of general-purpose financial statements for all
periods presented. Other comprehensive income (loss) is composed
exclusively of unrealized holding gains and losses on the
available-for-sale securities portfolio. The Company has elected to report
the effects of other comprehensive income (loss) as part of the
Consolidated Statement of Changes in Stockholders' Equity.
Cash Flow Information
---------------------
Management has defined cash and cash equivalents as "Cash and due from
banks," "Interest-bearing deposits in other banks," and "Federal funds
sold." Cash payments for interest for the three months ended March 31, 2007
and 2006, and the years ended December 31, 2006, 2005, and 2004, were
$3,163,043, $1,646,771, $8,924,141, $5,822,984, and $5,161,446,
respectively. Cash payments for income taxes for the three months ended
March 31, 2006, and for the year ended December 31, 2006 and 2005, were
$20,000, $40,000, and $1,327,577, respectively. There were no cash payments
for income taxes in 2007 or 2004.
Reclassification of Comparative Amounts
---------------------------------------
Certain comparative account balances for the prior periods have been
reclassified to conform to the current period's classifications. Such
reclassifications did not affect retained earnings or net income.
Recent Accounting Pronouncements
--------------------------------
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("FAS") No. 123R,
Share-Based Payment, which replaces FAS No. 123, Accounting for Stock-Based
Compensation, and supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees. This statement requires that all share-based payments
to employees, including grants of employee stock options, be recognized as
compensation costs in the financial statements based on their fair values.
The impact of the adoption of this standard will be dependent on the nature
and extent of stock-based compensation granted in future periods.
In February 2006, the FASB issued FAS No. 155, Accounting for Certain
Hybrid Instruments, an amendment of FASB Statements No. 133 and 140. FAS
No. 155 allows financial instruments that have embedded derivatives to be
accounted for as a whole (eliminating the need to bifurcate the derivative
from its host) if the holder elects to account for the whole instrument on
a fair value basis. This statement is effective for all financial
instruments acquired or issued after the beginning of an entity's first
fiscal year that begins after September 15, 2006. The adoption of this
standard is not expected to have a material effect on the Company's results
of operations or financial position.
In March 2006, the FASB issued FAS No. 156, Accounting for Servicing of
Financial Assets. This statement, which is an amendment to FAS No. 140,
will simplify the accounting for servicing assets and liabilities, such as
those common with mortgage securitization activities. Specifically, FAS No.
156 addresses the recognition and measurement of separately recognized
servicing assets and liabilities and provides an approach to simplify
efforts to obtain hedge-like (offset) accounting. FAS No. 156 also
clarifies when an obligation to service financial assets should be
separately recognized as a servicing asset or a servicing liability;
requires that a separately recognized servicing asset or servicing
liability be initially measured at fair value, if practicable; and permits
an entity with a separately recognized servicing asset or servicing
liability to choose either of the amortization or fair value methods for
subsequent measurement. The provisions of FAS No. 156 are effective as of
the beginning of the first fiscal year that begins after September 15,
2006. The adoption of this standard is not expected to have a material
effect on the Company's results of operations or financial position.
F-9
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements,
which provides enhanced guidance for using fair value to measure assets and
liabilities. The standard applies whenever other standards require or
permit assets or liabilities to be measured at fair value. The standard
does not expand the use of fair value in any new circumstances. FAS No. 157
is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years.
Early adoption is permitted. The adoption of this standard is not expected
to have a material effect on the Company's results of operations or
financial position.
In September 2006, the FASB issued FAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of
FASB Statements No. 87, 88, 106 and 132(R). FAS No. 158 requires that a
company recognize the overfunded or underfunded status of its defined
benefit post retirement plans (other than multiemployer plans) as an asset
or liability in its statement of financial position and that it recognize
changes in the funded status in the year in which the changes occur through
other comprehensive income. FAS No. 158 also requires the measurement of
defined benefit plan assets and obligations as of the fiscal year-end, in
addition to footnote disclosures. On December 31, 2006, the Company adopted
FAS No. 158, except for the measurement provisions, which are effective for
fiscal years ending after December 15, 2008. The adoption of this standard
is not expected to have a material effect on the Company's results of
operations or financial position.
In February 2007, the FASB issued FAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115, which provides all entities with an option to report
selected financial assets and liabilities at fair value. The objective of
the FAS No. 159 is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in earnings caused by measuring
related assets and liabilities differently without having to apply the
complex provisions of hedge accounting. FAS No. 159 is effective as of the
beginning of an entity's first fiscal year beginning after November 15,
2007. Early adoption is permitted as of the beginning of a fiscal year that
begins on or before November 15, 2007, provided the entity also elects to
apply the provisions of FAS No. 157, Fair Value Measurements. The adoption
of this standard is not expected to have a material effect on the Company's
results of operations or financial position.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of
FAS No. 109, Accounting for Income Taxes, and it seeks to reduce the
diversity in practice associated with certain aspects of measurement and
recognition in accounting for income taxes. This interpretation clarifies
that management is expected to evaluate an income tax position taken or
expected to be taken for likelihood of realization before recording any
amounts for such position in the financial statement. FIN 48 also requires
expanded disclosure with respect to income tax positions taken that are not
certain to be realized. This interpretation is effective for fiscal years
beginning after December 15, 2006, and will require management to evaluate
every open tax position that exists in every jurisdiction on the date of
initial adoption. The Company is currently evaluating the impact the
adoption of the standard will have on the Company's results of operations.
In September 2006, the FASB reached consensus on the guidance provided by
Emerging Issues Task Force Issue 06-4 ("EITF 06-4"), Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements. The guidance is applicable to
endorsement split-dollar life insurance arrangements, whereby the employer
owns and controls the insurance policy, that are associated with a
postretirement benefit. EITF 06-4 requires that for a split-dollar life
insurance arrangement within the scope of the issue, an employer should
recognize a liability for future benefits in accordance with FAS No. 106
(if, in substance, a postretirement benefit plan exists) or Accounting
Principles Board Opinion No. 12 (if the arrangement is, in substance, an
individual deferred compensation contract) based on the substantive
agreement with the employee. EITF 06-4 is effective for fiscal years
beginning after December 15, 2007. The Company is currently evaluating the
impact the adoption of the standard will have on the Company's results of
operations or financial condition.
F-10
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In September 2006, the FASB reached consensus on the guidance provided by
Emerging Issues Task Force Issue 06-5 ("EITF 06-5"), Accounting for
Purchases of Life Insurance--Determining the Amount That Could Be Realized
in Accordance with FASB Technical Bulletin No. 85-4, Accounting for
Purchases of Life Insurance. EITF 06-5 states that a policyholder should
consider any additional amounts included in the contractual terms of the
insurance policy other than the cash surrender value in determining the
amount that could be realized under the insurance contract. EITF 06-5 also
states that a policyholder should determine the amount that could be
realized under the life insurance contract assuming the surrender of an
individual-life by individual-life policy (or certificate by certificate in
a group policy). EITF 06-5 is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact the
adoption of the standard will have on the Company's results of operations
or financial condition.
In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10
("EITF 06-10"), Accounting for Collateral Assignment Split-Dollar Life
Insurance Agreements. EITF 06-10 provides guidance for determining a
liability for the postretirement benefit obligation as well as recognition
and measurement of the associated asset on the basis of the terms of the
collateral assignment agreement. EITF 06-10 is effective for fiscal years
beginning after December 15, 2007. The Company is currently evaluating the
impact the adoption of the EITF will have on the Company's results of
operations or financial condition.
2. INVESTMENT SECURITIES
The amortized cost and fair values of investment securities available for
sale and held to maturity are summarized as follows:
March 31, 2007
------------------------------------------------------
(Unaudited)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
Available for Sale
U.S. government agency securities $11,414,953 $ 83,606 $ (12,976) $11,485,583
Equity securities 1,812,828 - (54,026) 1,758,802
----------- ----------- ----------- -----------
Total $13,227,781 $ 83,606 $ (67,002) $13,244,385
=========== =========== =========== ===========
Held to Maturity
U.S. government agency securities $45,696,572 $ 19,102 $ (225,934) $45,489,740
Corporate securities 1,024,678 - (19,261) 1,005,417
Obligations of state and
political subdivisions 7,101,756 9,040 - 7,110,796
----------- ----------- ----------- -----------
Total $53,823,006 $ 28,142 $ (245,195) $53,605,953
=========== =========== =========== ===========
F-11
2. INVESTMENT SECURITIES (Continued)
2006
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Available for Sale
U.S. government agency securities $ 12,404,579 $ 63,466 $ (33,860) $ 12,434,185
Equity securities 1,798,599 - (80,841) 1,717,758
------------ ------------ ------------ ------------
Total $ 14,203,178 $ 63,466 $ (114,701) $ 14,151,943
============ ============ ============ ============
Held to Maturity
U.S. government agency securities $ 32,066,989 $ 5,672 $ (229,778) $ 31,842,883
Corporate securities 1,028,378 - (26,896) 1,001,482
Obligations of state and
political subdivisions 5,549,867 9,847 - 5,559,714
------------ ------------ ------------ ------------
Total $ 38,645,234 $ 15,519 $ (256,674) $ 38,404,079
============ ============ ============ ============
2005
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Available for Sale
Equity securities $ 1,746,053 $ - $ (17,000) $ 1,729,053
============ ============ ============ ============
Held to Maturity
U.S. government agency securities $ 35,350,766 $ 776 $ (607,118) $ 34,744,424
Corporate securities 3,059,088 4,841 (35,141) 3,028,788
Obligations of state and
political subdivisions 1,176,308 6,248 -- 1,182,556
------------ ------------ ------------ ------------
Total $ 39,586,162 $ 11,865 $ (642,259) $ 38,955,768
============ ============ ============ ============
As of March 31, 2007 and December 31, 2006, the amortized cost and fair value of
investments in debt securities, by contractual maturity, are shown below.
March 31, 2007 Available for Sale Held to Maturity
- --------------------------------------- -------------------------- ------------------------
(Unaudited) Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
Due within one year $ - $ - $ 6,071,060 $ 6,071,181
Due after one year through five years - - 17,243,995 17,161,862
Due after five years through ten years 1,500,000 1,499,851 2,979,161 2,987,064
Due after ten years 9,914,953 9,985,732 27,528,790 27,385,846
----------- ----------- ----------- -----------
Total $11,414,953 $11,485,583 $53,823,006 $53,605,953
=========== =========== =========== ===========
F-12
2. INVESTMENT SECURITIES (Continued)
December 31, 2006 Available for Sale Held to Maturity
- --------------------------------------- -------------------------- ------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
Due within one year $ - $ - $ 4,519,094 $ 4,519,317
Due after one year through five years - - 19,241,392 19,075,194
Due after five years through ten years 3,500,000 3,503,768 7,978,651 7,952,188
Due after ten years 8,904,579 8,930,417 6,906,097 6,857,380
---------- ---------- ---------- ----------
Total $12,404,579 $12,434,185 $38,645,234 $38,404,079
========== ========== ========== ==========
At March 31, 2007, December 31, 2006, and 2005, the carrying value of
securities pledged to secure public funds totaled $1,546,440, $1,682,677,
and $2,160,459, respectively.
As of December 31, 2006, proceeds from the sale of investment securities of
$3,969,812 resulted in the recognition of a loss of $30,145. These
securities were sold within three months of maturity. There were no
investment sales during 2005. As of December 31, 2004, proceeds from a
called investment security of $1,291,763 resulted in the recognition of a
gain of $22,788.
3. MORTGAGE-BACKED SECURITIES
The amortized cost and fair value of mortgage-backed securities available
for sale and held to maturity are summarized as follows:
March 31, 2007
------------------------------------------------------
(Unaudited)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
Available for Sale
Government National
Mortgage Association $ 178,138 $ 1,723 $ - $ 179,861
=========== =========== =========== ===========
Held to Maturity
Government National
Mortgage Association $ 3,974,942 $ 21,790 $ (18,916) $ 3,977,816
Freddie Mac 10,119,784 29,878 (68,450) 10,081,212
Fannie Mae 17,621,827 69,956 (361,496) 17,330,287
Collateralized mortgage obligations 32,300,441 64,538 (486,135) 31,878,844
----------- ----------- ----------- -----------
Total $64,016,994 $ 186,162 $ (934,997) $63,268,159
=========== =========== =========== ===========
F-13
3. MORTGAGE-BACKED SECURITIES (Continued)
2006
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
Available for Sale
Government National
Mortgage Association $ 198,288 $ 1,771 $ - $ 200,059
=========== =========== =========== ===========
Held to Maturity
Government National
Mortgage Association $ 4,488,561 $ 15,594 $ (22,913) $ 4,481,242
Freddie Mac 3,350,639 5,425 (42,324) 3,313,740
Fannie Mae 16,792,592 33,732 (417,578) 16,408,746
Collateralized mortgage obligations 34,352,741 25,635 (579,133) 33,799,243
----------- ----------- ----------- -----------
Total $58,984,533 $ 80,386 $(1,061,948) $58,002,971
=========== =========== =========== ===========
2005
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
Available for Sale
Government National
Mortgage Association $ 323,101 $ 1,213 $ - $ 324,314
=========== =========== =========== ===========
Held to Maturity
Government National
Mortgage Association $ 7,266,072 $ 14,598 $ (59,612) $ 7,221,058
Freddie Mac 2,982,953 2,609 (67,470) 2,918,092
Fannie Mae 18,809,993 20,897 (398,665) 18,432,225
Collateralized mortgage obligations 24,649,087 31,133 (479,920) 24,200,300
----------- ----------- ----------- -----------
Total $53,708,105 $ 69,237 $(1,005,667) $52,771,675
=========== =========== =========== ===========
The collateralized mortgage obligations contain both fixed and
adjustable-rate classes of securities which are repaid in accordance with a
predetermined priority. These mortgage-related securities relate primarily
to securities issued by Fannie Mae, Freddie Mac, and private institutions.
As of March 31, 2007 and December 31, 2006, the amortized cost and fair
value of mortgage-backed securities, by contractual maturity, are shown
below. Mortgage-backed securities provide for periodic payments of
principal and interest and have contractual lives ranging from 2 to 30
years. Due to expected repayment terms being significantly less than the
underlying mortgage loan pool contractual maturities, the estimated lives
of these securities could be significantly shorter.
March 31, 2007 Available for Sale Held to Maturity
- ----------------------------- ------------------------- -------------------------
(Unaudited)
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
Due within one year $ - $ - $ 309,164 $ 297,735
Due after one year through
five years - - 6,275,545 6,041,739
Due after five years through
ten years - - 4,366,135 4,270,439
----------- ----------- ----------- -----------
Due after ten years 178,138 179,861 53,066,150 52,658,246
----------- ----------- ----------- -----------
Total $ 178,138 $ 179,861 $64,016,994 $63,268,159
=========== =========== =========== ===========
F-14
3. MORTGAGE-BACKED SECURITIES (Continued)
December 31, 2006 Available for Sale Held to Maturity
- ----------------------------- ------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
Due after one year through
five years $ - $ - $ 6,848,554 $ 6,579,264
Due after five years through
ten years - - 4,634,845 4,528,314
Due after ten years 198,288 200,059 47,501,134 46,895,393
----------- ----------- ----------- -----------
Total $ 198,288 $ 200,059 $58,984,533 $58,002,971
=========== =========== =========== ===========
4. UNREALIZED LOSSES ON SECURITIES
The following table shows the Company's fair value and gross unrealized
losses, aggregated by investment category and length of time that the
individual securities have been in a continuous unrealized loss position,
at March 31, 2007 and December 31, 2006 and 2005.
March 31, 2007
--------------------------------------------------------------------------------------------
Less than Twelve Months Twelve Months or Greate Total
---------------------------- ---------------------------- ----------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------ ------------ ------------ ------------ ------------ ------------
(Unaudited)
U.S. government agency
securities $ 16,023,315 $ (91,285) $ 26,167,723 $ (147,625) $ 42,191,038 $ (238,910)
Corporate securities - - 1,005,416 (19,261) 1,005,416 (19,261)
Government National
Mortgage Association - - 1,910,655 (18,916) 1,910,655 (18,916)
Freddie Mac 3,250,721 (29,654) 1,824,904 (38,796) 5,075,625 (68,450)
Fannie Mae - - 12,147,637 (361,496) 12,147,637 (361,496)
Collateralized mortgage
obligations 2,968,914 (20,029) 19,732,559 (466,106) 22,701,473 (486,135)
------------ ------------ ------------ ------------ ------------ ------------
Total debt securities 22,242,950 (140,968) 62,788,894 (1,052,200) 85,031,844 (1,193,168)
Equity securities - - 1,758,803 (1,479) 1,758,803 (1,479)
------------ ------------ ------------ ------------ ------------ ------------
$ 22,242,950 $ (140,968) $ 64,547,697 $ (1,053,679) $ 86,790,647 $ (1,194,647)
============ ============ ============ ============ ============ ============
2006
--------------------------------------------------------------------------------------------
Less than Twelve Months Twelve Months or Greater Total
---------------------------- ---------------------------- ----------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------ ------------ ------------ ------------ ------------ ------------
U.S. government agency
securities $ 15,702,902 $ (82,162) $ 18,617,933 $ (181,476) $ 34,320,835 $ (263,638)
Corporate securities - - 1,001,483 (26,896) 1,001,483 (26,896)
Government National
Mortgage Association 373,717 (1,486) 2,153,967 (21,427) 2,527,684 (22,913)
Freddie Mac - - 1,593,564 (42,324) 1,593,564 (42,324)
Fannie Mae 276,353 (2,127) 12,679,336 (415,451) 12,955,689 (417,578)
Collateralized mortgage
obligations 10,042,798 (29,669) 18,512,258 (549,464) 28,555,056 (579,133)
------------ ------------ ------------ ------------ ------------ ------------
Total debt securities 26,395,770 (115,444) 54,558,541 (1,237,038) 80,954,311 (1,352,482)
Equity securities - - 1,717,758 (80,841) 1,717,758 (80,841)
------------ ------------ ------------ ------------ ------------ ------------
$ 26,395,770 $ (115,444) $ 56,276,299 $ (1,317,879) $ 82,672,069 $ (1,433,323)
============ ============ ============ ============ ============ ============
F-15
4. REALIZED LOSSES ON SECURITIES (Continued)
2005
--------------------------------------------------------------------------------------------
Less than Twelve Months Twelve Months or Greater Total
---------------------------- ---------------------------- ----------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------ ------------ ------------ ------------ ------------ ------------
U.S. government agency
securities $ 24,013,919 $ (351,499) $ 9,730,349 $ (255,619) $ 33,744,268 $ (607,118)
Corporate securities 1,000,666 (29) 1,008,121 (35,112) 2,008,787 (35,141)
Government National
Mortgage Association 1,150,717 (1,462) 3,491,265 (58,150) 4,641,982 (59,612)
Freddie Mac 717,024 (6,238) 2,015,443 (61,232) 2,732,467 (67,470)
Fannie Mae 10,741,656 (242,500) 5,245,759 (156,165) 15,987,415 (398,665)
Collateralized mortgage
obligations 10,941,672 (180,309) 12,160,252 (299,611) 23,101,924 (479,920)
------------ ------------ ------------ ------------ ------------ ------------
Total debt securities 48,565,654 (782,037) 33,651,189 (865,889) 82,216,843 (1,647,926)
Equity securities - - 483,000 (17,000) 483,000 (17,000)
------------ ------------ ------------ ------------ ------------ ------------
$ 48,565,654 $ (782,037) $ 34,134,189 $ (882,889) $ 82,699,843 $ (1,664,926)
============ ============ ============ ============ ============ ============
The policy of the Company is to recognize an other-than-temporary
impairment of equity securities where the fair value has been significantly
below cost for three consecutive quarters. For fixed maturity investments
with unrealized losses due to interest rates where the Company has the
positive intent and ability to hold the investment for a period of time
sufficient to allow a market recovery, declines in value below cost are not
assumed to be other than temporary. There are 102 and 100 positions that
are temporarily impaired at March 31, 2007 and December 31, 2006. The
Company reviews its position quarterly and has asserted that at March 31,
2007 and December 31, 2006, the declines outlined in the above table
represent temporary declines and the Company does have the intent and
ability either to hold those securities to maturity or to allow a market
recovery.
The Company has concluded that any impairment of its investment securities
portfolio is not other than temporary but is the result of interest rate
changes that are not expected to result in the noncollection of principal
and interest during the period.
F-16
5. LOANS RECEIVABLE
Loans receivable consist of the following:
March 31, December 31,
2007 2006 2005
------------- ------------- -------------
Real estate loans: (Unaudited)
1 - 4 family $ 103,624,068 $ 102,754,981 $ 74,115,053
Home equity 58,595,461 59,327,434 49,656,695
Commercial 14,716,960 14,472,039 13,889,193
Construction 942,200 710,700 1,666,900
------------- ------------- -------------
177,878,689 177,265,154 139,327,841
Commercial 4,945,018 4,561,481 6,022,416
Consumer and other loans
Auto loans 18,656,163 21,135,672 33,591,356
Manufactured housing loans 7,821,848 7,512,182 5,422,063
Savings account loans 1,393,562 1,093,176 1,079,574
Other 3,308,804 2,154,123 1,203,032
------------- ------------- -------------
31,180,377 31,895,153 41,296,025
------------- ------------- -------------
Less:
Deferred loan costs (175,968) (164,153) (154,968)
Unearned income 1,321,939 1,580,666 2,849,892
Allowance for loan losses 1,822,637 1,813,469 3,035,676
------------- ------------- -------------
2,968,608 3,229,982 5,730,600
------------- ------------- -------------
Total $ 211,035,476 $ 210,491,806 $ 180,915,682
============= ============= =============
The Company's primary activity is with customers located within Gloucester
County and surrounding areas. Commercial, residential, and personal loans
are granted. Although the Company has a diversified loan portfolio at March
31, 2007, and December 31, 2006 and 2005, repayment of these loans is
dependent upon the local economic conditions in its immediate trade area.
Activity in the allowance for loan losses is as follows:
Three Months Ended March 31, Years Ended December 31,
2007 2006 2006 2005 2004
----------- ----------- ----------- ----------- -----------
(Unaudited)
Balance, January 1 $ 1,813,469 $ 3,035,676 $ 3,035,676 $ 3,962,656 $ 3,861,946
Loans charged off (10,436) (334,560) (988,259) (76,832) (418,797)
Recoveries 19,604 1,585 114,496 66,547 532,273
----------- ----------- ----------- ----------- -----------
Net loans charged off 9,168 (332,975) (873,763) (10,285) 113,476
Recovery of loan losses - (199,640) (348,444) (916,695) (12,766)
----------- ----------- ----------- ----------- -----------
Total $ 1,822,637 $ 2,503,061 $ 1,813,469 $ 3,035,676 $ 3,962,656
=========== =========== =========== =========== ===========
The Company had nonaccrual loans, inclusive of impaired loans, of
$1,915,937, $3,806,606, $2,313,789, $3,370,443, and $1,487,893 at March 31,
2007 and 2006, and December 31, 2006, 2005, and 2004, respectively.
Interest income on loans would have increased by $36,651, $57,968,
$116,810, $140,779, and $125,218 during the three months ended March 31,
2007 and 2006, and the years ended December 31, 2006, 2005, and 2004,
respectively, if these loans had performed in accordance with their
original terms.
F-17
5. LOANS RECEIVABLE
Information with respect to impaired loans as of and for the periods ended
is as follows:
Three Months Ended March 31, Years Ended December 31,
2007 2006 2006 2005 2004
---------- ---------- ---------- ---------- ----------
(Unaudited)
Impaired loans with a related
allowance for loan losses $1,847,940 $3,503,346 $2,125,398 $3,148,515 $ 855,687
Impaired loans without a related
allowance for loan losses - - - - -
---------- ---------- ---------- ---------- ----------
Related allowance for loan losses 518,463 1,089,760 561,767 1,138,231 125,673
Average recorded balance of impaired loans 2,157,642 1,819,335 2,449,032 1,852,937 1,301,632
Interest income recognized on impaired loans 32,026 41,156 62,397 3,277 19,389
In the normal course of business, loans are extended to directors,
executive officers, and their associates. A summary of loan activity for
those directors, executive officers, and their associates with aggregate
balances of $120,000 or more for the periods ended is as follows:
(Unaudited)
------------------------------------
2005 Additions Repayments 2006 Additions Repayments 2007
- ----------- ----------- ---------- ----------- ---------- ---------- ----------
$ 581,539 $ 146,526 $ 77,632 $ 650,435 $ - $ 8,590 $ 641,845
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
March 31, December 31,
2007 2006 2005
------------ ------------ ------------
(Unaudited)
Investment securities $ 820,202 $ 714,889 $ 343,283
Mortgage-backed securities 278,347 234,134 204,432
Loans receivable 788,585 784,548 559,139
------------ ------------ ------------
Total $ 1,887,134 $ 1,733,571 $ 1,106,854
============ ============ ============
7. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
March 31, December 31,
2007 2006 2005
------------ ------------ ------------
(Unaudited)
Land and improvements $ 762,703 $ 762,703 $ 770,627
Buildings and improvements 6,950,126 6,897,076 6,871,116
Furniture and equipment 2,932,778 2,891,096 2,842,409
Construction in progress 149,708 134,354 30,036
Automobiles 46,395 46,395 35,000
------------ ------------ ------------
10,841,710 10,731,624 10,549,188
Less accumulated depreciation (4,375,976) (4,262,691) (3,999,302)
------------ ------------ ------------
Total $ 6,465,734 $ 6,468,933 $ 6,549,886
============ ============ ============
Depreciation expense for the three months ended March 31, 2007 and 2006,
and the years ended December 31, 2006, 2005, and 2004, was $113,286,
$119,679, $457,255, $508,915, and $502,102, respectively.
F-18
8. FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the FHLB system. As a member, the Bank maintains an
investment in the capital stock of the FHLB, at cost, in an amount not less
than the greater of 1 percent of its outstanding home loans or 5 percent of
its outstanding notes payable to the FHLB as calculated at December 31 of
each year.
9. DEPOSITS
Comparative details of deposits are as follows:
March 31, 2007 December 31, 2006 December 31, 2005
----------------------- ---------------------- ---------------------
Amount % Amount % Amount %
------------ ----- ------------ ----- ------------ -----
(Unaudited)
Non-interest-bearing $ 10,262,547 3.2% $ 9,532,029 3.0% $ 12,123,517 4.4%
------------ ----- ------------ ----- ------------ -----
Interest-bearing:
Savings 66,400,573 20.8 63,761,165 20.2 62,551,038 22.5
NOW checking 32,707,544 10.2 35,926,129 11.4 34,560,371 12.5
Money market 49,130,000 15.4 44,636,577 14.1 24,661,590 8.9
------------ ----- ------------ ----- ------------ -----
148,238,117 46.4 144,323,871 45.7 121,772,999 43.9
------------ ----- ------------ ----- ------------ -----
Time certificates of deposit:
2.00% or less - 3,327,749 1.2
- - -
2.01 - 4.00% 28,148,627 8.8 29,261,168 9.3 83,200,209 30.0
4.01 - 6.00% 132,389,226 41.4 131,207,362 41.5 55,560,420 20.0
6.01 - 8.00% 959,150 0.2 1,637,997 0.5 1,559,323 0.5
------------ ----- ------------ ----- ------------ -----
161,497,003 50.4 162,106,527 51.3 143,647,701 51.7
------------ ----- ------------ ----- ------------ -----
Total $319,997,667 100.0% $315,962,427 100.0% $277,544,217 100.0%
============ ===== ============ ===== ============ =====
The scheduled maturities of time certificates of deposits at March 31, 2007
and December 31, 2006, are as follows:
Period Ending
March 31,
--------------------------------------------
(Unaudited)
2008 $110,002,109
2009 18,835,405
2010 9,829,904
2011 12,672,694
2012 4,068,252
Thereafter 6,088,639
------------
Total $161,497,003
============
Year Ending
December 31,
--------------------------------------------
2007 $113,516,368
2008 16,089,264
2009 6,943,370
2010 11,588,833
2011 6,538,663
Thereafter 7,430,029
------------
Total $162,106,527
============
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was $55,222,292, $55,010,327 and $47,379,397 at March 31, 2007,
December 31, 2006, and 2005, respectively. Deposits in excess of $100,000
are not federally insured.
F-19
9. DEPOSITS (Continued)
Maturities on time deposits of $100,000 or more at March 31, 2007, and
December 31, 2006 are as follows:
March 31, 2007 December 31, 2006
-------------- -----------------
(Unaudited)
Within three months $20,058,849 $18,344,635
Beyond three but within six months 9,479,737 14,714,662
Beyond six but within twelve months 10,764,632 10,329,691
Beyond one year 14,919,074 11,621,339
----------- -----------
Total $55,222,292 $55,010,327
=========== ===========
Interest expense by deposit category is as follows:
Three Months Ended March 31, Years Ended December 31,
2007 2006 2006 2005 2004
---------- ---------- ---------- ---------- ----------
(Unaudited)
Savings $ 405,400 $ 148,310 $ 587,347 $ 680,234 $ 733,973
NOW and money market 573,835 255,044 1,714,798 642,697 494,708
Time certificates of deposit 1,850,741 1,357,073 6,386,367 4,540,497 3,974,986
---------- ---------- ---------- ---------- ----------
$2,829,976 $1,760,427 $8,688,512 $5,863,428 $5,203,667
========== ========== ========== ========== ==========
10. SHORT-TERM BORROWINGS
Short-term borrowings include overnight repurchase agreements through the
FHLB. The outstanding balances and related information for short-term
borrowings are summarized as follows:
Three Months Ended
March 31, Years Ended December 31,
2007 2006 2006 2005 2004
----------- ---------- ----------- --------- ------------
(Unaudited)
Balance at period-end $21,000,000 $6,900,000 $ 4,400,000 $ $ -
-
Average balance outstanding 9,556,667 2,226,667 12,859,178 196,986 -
Maximum month-end balance 21,000,000 6,900,000 24,100,000 -
-
Weighted-average rate at period-end 5.42% 4.72% 5.33% -
-
Weighted-average rate during the period 5.49% 5.17% 5.36% 4.03% -
The Bank has a credit arrangement with the FHLB with a total available
borrowing limit of approximately $102.8 and $101.5 million at March 31,
2007, and December 31, 2006. This credit arrangement is subject to annual
renewal, incurs no service charges, and is secured by the Bank's FHLB
stock, mortgage-backed securities, and qualifying first-mortgage loans.
F-20
11. INCOME TAXES
The components of the income tax expense are summarized as follows:
Three Months Ended March 31, Years Ended December 31,
2007 2006 2006 2005 2004
--------- --------- --------- --------- ---------
(Unaudited)
Current:
Federal $(201,372) $ 30,972 $(239,257) $ 381,976 $ 481,230
State 15,000 25,316 - 169,549 13,793
--------- --------- --------- --------- ---------
(186,372) 56,288 (239,257) 551,525 495,023
Deferred 26,760 60,329 271,784 417,152 99,981
Valuation allowance 34,612 - 57,473 (76,080) (336,434)
--------- --------- --------- --------- ---------
Total $(125,000) $ 116,617 $ 90,000 $ 892,597 $ 258,570
========= ========= ========= ========= =========
The following temporary differences gave rise to the net deferred tax
assets:
Three Months
Ended Years Ended December 31,
March 31, 2007 2006 2005
---------- ---------- ----------
(Unaudited)
Deferred tax assets:
Allowance for loan losses $ 718,207 $ 873,255 $1,170,062
Net operating loss carryforward 429,688 310,586 253,113
Net unrealized loss on securities - 16,818 5,367
Other 361,041 351,855 403,905
---------- ---------- ----------
Total gross deferred tax assets 1,508,936 1,552,514 1,832,447
Less valuation allowance 345,198 310,586 253,113
---------- ---------- ----------
Deferred tax assets after valuation allowance 1,163,738 1,241,928 1,579,334
---------- ---------- ----------
Deferred tax liabilities:
Premises and equipment 40,839 40,839 60,439
Net unrealized gain on securities 6,231
---------- ---------- ----------
Total gross deferred tax liabilities 47,070 40,839 60,439
---------- ---------- ----------
Net deferred tax assets $1,116,668 $1,201,089 $1,518,895
========== ========== ==========
At December 31, 2006, the Company has an available net operating loss
carryforward of $3,450,951 for state tax purposes that will begin to expire
in 2013. For the periods ended, a valuation allowance has been established
for 100 percent of the state net operating loss carryforwards that
management believes may not be realizable.
The reconciliation of the federal statutory rate and the Company's
effective income tax rate is as follows:
Three Months Ended March 31,
2007 2006
--------------------- -------------------------
% of % of
Pretax Pretax
Amount Income Amount Income
--------- -------- ---------- --------
(Unaudited)
Tax expense (benefit) at statutory rate $(110,415) (34.0)% $ 115,154 34.0%
State income tax, net of
federal tax 9,900 3.0 16,709 4.9
Effect of tax free income (43,233) (13.3) (24,864) (7.3)
Other, net 18,748 5.8 9,618 2.8
--------- ----- ------------ ----
Actual tax expense (benefit)
and effective rate $(125,000) (38.5)% $ 116,617 34.4%
========= ===== ============ ====
F-21
11. INCOME TAXES (Continued)
Years Ended December 31,
2006 2005 2004
----------------------- ----------------------- ---------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
--------- -------- ---------- -------- -------- --------
Tax expense at statutory rate $ 159,621 34.0% $855,166 34.0% $ 648,993 34.0 %
State income tax, net of
federal tax 46,200 9.8 111,902 4.4 9,103 0.5
Effect of tax free income (126,909) (27.0) (95,621) (3.8) (79,412) (4.2)
Valuation allowance - - - - (273,118) (14.3)
Other, net 11,088 2.4 21,150 0.9 (46,996) (2.5)
--------- ---- -------- ---- --------- ----
Actual tax expense
and effective rate $ 90,000 19.2% $892,597 35.5% $ 258,570 13.5 %
========= ==== ======== ==== ========= ====
12. REGULATORY MATTERS
Cash and Due from Banks
-----------------------
The Bank is required to maintain reserve funds in cash or on deposit with
the Federal Reserve Bank. As of March 31, 2007, December 31, 2006, and
2005, the Bank had required reserves of $3,429,000, $1,129,000, and
$994,000, respectively, composed principally of vault cash and a depository
amount held with the Federal Reserve Bank.
13. EMPLOYEE BENEFITS
Defined Benefit Plan
--------------------
The Bank sponsors a trusteed, defined benefit pension plan covering
substantially all employees and officers. The plan calls for benefits to be
paid to eligible employees at retirement based primarily upon years of
service with the Bank and compensation rates near retirement. The Bank's
funding policy is to make annual contributions as needed based upon the
funding formula developed by the plan's actuary. This plan is considered a
multi-employer plan for which the Bank makes contributions, when necessary,
to provide benefits to eligible employees upon their retirement. Pension
contributions to this plan amounted to $181,364, $204,473, $787,517,
$836,355, and $381,678 for the three months ended March 31, 2007 and 2006,
and the years ended December 31, 2006, 2005, and 2004, respectively.
Defined Contribution Plan
-------------------------
The Bank sponsors a thrift plan with a 401(k) option. The Bank matches up
to 6 percent of each eligible employee's contribution to the plan.
Employees are eligible after one year of service. Employer contributions to
this plan amounted to $14,160, $10,847, $50,121, $44,334, and $41,808 for
the three months ended March 31, 2007 and 2006, and the years ended
December 31, 2006, 2005, and 2004, respectively.
Supplemental Retirement Plans
-----------------------------
The Bank maintains a Director Fee Continuation Agreement ("Director Plan")
to provide benefits to eligible directors. The Director Plan provides
benefits to eligible directors upon their retirement from the Board and a
preretirement death benefit. Each eligible director will receive an annual
benefit equal to fifty percent of the average of the three highest
Director's total compensation prior to the Director's retirement for a
period of ten years.
F-22
13. EMPLOYEE BENEFITS (Continued)
The following table sets forth the change in plan assets and benefit
obligation at March 31 and December 31:
Director Plan Director Plan
---------------------------- ------------------------
Three Months Ended March 31, Years Ended December 31,
---------------------------- ------------------------
2007 2006 2006 2005
--------- --------- --------- ---------
(Unaudited)
Change in benefit obligation:
Benefit obligation at beginning of year $ 673,561 $ 700,146 $ 700,146 $ 659,734
Service cost 8,010 8,979 35,916 43,086
Interest cost 9,495 14,685 58,739 52,722
Benefits paid (15,450) (25,558) (121,240) (55,396)
--------- --------- --------- ---------
Benefit obligation at end of period 675,616 698,252 673,561 700,146
Fair value of plan assets at end of period - - - -
--------- --------- --------- ---------
Funded status $(675,616) $(698,252) $(673,561) $(700,146)
========= ========= ========= =========
Components of Net Periodic Benefit Cost
---------------------------------------
Director Plan Director Plan
---------------------------- ------------------------------------
Three Months Ended March 31, Years Ended December 31,
---------------------------- ------------------------------------
2007 2006 2006 2005 2004
--------- --------- --------- --------- ----------
(Unaudited)
Net periodic benefit cost:
Service cost $ 8,010 $ 8,979 $35,916 $43,086 $ 102,886
Interest cost 9,495 14,685 58,739 52,722 38,775
------- -------- ------- ------- ---------
Net periodic benefit cost $17,505 $23,664 $94,655 $95,808 $ 141,661
======= ======== ======= ======= =========
The discount rate used to determine benefit obligations for the Director
Plan at the measurement dates was 7.50 percent for each of the periods
ended March 31, 2007 and 2006, and December 31, 2006, 2005, and 2004.
At December 31, 2006, the projected benefit payments for the Plans are as
follows:
Director
Plan
---------
2007 $ 54,017
2008 54,017
2009 54,017
2010 54,017
2011 54,017
2012 - 2016 139,879
--------
Total $409,964
========
The Bank also maintains an Executive Incentive Retirement Plan Agreement
("Executive Plan") with executives of the Bank. The Executive Plan provides
the executives with supplemental retirement benefits based upon current
salary and percentage award and a preretirement death benefit. The award
covered under the agreement shall be paid to the executive for the
executive's services as determined at the sole discretion of the Board of
Directors, based upon net income. The executives shall be vested in each
award individually at a rate of twenty percent per full year of employment
with the Bank from the date of each such award. The executives are 100
percent vested after obtaining age 65. Payments to the executives will be
in either equal annual installments for fifteen years or in a lump sum. The
costs recognized by the Bank were $11,558, $8,191, $32,764, $43,551, and
$14,220, for the three months ended March 31, 2007 and 2006, and for the
years ended December 31, 2006, 2005, and 2004, respectively.
The Bank is the beneficiary of life insurance policies with a cash
surrender value at March 31, 2007, and December 31, 2006, of $7,532,530 and
$7,462,020, respectively, that have been purchased as a method of financing
benefits under these Plans.
F-23
14. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
-----------
In the normal course of business, the Bank makes various commitments which
are not reflected in the accompanying consolidated financial statements.
These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the Consolidated
Balance Sheet. The Bank's exposure to credit loss in the event of
nonperformance by the other parties to the financial instruments is
represented by the contractual amounts as disclosed. The Bank minimizes its
exposure to credit loss under these commitments by subjecting them to
credit approval and review procedures and collateral requirements as deemed
necessary. Commitments generally have fixed expiration dates within one
year of their origination.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Performance
letters of credit represent conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. These instruments
are issued primarily to support bid or performance-related contracts. The
coverage period for these instruments is typically a one-year period with
an annual renewal option subject to prior approval by management. Fees
earned from the issuance of these letters are recognized over the coverage
period. For secured letters of credit, the collateral is typically Bank
deposit instruments or customer business assets.
The off-balance sheet commitments consisted of the following:
2007 2006 2005
---------- ---------- ----------
(Unaudited)
Commitment to extend credit $8,547,196 $7,011,038 $9,284,878
Standby letters of credit 1,105,909 1,205,909 401,325
Commitments to extend credit consist of fixed-rate commitments with
interest rates ranging from 5.375 to 6.50 at March 31, 2007, and 5.375
percent to 6.75 percent at December 31, 2006. The commitments outstanding
at March 31, 2007 and December 31, 2006, contractually mature in less than
one year.
Contingent Liabilities
----------------------
In 2003, three lawsuits were filed by the Bank against a land developer for
damages resulting from unpaid commercial loans and two foreclosure actions.
The contractor has filed counterclaims in all instances. In addition, one
lawsuit includes as defendants all contract purchasers of lots in a
development who may claim vendees' liens for deposits given to the
developer. Numerous contract purchasers have or will file answers to the
foreclosure action, including counterclaims against the Bank for
compensatory damages representing monies paid by the contract purchasers to
the land developer. The counterclaims are premised upon alleged improper
allocation of loan payments by the Bank and the alleged failure of the Bank
to maintain deposits in escrow accounts. The contractor is seeking
compensatory and punitive damages in an unspecified amount, as well as to
invalidate the Bank's liens on the subject property. All pending Law
Division matters in New Jersey State Court have been stayed due to the land
developer's filing in bankruptcy court. At this time, outside counsel for
the Bank cannot offer an opinion as to the probable outcome. The Bank
believes the suit is without merit and is vigorously defending its
position.
In the normal course of business, the Company and its subsidiaries are
involved in various legal proceedings primarily involving the collection of
outstanding loans. None of these proceedings are expected to have a
material effect on the financial position or results of operations of the
Company.
F-24
15. REGULATORY CAPITAL REQUIREMENTS
Federal regulations require the Bank to maintain certain minimum amounts of
capital. Specifically, the Bank is required to maintain certain minimum
dollar amounts and ratios of Total and Tier I capital to risk-weighted
assets and of Tier I capital to average total assets.
In addition to the capital requirements, the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") established five capital categories
ranging from "well capitalized" to "critically undercapitalized." Should
any institution fail to meet the requirements to be considered "adequately
capitalized," it would become subject to a series of increasingly
restrictive regulatory actions. Management believes as of March 31, 2007
and December 31, 2006, the Bank met all capital adequacy requirements to
which they are subject.
As of March 31, 2007, and December 31, 2006, and 2005, the OTS categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be classified as a well capitalized financial
institution, Total risk-based, Tier 1 risk-based, core capital, and
tangible equity capital ratios must be at least 10 percent, 6 percent, 5
percent, and 1.5 percent, respectively. There have been no conditions or
events since the notification that management believes have changed the
Bank's category.
The following table reconciles capital under U.S. generally accepted
accounting principles.
March 31, December 31,
2007 2006 2005
------------ ------------ ------------
(Unaudited)
Total stockholders' equity $ 28,472,251 $ 28,635,072 $ 28,280,488
Other disallowed assets (1,089,000) (1,167,044) (918,679)
Nonqualifying equity instruments (1,000) (1,000) (1,000)
Accumulated other comprehensive (income) loss (47,753) (20,709) 10,419
------------ ------------ ------------
Tier I, core, and tangible capital 27,334,498 27,446,319 27,371,228
Allowance for loan losses 1,304,600 1,750,068 2,311,533
Other assets required to be deducted (125,933) (126,717) (188,326)
------------ ------------ ------------
Total risk-based capital $ 28,513,165 $ 29,069,670 $ 29,494,435
============ ============ ============
F-25
15. REGULATORY CAPITAL REQUIREMENTS (Continued)
The following table reflects the Bank's capital ratios and minimum
requirements at March 31, 2007, and December 31, 2006 and 2005.
March 31, December 31,
------------------- -----------------------------------------------
2007 2006 2005
------------------- -------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Unaudited)
Total Capital
(to Risk-Weighted Assets)
- ---------------------------
Actual $28,513,165 13.8% $29,069,670 14.2% $29,494,435 16.1%
For Capital Adequacy Purposes 16,481,393 8.0 16,337,680 8.0 14,735,882 8.0
To Be Well Capitalized 20,601,741 10.0 20,422,110 10.0 18,419,853 10.0
Tier I Capital
(to Risk-Weighted Assets)
- ---------------------------
Actual $27,334,498 13.3% $27,446,319 13.4% $27,371,228 14.9%
For Capital Adequacy Purposes 8,240,696 4.0 8,168,840 4.0 7,367,941 4.0
To Be Well Capitalized 12,361,045 6.0 12,253,260 6.0 11,051,912 6.0
Core Capital
(to Adjusted Assets)
- ---------------------------
Actual $27,334,498 7.4% $27,446,319 7.8% $27,371,228 8.9%
For Capital Adequacy Purposes 11,127,547 3.0 10,520,036 3.0 9,215,572 3.0
To Be Well Capitalized 18,545,912 5.0 17,533,393 5.0 15,359,287 5.0
Tangible Capital
(to Adjusted Assets)
- ---------------------------
Actual $27,334,498 7.4% $27,446,319 7.8% $27,371,228 8.9%
For Capital Adequacy Purposes 5,563,773 1.5 5,260,018 1.5 4,607,786 1.5
To Be Well Capitalized N/A N/A N/A
Prior to the enactment of the Small Business Job Protection Act, the Bank
accumulated approximately $2,855,000 of retained earnings, which represents
allocations of income to bad debt deductions for tax purposes only. Since
this amount represents the accumulated bad debt reserves prior to 1988, no
provision for federal income tax has been made for such amount. If any
portion of this amount is used other than to absorb loan losses (which is
not anticipated), the amount will be subject to federal income tax at the
current corporate rate.
F-26
16. FAIR VALUE DISCLOSURE
The estimated fair values of the Company's financial instruments at March
31, 2007 and December 31, 2006 and 2005, are as follows:
March 31, December 31,
2007 2006 2005
--------------------------- ---------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
------------ ------------ ------------ ------------ ------------ ------------
(Unaudited)
Financial assets:
Cash and cash
equivalents $ 9,026,287 $ 9,026,287 $ 10,618,180 $ 10,618,180 $ 14,030,652 $ 14,030,652
Investment securities:
Available for sale 13,244,385 13,244,385 14,151,943 14,151,943 1,729,053 1,729,053
Held to maturity 53,823,006 53,605,953 38,645,234 38,404,079 39,586,162 38,955,768
Mortgage-backed securities:
Available for sale 179,861 179,861 200,059 200,059 324,314 324,314
Held to maturity 64,016,994 63,268,159 58,984,533 58,002,971 53,708,105 52,771,675
Loans receivable, net 211,035,476 208,994,804 210,491,806 205,707,806 180,915,682 178,929,682
Accrued interest receivable 1,887,134 1,887,134 1,733,571 1,733,571 1,106,854 1,106,854
FHLB stock 1,328,600 1,328,600 581,600 581,600 355,000 355,000
Bank-owned life insurance 7,532,530 7,532,530 7,462,020 7,462,020 7,205,131 7,205,131
Financial liabilities:
Deposits $319,997,667 $319,567,667 $315,962,427 $314,266,427 $277,544,217 $275,398,061
Short-term borrowings 21,000,000 21,000,000 4,400,000 4,400,000 - -
Advances by borrowers
for taxes and insurance 592,593 592,593 514,511 514,511 474,957 474,957
Accrued interest payable 368,917 368,917 573,526 573,526 120,463 120,463
Financial instruments are defined as cash, evidence of an ownership
interest in an entity, or a contract which creates an obligation or right
to receive or deliver cash or another financial instrument from/to a second
entity on potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could
be exchanged in a current transaction between willing parties other than in
a forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based
upon the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for
financial instruments are based upon manage-ment's judgment regarding
current economic conditions, interest rate risk, expected cash flows,
future estimated losses, and other factors as determined through various
option pricing formulas or simulation modeling. As many of these
assumptions result from judgments made by management based upon estimates
which are inherently uncertain, the resulting estimated fair values may not
be indicative of the amount realizable in the sale of a particular
financial instrument. In addition, changes in the assumptions on which the
estimated fair values are based may have a significant impact on the
resulting estimated fair values.
As certain assets, such as deferred tax assets and premises and equipment,
are not considered financial instruments, the estimated fair value of
financial instruments would not represent the full value of the Company.
The Company employed simulation modeling in determining the estimated fair
value of financial instruments for which quoted market prices were not
available based upon the following assumptions:
Cash and Cash Equivalents, Accrued Interest Receivable, FHLB Stock,
---------------------------------------------------------------------------
Short-Term Borrowings, Advances by Borrowers for Taxes and Insurance, and
---------------------------------------------------------------------------
Accrued Interest Payable
------------------------
The fair value is equal to the current carrying value.
F-27
16. FAIR VALUE DISCLOSURE (Continued)
Investment and Mortgage-Backed Securities
-----------------------------------------
The fair value of these securities is equal to the available quoted market
price. If no quoted market price is available, fair value is estimated
using the quoted market price for similar securities.
Loans Receivable, net and Deposits
----------------------------------
The fair value of loans is estimated by discounting the future cash flows
using a simulation model which estimates future cash flows based upon
current market rates adjusted for prepayment risk and credit quality.
Savings, checking, and money market deposit accounts are valued at the
amount payable on demand as of year-end. Fair values for time deposits are
estimated using a discounted cash flow calculation that applies contractual
costs currently being offered in the existing portfolio to current market
rates being offered for deposits of similar remaining maturities.
Bank-Owned Life Insurance
-------------------------
The fair value is equal to the cash surrender value of the life insurance
policies.
Commitments to Extend Credit
----------------------------
These financial instruments are generally not subject to sale, and
estimated fair values are not readily available. The carrying value,
represented by the net deferred fee arising from the unrecognized
commitment, and the fair value, determined by discounting the remaining
contractual fee over the term of the commitment using fees currently
charged to enter into similar agreements with similar credit risk, are not
considered material for disclosure. The contractual amounts of unfunded
commitments are presented in Note 14.
17. STOCK OFFERING
On January 29, 2007, the Board of Directors of the Company and the Bank
unanimously adopted a Plan of Stock Issuance (the "Plan") pursuant to which
the Company will offer shares of its common stock of up to but less than 50
percent of its total outstanding common stock to eligible depositors of the
Bank in a subscription offering and, if necessary, to the general public of
the community and/or in a syndicated offering. The majority of the common
stock will continue to be owned by the Company. The Plan is subject to the
approval of the Office of Thrift Supervision ("OTS").
The regulations of the OTS prohibit the Bank from declaring or paying a
cash dividend if the effect thereof would cause the Bank's regulatory
capital to be reduced below the federal regulatory capital requirement in
section 567.2 of the Rules and Regulations of the OTS.
Costs associated with the conversion will be deferred and deducted from the
proceeds of the stock offering. If, for any reason, the offering is not
successful, the deferred costs will be charged to operations. As of March
31, 2007, and December 31, 2006, there was approximately $211,453 and
$48,000, respectively, of costs incurred with the conversion.
F-28
18. PARENT COMPANY
Condensed financial information of Gateway Community Financial Corp. is as
follows:
CONDENSED BALANCE SHEET
March 31, December 31,
2007 2006 2005
----------- ----------- -----------
(Unaudited)
ASSETS
Cash and due from banks $ 268,786 $ 268,125 $ 265,460
Investment in subsidiary, the Bank 28,472,252 28,635,072 28,280,490
----------- ----------- -----------
TOTAL ASSETS $28,741,038 $28,903,197 $28,545,950
=========== =========== ===========
STOCKHOLDERS' EQUITY $28,741,038 $28,903,197 $28,545,950
=========== =========== ===========
CONDENSED STATEMENT OF INCOME
Three Months Ended March 31, Year Ended December 31,
2007 2006 2006 2005 2004
----------- ----------- ----------- ----------- -----------
(Unaudited)
Interest income $ 661 $ 655 $ 2,665 $ 2,638 $ 2,619
Equity in undistributed
earnings of subsidiary (200,411) 221,416 376,809 1,619,960 1,647,614
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (199,750) $ 222,071 $ 379,474 $ 1,622,598 $ 1,650,233
=========== =========== =========== =========== ===========
CONDENSED STATEMENT OF CASH FLOWS
Three Months Ended March 31, Year Ended December 31,
2007 2006 2006 2005 2004
----------- ----------- ----------- ----------- -----------
(Unaudited)
OPERATING ACTIVITIES
Net income $ (199,750) $ 222,071 $ 379,474 $ 1,622,598 $ 1,650,233
Equity in undistributed earnings
of subsidiary 200,411 (221,416) (376,809) (1,619,960) (1,647,614)
----------- ----------- ----------- ----------- -----------
Net cash provided by 661 655 2,665 2,638 2,619
----------- ----------- ----------- ----------- -----------
operating activities
Increase in cash and 661 655 2,665 2,638 2,619
cash equivalents
CASH AT BEGINNING OF YEAR 268,125 265,460 265,460 262,822 260,203
----------- ----------- ----------- ----------- -----------
CASH AT END OF PERIOD $ 268,786 $ 266,115 $ 268,125 $ 265,460 $ 262,822
=========== =========== =========== =========== ===========
F-29
You should rely only on the information contained in this document. We have not
authorized anyone to provide you with information that is different. This
document does not constitute an offer to sell, or the solicitation of an offer
to buy, any of the securities offered hereby to any person in any jurisdiction
in which the offer or solicitation would be unlawful. The affairs of Gateway
Community Financial Corp. and its subsidiaries may change after the date of this
prospectus. Delivery of this document and the sales of shares made hereunder
does not mean otherwise.
Gateway Community Financial Corp.
Holding Company for Gloucester County Federal Savings Bank
Up to 3,105,000 Shares of Common Stock
(Subject to Increase to Up to 3,570,750 Shares)
----------
PROSPECTUS
----------
Sandler O'Neill + Partners, L.P.
____________, 2007
Until the later of ______________ __, 2007, or 25 days after commencement of the
syndicated community offering, if any, whichever is later, all dealers effecting
transactions in these securities, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 16. Exhibits and Financial Statement Schedules.
The exhibits and financial statement schedules filed as part of this
Registration Statement are as follows:
(a) Exhibits:
1 Form of Sales Agency Agreement with Sandler O'Neill & Partners, L.P.*
2 Plan of Stock Issuance, as amended*
3.1 Charter of Gateway Community Financial Corp.*
3.2 Bylaws of Gateway Community Financial Corp.*
4 Specimen Stock Certificate of Gateway Community Financial Corp.*
5 Opinion of Malizia Spidi & Fisch, PC regarding legality of securities registered *
8.1 Federal Tax Opinion of Malizia Spidi & Fisch, PC*
8.2 State Tax Opinion of S.R. Snodgrass, A.C. *
10.1 Employment Agreement with Robert C. Ahrens *
10.2 Employment Agreement with Bruce E. Haines *
10.3 Employment Agreement with Timothy P. Hand *
10.4 Executive Incentive Retirement Plan Agreement *
10.5 Director Fee Continuation Agreement *
10.4 Executive Incentive Retirement Plan Agreement *
10.5 Director Fee Continuation Agreement *
23.1 Consent of S.R. Snodgrass, A.C.
23.2 Consent of Feldman Financial Advisors, Inc.*
23.3 Consent of Malizia Spidi & Fisch, PC (contained in its opinions filed as Exhibits 5 and
8.1)
24 Power of Attorney (set forth on the signature page) *
99.1 Letter of Feldman Financial Advisors, Inc. as to the value of subscription rights *
99.2 Conversion Valuation Appraisal Report prepared by Feldman Financial Advisors, Inc. *
99.3 Marketing Materials and Stock Order Form *
- --------------
* Previously filed.
(b) Financial Statement Schedules:
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or the notes thereto.
II-1
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this aamended registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Sewell, New Jersey
on June 18, 2007.
GATEWAY COMMUNITY FINANCIAL CORP.
By: /s/Robert C. Ahrens
---------------------------------------
Robert C. Ahrens
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed below by the following persons in the
capacities indicated on June 18, 2007.
/s/Robert C. Ahrens /s/ John S. Gligor, Sr. *
- ----------------------------------------------------- -----------------------------------------------------
Robert C. Ahrens John S. Gligor, Sr.
President, Chief Executive Officer and Director Chairman of the Board
(Principal Executive Officer)
/s/ Walter N. Friedrich * /s/ Robert A. Jones *
- ----------------------------------------------------- -----------------------------------------------------
Walter N. Friedrich Robert A. Jones
Vice Chairman of the Board Director
/s/ Dennis L. King * s/ Scott P. Newman*
- ----------------------------------------------------- -----------------------------------------------------
Dennis L. King Scott P. Newman
Director Director
/s/ Frank D. Wilson * /s/ Francis J. Walsh*
- ----------------------------------------------------- -----------------------------------------------------
Frank D. Wilson Francis J. Walsh
Director Chief Financial Officer
(Principal Financial and Accounting Officer)
* By: /s/Robert C. Ahrens
----------------------------------------------------
Robert C. Ahrens
Attorney-in-Fact