UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-25204
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GATEWAY BANCORP, INC.
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(Exact name of small business issuer as specified in its charter)
KENTUCKY 61-1269067
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2717 LOUISA STREET, CATLETTSBURG, KENTUCKY 41129
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(Address of principal executive offices)
(Zip Code)
(606) 739-4126
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
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State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
As of November 7, 1997, there were issued and outstanding 1,081,665
shares of the Registrant's Common Stock.
Transitional Small Business Disclosure Format (check one):
YES NO X
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GATEWAY BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
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Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (as of
September 30, 1997 (unaudited) and
December 31, 1996)................................ 3
Consolidated Statements of Income (for
the three months ended September 30, 1997
and 1996 (unaudited))............................. 4
Consolidated Statements of Income (for
the nine months ended September 30, 1997
and 1996 (unaudited))............................. 5
Consolidated Statements of Changes in
Stockholders' Equity (for the nine months
ended September 30, 1997 (unaudited) and
the year ended December 31, 1996)................. 6
Consolidated Statements of Cash Flows
(for the nine months ended September 30,
1997 and 1996 (unaudited))........................ 7
Notes to Consolidated Financial Statements..... 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 11-16
Part II. Other Information
Item 1. Legal Proceedings................................ 17
Item 2. Changes in Securities............................ 17
Item 3. Defaults Upon Senior Securities.................. 17
Item 4. Submission of Matters to a Vote of
Security Holders................................. 17
Item 5. Other Information................................ 17
Item 6. Exhibits and Reports on Form 8-K................. 17
Signatures...................................................... 18
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
1997 DECEMBER 31,
ASSETS (UNAUDITED) 1996
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CASH AND CASH EQUIVALENTS............................ $ 5,019,588 $ 1,348,415
INVESTMENT SECURITIES HELD TO MATURITY............... 12,321,549 17,523,931
LOANS RECEIVABLE, net................................ 21,420,513 19,075,792
MORTGAGE-BACKED SECURITIES HELD TO MATURITY.......... 23,129,509 27,663,022
ACCRUED INTEREST RECEIVABLE.......................... 237,530 430,055
FORECLOSED REAL ESTATE............................... 43,963 --
OFFICE PROPERTIES AND EQUIPMENT...................... 342,809 358,497
INCOME TAXES REFUNDABLE.............................. 57,755 15,323
OTHER ASSETS......................................... 35,288 23,902
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$ 62,608,504 $ 66,438,937
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LIABILITIES AND STOCKHOLDERS' EQUITY
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DEPOSITS............................................. $ 44,859,991 $ 49,194,746
DEFERRED INCOME TAXES PAYABLE........................ 158,499 111,808
ACCRUED INTEREST PAYABLE............................. 35,858 32,864
OTHER LIABILITIES.................................... 183,978 70,866
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Total liabilities............................... 45,238,326 49,410,284
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STOCKHOLDERS' EQUITY:
Common stock....................................... 10,817 10,758
Employee benefit plans............................. (810,355) (918,319)
Additional paid-in capital......................... 8,013,803 7,930,355
Retained earnings-substantially restricted......... 10,155,913 10,005,859
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Total stockholders' equity...................... 17,370,178 17,028,653
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$ 62,608,504 $ 66,438,937
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3
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
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(UNAUDITED) (UNAUDITED)
INTEREST INCOME:
Loans Receivable-
Mortgage loans.................................... $ 386,149 $ 333,774
Other loans....................................... 9,833 10,203
Investment securities.............................. 221,857 344,506
Mortgage-backed and related securities............. 422,799 494,780
Other interest-earning assets...................... 41,641 13,259
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Total interest income........................... 1,082,279 1,196,522
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INTEREST EXPENSE:
Passbook savings................................... 23,598 38,506
Certificates of deposit............................ 528,891 610,590
FHLB advances...................................... 325 --
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Total interest expense.......................... 552,814 649,096
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Net interest income............................. 529,465 547,426
PROVISION FOR LOAN LOSSES............................ -- --
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Net interest income after provision
for loan losses................................ 529,465 547,426
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NON-INTEREST INCOME:
Other.............................................. 4,285 3,036
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Total non-interest income....................... 4,285 3,036
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NON-INTEREST EXPENSE:
Compensation and benefits.......................... 116,779 90,821
Occupancy and equipment............................ 10,529 9,110
SAIF deposit insurance premiums.................... 5,883 369,655
Professional services.............................. 189,970 15,851
Other taxes........................................ 14,310 13,620
Other.............................................. 72,203 49,951
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Total non-interest expense...................... 409,674 549,008
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INCOME BEFORE PROVISION FOR INCOME TAXES............. 124,076 1,454
PROVISION FOR INCOME TAXES........................... 40,196 (2,033)
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NET INCOME........................................... $ 83,880 $ 3,487
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NET INCOME PER SHARE $ .08 $ .00
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4
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
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(UNAUDITED) (UNAUDITED)
INTEREST INCOME:
Loans receivable-
Mortgage loans.................................... $ 1,115,833 $ 972,795
Other loans....................................... 29,144 33,367
Investment securities.............................. 731,074 992,480
Mortgage-backed and related securities............. 1,333,558 1,450,110
Other interest-earning assets...................... 107,577 113,001
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Total interest income........................... 3,317,186 3,561,753
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INTEREST EXPENSE:
Passbook savings................................... 72,740 137,989
Certificates of deposit............................ 1,634,898 1,893,396
FHLB advances...................................... 14,953 --
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Total interest expense.......................... 1,722,591 2,031,385
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Net interest income............................. 1,594,595 1,530,368
PROVISION FOR LOAN LOSSES............................ -- --
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Net interest income after provision
for loan losses.................................. 1,594,595 1,530,368
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NON-INTEREST INCOME:
Gains on foreclosed real estate.................... -- 14,181
Gain on investments................................ 1,500 2,000
Other.............................................. 9,635 7,580
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Total non-interest income....................... 11,135 23,761
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NON-INTEREST EXPENSE:
Compensation and benefits.......................... 336,203 281,537
Occupancy and equipment............................ 28,172 28,042
SAIF deposit insurance premiums.................... 18,779 430,467
Professional services.............................. 321,585 108,956
Other taxes........................................ 49,151 45,327
Other.............................................. 186,233 167,169
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Total non-interest expense...................... 940,123 1,061,498
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INCOME BEFORE PROVISION FOR INCOME TAXES............. 665,607 492,631
PROVISION FOR INCOME TAXES........................... 233,235 150,285
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NET INCOME.......................................... $ 432,372 $ 342,346
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NET INCOME PER SHARE $ .41 $ .30
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5
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
RETAINED
EMPLOYEE ADDITIONAL EARNINGS- TOTAL
COMMON BENEFIT PAID-IN SUBSTANTIALLY STOCKHOLDERS'
STOCK PLANS CAPITAL RESTRICTED EQUITY
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BALANCES, December 31, 1995................ $ 11,970 $ (1,098,907) $ 9,502,671 $ 10,062,529 $ 18,478,263
NET INCOME, year ended December 31, 1996... -- -- -- 529,582 529,582
DIVIDENDS DECLARED, $.40 per share......... -- -- (432,777) -- (432,777)
ESOP SHARES RELEASED, 6,461 shares......... -- 64,610 (108) -- 64,502
RRP STOCK AMORTIZED, 7,998 shares.......... -- 115,978 -- -- 115,978
PURCHASE OF 121,216 TREASURY SHARES........ (1,212) -- (1,139,431) (586,252) (1,726,895)
--------- ------------- ------------ ------------- -------------
BALANCES, December 31, 1996................ 10,758 (918,319) 7,930,355 10,005,859 17,028,653
NET INCOME, nine months ended September 30,
1997 (unaudited)......................... -- -- -- 432,372 432,372
DIVIDENDS DECLARED, $.30 per share
(unaudited).............................. -- 530 5,459 (309,306) (303,317)
STOCK OPTIONS EXERCISED, 5,900 shares
(unaudited).............................. 59 -- 50,970 28,964 79,993
ESOP SHARES RELEASED, 4,308 shares
(unaudited).............................. -- 43,080 27,019 (1,976) 68,123
RRP STOCK AMORTIZED, 4,438 shares
(unaudited).............................. -- 64,354 -- -- 64,354
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BALANCES, September 30, 1997 (unaudited)... $ 10,817 $ (810,355) $ 8,013,803 $ 10,155,913 $ 17,370,178
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6
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
OPERATING ACTIVITIES:
- ------------------------------------------------------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
Net income.................................................. $ 432,372 $ 342,346
Adjustments to reconcile net income to net
cash provided by operating activities-
Gain on investments....................................... 1,500 2,000
Provision for depreciation................................ 16,178 15,428
Amortization and accretion................................ (53,416) (55,167)
Provision for deferred income taxes....................... 46,691 (3,487)
ESOP compensation......................................... 68,123 9,000
RRP compensation.......................................... 64,354 68,164
FHLB stock dividends...................................... (43,300) (39,400)
Net change in--
Accrued interest receivable............................. 192,525 152,917
Other assets............................................ (11,386) (41,415)
Income taxes refundable................................. (42,432) (184,542)
Accrued interest payable................................ 2,994 14,133
Other liabilities....................................... 113,112 13,750
Accrued SAIF special assessment......................... -- 338,631
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Net cash provided by operating activities............. 787,315 632,358
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INVESTING ACTIVITIES:
Net increase in loans..................................... (2,388,684) (1,221,139)
Purchases of investment securities........................ -- (13,280,499)
Maturities of investment securities....................... 5,200,000 15,920,030
Sales and calls of investment securities.................. 50,000 350,000
Purchases of mortgage-backed securities................... -- (5,837,034)
Principal collected on mortgage-backed securities......... 4,581,111 4,425,316
Purchases of office properties and equipment.............. (490) (11,469)
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Net cash provided by investing activities............. 7,441,937 345,205
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FINANCING ACTIVITIES:
Net decrease in savings accounts.......................... (294,901) (389,142)
Net decrease in certificates of deposit................... (4,039,854) (1,408,359)
Advances from the FHLB.................................... 3,250,000 --
Repayment of FHLB advances................................ (3,250,000) --
Dividends paid............................................ (303,317) (1,647,763)
Purchase of common stock.................................. -- (1,187,046)
Stock options exercised................................... 79,993 --
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Net cash used for financing activities................ (4,558,079) (4,632,310)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 3,671,173 (3,654,747)
CASH AND CASH EQUIVALENTS, beginning of period.............. 1,348,415 6,542,257
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CASH AND CASH EQUIVALENTS, end of period.................... $ 5,019,588 $ 2,887,510
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SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Income taxes paid......................................... $ 240,000 $ 309,000
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Interest paid on deposit accounts......................... $ 1,719,597 $ 2,017,252
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Loans taken into foreclosed real estate..................... $ 43,963 $ --
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7
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
Gateway Bancorp, Inc. (the "Company") was incorporated under Kentucky law
in October 1994 by Catlettsburg Federal Savings and Loan Association in
connection with its conversion (the "Conversion") to a federally-chartered
stock savings bank known as "Catlettsburg Federal Savings Bank" (the "Bank").
The Conversion was completed on January 18, 1995. See Note 2 herein.
The accompanying consolidated financial statements were prepared in
accordance with instructions to Form 10-QSB, and therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. However, all normal, recurring adjustments
which, in the opinion of management, are necessary for a fair presentation of
the financial statements, have been included. These financial statements
should be read in conjunction with the audited financial statements and the
notes thereto for the year ended December 31, 1996. The results for the nine
months ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1997.
BUSINESS
The Company's principal business is conducted through the Bank which
conducts business from its main office located in Catlettsburg, Kentucky, and
one full-service branch located in Grayson, Kentucky. The Bank's deposits are
insured by the Savings Association Insurance Fund ("SAIF") to the maximum
extent permitted by law. The Bank is subject to examination and comprehensive
regulation by the Office of Thrift Supervision ("OTS"), which is the Bank's
chartering authority and primary regulator. The Bank is also subject to
regulation by the Federal Deposit Insurance Corporation ("FDIC"), as the
administrator of the SAIF, and to certain reserve requirements established by
the Federal Reserve Board ("FRB"). The Bank is a member of the Federal Home
Loan Bank of Cincinnati ("FHLB").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, the Bank, and the Bank's one wholly-owned subsidiary. All
significant intercompany transactions have been eliminated in consolidation.
Additionally, certain reclassifications may have been made in order to
conform with the current period's presentation. The accompanying consolidated
financial statements have been prepared on the accrual basis.
8
(2) CONVERSION TRANSACTION
On January 18, 1995, (i) the Bank converted from a federally-chartered
mutual savings and loan association to a federally-chartered stock savings
bank and (ii) the Company acquired all of the common stock of the Bank in the
Conversion. As part of the Conversion, the Company issued 1,244,570 shares of
its Common Stock. Total proceeds of $12,445,700 were reduced by $500,000 for
shares to be purchased by the Employee Stock Ownership Plan ("ESOP") and by
approximately $737,200 for conversion expenses. As a result of the
Conversion, the Company contributed approximately $5,900,000 of additional
capital to the Bank and retained the balance of the proceeds.
(3) NET INCOME PER SHARE
Net income per share for the three and nine months ended September 30,
1997 and 1996 was computed using the weighted average (1,042,518 and
1,124,875, respectively) number of shares outstanding. Shares which have not
been committed to be released to the ESOP are not considered to be
outstanding for purposes of calculating net income per share.
(4) DIVIDENDS PER SHARE
For purposes of recording dividends, dividends paid on unallocated ESOP
shares are not considered dividends for financial reporting purposes, and are
used for debt service. There were 18,515 and 14,207 shares released to the
ESOP at September 30, 1997 and December 31, 1996, respectively. Dividends on
allocated shares used for debt service are charged to retained earnings and
paid by releasing additional shares to the ESOP with the same corresponding
value.
(5) PURCHASE OF COMMON STOCK
Through September 30, 1997, the Company had purchased 168,816 shares of
its outstanding common stock on the open market at an aggregate cost of
$2,416,160. In accordance with the 1988 amendment to the Kentucky Business
Corporation Act, the purchase of these shares has been recorded as a purchase
of common stock shares, which are authorized but unissued. The shares are
available for reissuance.
(6) EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established the ESOP for employees of the Company and the
Bank effective upon the Conversion. Full-time employees of the Company and
the Bank who have been credited with at least 1,000 hours of service during a
twelve month period and who have attained age 21 are eligible to participate
in the ESOP. The Company loaned the ESOP $500,000 for the initial purchase of
the ESOP shares. The loan is due and payable in forty (40) equal quarterly
installments of $12,500 beginning March 31, 1995, plus interest at the rate
of 8.75% per annum. The Company will make scheduled discretionary cash
contributions to the ESOP sufficient to amortize the principal and interest
on the loan. The Company accounts for its ESOP in accordance with Statement
of Position 93-6, "Employer's Accounting For Employee Stock Ownership Plans."
As shares are committed to be released to participants, the Company reports
compensation expense equal to the average market price of the shares during
the period. ESOP compensation expense recorded during the three and nine
months ended September 30, 1997 was $25,650 and $68,123, respectively, and
during the three and nine months ended September 30, 1996 was $3,000 and
$9,000, respectively.
9
(7) RECOGNITION AND RETENTION PLAN AND TRUST
The Company has established a Recognition and Retention Plan and Trust
("RRP"). As of September 30, 1997, the Company had purchased 49,782 shares in
the open market to fund the RRP at an aggregate cost of $721,839. As of
September 30, 1997, 32,228 of the shares available under the RRP have been
awarded to the Company's Board of Directors and the Bank's executive officers
and other key employees, subject to vesting and other provisions of the RRP.
At September 30, 1997, the deferred cost of unearned RRP shares totaled
$496,034 and is recorded as a charge against stockholders' equity.
Compensation expense will be recognized ratably over the five year vesting
period only for those shares awarded. The Company recorded compensation
expense related to the RRP of $21,644 and $64,354 for the three and nine
months ended September 30, 1997, and $22,721 and $68,164 for the three and
nine months ended September 30, 1996.
(8) STOCK OPTION PLAN
The Company established a Stock Option Plan (the "Plan") in 1995. A total
of 124,457 shares may be issued pursuant to the Plan. Through September 30,
1997 an aggregate of 75,911 stock options have been granted to the Company's
Board of Directors, and the Bank's executive officers and other key
employees. These options are subject to vesting provisions as well as other
provisions of the Plan. Such options were not dilutive during the three and
nine months ended September 30, 1997 and 1996. 5,900 options were exercised
during the three months ended September 30, 1997 at an aggregate price of
$79,993, leaving options outstanding of 70,011, of which 27,327 were
exercisable at September 30, 1997.
No compensation expense has been recognized in these interim financial
statements for the value of stock options earned as permitted by Statement of
Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation.
(9) SAIF INSURANCE ASSESSMENT
Beginning January 1, 1997, the Bank's SAIF assessments were reduced to
$.064 for every $100 of insured deposits, from the prior level of $.23 per
$100 of insured deposits. Such reduction reflects the consequences of the
1996 legislation which eliminated the deposit insurance premium differential
between SAIF-insured institutions and Bank Insurance Fund-insured
institutions.
(10) PENDING ACQUISITION
On June 17, 1997, the Company entered into an Agreement and Plan of
Merger ("Merger"), as amended on September 2, 1997, with Peoples Bancorp,
Inc. ("Peoples"), an Ohio multi-bank holding company headquartered in
Marietta, Ohio, whereby Peoples agreed to acquire 100% of the Company's
outstanding common stock. The purchase consideration consists of $18.75 per
share of the Company's common stock, which may be paid in cash, Peoples
common stock or both, at the election of each stockholder, as more fully
described in the Agreement and Plan of Merger.
The Company mailed proxy materials on October 29, 1997 to holders of
record of the Company's common stock at the close of business on October 21,
1997 in connection with the Special Meeting of Stockholders ("Special
Meeting") to be held on December 4, 1997. At the Special Meeting, the
Company's stockholders will consider and vote upon the Agreement and Plan of
Merger.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
GENERAL. At September 30, 1997, the Company's total assets amounted to $62.6
million as compared to $66.4 million at December 31, 1996, a decrease of $3.8
million, or 5.7%. The $3.8 million decrease consisted primarily of decreases
in investment securities held to maturity and mortgage-backed securities held
to maturity of $5.2 million and $4.6 million, respectively, partially offset
by increases in cash and cash equivalents and loans receivable, net, of $3.7
million and $2.3 million, respectively.
CASH AND CASH EQUIVALENTS. These balances consist of cash on hand and
short-term (liquid) interest-bearing deposits in other financial
institutions. The $3.7 million increase, from $1.3 million at December 31,
1996 to $5.0 million at September 30, 1997, was primarily due to the
retention of proceeds from maturing investment securities and principal
repayments on mortgage-backed securities during the period, less cash
requirements to fund loan demand and maturing savings deposits.
INVESTMENT SECURITIES. Investment securities consist primarily of U.S.
Treasury and U.S. Governmental agency securities. The $5.2 million decrease,
from $17.5 million at December 31, 1996 to $12.3 million at September 30,
1997, resulted from maturing securities with no corresponding reinvestments.
Maturity proceeds were used primarily to fund loan commitments and maturing
savings deposits.
At September 30, 1997, the market value of the Company's investment
securities portfolio was less than the carrying value by approximately
$26,000, as compared to an unrealized loss of approximately $100,000 at
December 31, 1996. These changes in market value are not deemed to be
significant and the Company intends, and has the ability, to hold its
investment securities to maturity.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities have always been a
primary component of the Company's interest-earning assets, due to the
relatively low demand for competitive-rate, single family mortgage loans in
the Company's lending area. The $4.6 million decrease, from $27.7 million at
December 31, 1996 to $23.1 million at September 30, 1997, consisted entirely
of principal repayments. Such proceeds were used primarily to fund loan
commitments and maturing savings deposits.
At September 30, 1997, the market value of the Company's mortgage-backed
securities portfolio exceeded the carrying value by approximately $411,000.
This compared to an unrealized gain of approximately $40,000 at December 31,
1996. The Company intends, and has the ability, to hold its mortgage-backed
securities to maturity.
LOANS RECEIVABLE, NET. Loans receivable, net, increased from $19.1 million at
December 31, 1996 to $21.4 million at September 30, 1997, an increase of
12.0%. Such increase resulted from a continuing emphasis on a competitive
loan pricing policy as part of the Company's strategy to increase its
mortgage loan market share.
LOAN CONCENTRATIONS. The Company does not have a concentration of its loan
portfolio in any one industry or to any one borrower. Real estate lending
(both mortgage and construction loans) continues to be the largest component
11
of the loan portfolio, representing $20.9 million, or 97.4%, of total gross
loans, while consumer loans, consisting of loans secured by deposit accounts,
totaled $.6 million, or 2.6%, of total gross loans outstanding at September
30, 1997.
The Company's lending is concentrated to borrowers who reside in and/or which
are collateralized by real estate located in Boyd, Carter and Greenup County,
Kentucky. Employment in these areas is highly concentrated in the petroleum
and steel industries. Therefore, many debtors' ability to honor their
contracts is dependent upon these economic sectors.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses as a percentage of
total loans decreased from .42% at December 31, 1996 to .38% at September 30,
1997. The total dollar amount of the allowance remained unchanged totaling
$81,000 at both periods.
There were no loans charged off or recoveries during the three and nine
months ended September 30, 1997 and 1996.
Total non-performing loans (non-accruing loans and accruing loans greater
than 90 days delinquent) totaled $518,000 and $209,000, respectively, or
2.42% and 1.09% of total loans outstanding, respectively, at September 30,
1997 and December 31, 1996. Total non-performing assets (non-performing loans
and foreclosed real estate) totaled .90% and .31% of total assets at
September 30, 1997 and December 31, 1996, respectively. Of the Company's
non-performing loans at September 30, 1997, $478,300 consist of eight
single-family residential loans, while $39,700 consists of one commercial
real estate loan.
The Company had no loans specifically classified as impaired at September 30,
1997 or 1996, and had no troubled debt restructurings during the periods then
ended.
OFFICE PROPERTIES AND EQUIPMENT. The Company's net investment in facilities
and equipment totaled approximately $343,000 at September 30, 1997 as
compared to $358,000 at December 31, 1996.
LIABILITIES. The Company's liabilities consist primarily of customer
deposits. Liabilities decreased $4.2 million, or 8.5%, from $49.4 million at
December 31, 1996 to $45.2 million at September 30, 1997. Deposits decreased
$4.3 million, or 8.7%, from $49.2 million at December 31, 1996 to $44.9
million at September 30, 1997. Such decreases are attributed by management to
relatively unchanged market rates of interest paid on deposits during the
period when compared to higher yielding investment alternatives available to
the Company's customers.
Occasionally, borrowings from the FHLB of Cincinnati are utilized to satisfy
short-term liquidity needs. The Company borrowed and repaid $3.2 million from
the FHLB during the nine months ended September 30, 1997. The Company had no
comparable borrowings during the nine months ended September 30, 1996.
STOCKHOLDERS' EQUITY. The Company's stockholders' equity totaled $17.4
million at September 30, 1997, as compared to $17.0 million at December 31,
1996. The $.4 million increase for the period ended September 30, 1997 was
primarily attributable to net income for the period of $432,372, the release
of common stock to the employee benefit plans, and the payments received by
the Company in connection with the issuance of 5,900 common shares for stock
options exercised, offset by the payment of dividends.
12
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1997 AND SEPTEMBER 30, 1996
NET INCOME. Net income increased $80,393, from $3,487 for the three months
ended September 30, 1996 to $83,880 for the three months ended September 30,
1997. Net income per share was $.08 and $.00 for the 1997 and 1996 quarters,
respectively. The increase resulted primarily from decreases in interest
expense and non-interest expense of $96,282 and $139,334, or 14.8% and 25.4%,
respectively, offset by a reduction in interest income of $114,243, or 9.5%,
and an increase in the provision for income taxes of $42,229. If not for the
one-time assessment by the Federal Deposit Insurance Corporation to restore
the Savings Association Insurance Fund ("SAIF") to the statutorily prescribed
level of 1.25% of insured deposits, net income for the 1996 quarter would
have been $226,983, or $.20 per share.
INTEREST INCOME. The $114,243 decrease in interest income, from $1,196,522
for the three months ended September 30, 1996 to $1,082,279 for the three
months ended September 30, 1997, was primarily due to lower volumes of
interest-earning assets, except for loans receivable and interest-bearing
cash balances, partially offset by higher yielding investment securities and
mortgage-backed securities. The reduction in the level of interest earning
assets is attributable to the use of cash to fund savings deposit withdrawals
which totaled $1,457,825 for the three months ended September 30, 1997. The
Company continues to offer competitive interest rates on all deposit
instruments.
INTEREST EXPENSE. The $96,282 decrease in interest expense, from $649,096
for the three months ended September 30, 1996 to $552,814 for the three
months ended September 30, 1997, resulted primarily from a lower volume of
interest-bearing liabilities during the 1997 quarter as compared to the 1996
quarter, and to a lesser extent, from lower rates paid on deposits.
PROVISION FOR LOAN LOSSES. The Company recorded no provision for loan losses
for the three months ended September 30, 1997 and 1996. Management's decision
to make no provision for loan losses reflects their assessment that the
current loan loss allowance is adequate. Management considers non-performing
loans, past due loans, the overall quality of the loan portfolio, and prior
loan loss experience in making this determination.
NON-INTEREST INCOME. Non-interest income increased slightly, from $3,036 for
the three months ended September 30, 1996 to $4,285 for the three months
ended September 30, 1997. Historically, non-interest income has not been a
significant component of the Company's net income, or operations.
NON-INTEREST EXPENSE. Non-interest expense decreased $139,334, from $549,008
for the three months ended September 30, 1996 to $409,674 for the three
months ended September 30, 1997. The decrease was primarily attributable to a
reduction during the 1997 quarter as compared to the 1996 quarter in SAIF
deposit insurance premiums of $363,772, partially offset by increases in
professional services, compensation and benefits and other non-operating
expenses of $174,119, $25,958 and $22,252, respectively. The decrease in SAIF
deposit insurance premiums resulted from the 1996 one-time assessment of
$338,631, along with lower 1997 premiums due to a reduced premium rate, from
$.23 per hundred of insured deposits during 1996 to $.064 per hundred during
1997, along with lower levels during 1997 of insured deposits. Professional
services and other non-operating expenses increased due to increased costs
associated with the Merger. Compensation and benefits increased primarily due
to a $22,650 increase in ESOP compensation expense attributable to a
reduction in the 1997 quarter as compared to the 1996 quarter in dividends on
unallocated ESOP shares available for debt service on the ESOP loan.
13
PROVISION FOR INCOME TAXES. The provision for income taxes increased $42,229
for the quarter ended September 30, 1997 as compared to the quarter ended
September 30, 1996 due to the $122,622 increase in pretax income.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
AND SEPTEMBER 30, 1996
NET INCOME. Net income increased $90,026, or 26.3%, from $342,346 for the
nine months ended September 30, 1996 to $432,372 for the nine months ended
September 30, 1997. Net income per share was $.41 and $.30 for the 1997 and
1996 nine month periods, respectively, an increase of 36.7%. The increase
resulted primarily from decreases in interest expense and non-interest
expense of $308,794 and $121,375, or 15.2% and 11.4%, respectively, offset by
decreases in interest income and non-interest income of $244,567 and $12,626,
or 6.9% and 53.1%, respectively, and an increase in the provision for income
taxes of $82,950, or 55.2%. Earnings would have been $565,842 or $.50 per
share, for the 1996 nine month period if not for the one-time SAIF assessment.
INTEREST INCOME. The $244,567 decrease in interest income, from $3,561,753
for the nine months ended September 30, 1996 to $3,317,186 for the nine
months ended September 30, 1997, was primarily due to lower volumes of
interest-earning assets during the 1997 period as compared to the 1996
period, except for loans receivable, partially offset by higher yielding
investment securities and mortgage-backed securities. The reduction in the
level of interest earning assets is attributable to the use of cash to fund
savings deposit withdrawals which totaled $4,334,755 for the nine months
ended September 30, 1997. The Company continues to offer competitive interest
rates on all deposit instruments.
INTEREST EXPENSE. The $308,794 decrease in interest expense, from $2,031,385
for the nine months ended September 30, 1996 to $1,722,591 for the nine
months ended September 30, 1997, was primarily due to the lower volume of
interest-bearing liabilities during the 1997 nine month period as compared to
the 1996 period, and to a lesser extent, from lower rates paid on deposits.
PROVISION FOR LOAN LOSSES. The Company recorded no provision for loan losses
for the nine months ended September 30, 1997 and 1996. Management has
determined that the allowance for loan losses is adequate during both periods
after considering non-performing loans, past due loans, the overall quality
of the loan portfolio, and prior loan loss experience.
NON-INTEREST INCOME. The $12,626 decrease in non-interest income, from
$23,761 for the nine months ended September 30, 1996 to $11,135 for the nine
months ended September 30, 1997, was primarily the result of $14,181 during
the 1996 period of partial recoveries on prior years foreclosed real estate
loans, with no comparable recoveries during the 1997 nine month period.
NON-INTEREST EXPENSE. Non-interest expense decreased $121,375, from
$1,061,498 for the nine months ended September 30, 1996 to $940,123 for the
nine months ended September 30, 1997. The decrease was primarily due to a
reduction in the 1997 period as compared to the 1996 period in SAIF deposit
insurance premiums of $411,688, partially offset by increases in compensation
and benefits of $54,666, professional services expenses of $212,629, and
other non-operating expenses of $19,064. The decrease in SAIF deposit
insurance premiums resulted from the 1996 special assessment along with the
reduced 1997 premiums referred to above. Professional services and other
non-operating expenses increased primarily due to increased costs associated
with the Merger. Compensation and benefits increased primarily due to a
14
$59,123 increase in ESOP compensation expense caused by the reduction in
dividends during the 1997 period available for debt service, as noted above.
PROVISION FOR INCOME TAXES. The provision for income taxes increased $82,950
for the nine months ended September 30, 1997 as compared to the nine months
ended September 30, 1996, due to the $172,976 increase in pretax income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's
primary sources of funds are deposits, amortization, prepayments and
maturities of outstanding loans and mortgage-backed securities, maturities of
investment securities and other short-term investments and funds provided
from operations. While scheduled payments from the amortization of loans and
mortgage-backed securities and maturing investment securities and short term
investments are relatively predictable sources of funds, deposit flows and
loan prepayments are greatly influenced by general interest rates, economic
conditions and competition. In addition, the Bank invests excess funds in
overnight deposits and other short-term interest-earning assets which provide
liquidity to meet lending requirements. At September 30, 1997, the Bank had
no outstanding advances from the Federal Home Loan Bank of Cincinnati or
other borrowings. During the nine months ended September 30, 1997, the Bank
borrowed, and subsequently repaid, $3,250,000 from the FHLB to meet
short-term liquidity needs.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Bank maintains a
strategy of investing in various investment and mortgage-backed securities
and residential mortgage loans. The Bank uses its sources of funds primarily
to meet its ongoing commitments, and to maintain a portfolio of
mortgage-backed and investment securities. At September 30, 1997, the total
approved loan commitments outstanding amounted to $163,000. At the same date,
there were no commitments under unused lines of credit. Certificates of
deposit scheduled to mature in one year or less at September 30, 1997,
totaled $30.3 million. Management believes that a significant portion of
maturing deposits will remain with the Bank. At September 30, 1997, the Bank
had a liquidity ratio of 25.4% which exceeded the required minimum liquid
asset ratio of 5.0% of assets.
At September 30, 1997, the Bank had regulatory capital which was well in
excess of applicable limits. At September 30, 1997, the Bank was required to
maintain tangible capital of 1.5% of adjusted total assets, core capital of
3.0% of adjusted total assets and risk-based capital of 8.0% of adjusted
risk-weighted assets. At September 30, 1997, the Bank's tangible capital was
$15.5 million or 25.6% of adjusted total assets, core capital was $15.5
million or 25.6% of adjusted total assets and risk-based capital was $15.6
million or 81.7% of adjusted risk-weighted assets, exceeding the requirements
by $14.6 million, $13.7 million and $14.1 million, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In management's opinion, there are no recent accounting pronouncements which
have been adopted, or pending pronouncements that, if adopted, which have had
or would have a significant effect on the Company's financial position or
results of operations.
15
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
In addition to historical information, forward-looking statements are
contained herein that are subject to risks and uncertainties, that could
cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that could cause future results to vary
from current expectations, include, but are not limited to, the impact of
economic conditions (both generally and more specifically in the markets in
which Gateway operates), the impact of competition for Gateway's customers
from other providers of financial services, the impact of government
legislation and regulation (which changes from time to time and over which
Gateway has no control), and other risks detailed in this Form 10-Q and in
Gateway's other Securities and Exchange Commission filings. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. Gateway
undertakes no obligation to publicly revise these forward-looking statements,
to reflect events or circumstances that arise after the date hereof. Readers
should carefully review the risk factors described in other documents Gateway
files from time to time with the Securities and Exchange Commission.
16
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
There are no material legal proceedings to which the Registrant
or any of its subsidiaries is a part, or to which any of
their property is subject.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits:
NO. DESCRIPTION PAGE
------- -------------- ------
3.1 ARTICLES OF INCORPORATION OF GATEWAY BANCORP, INC.1/
3.2 BYLAWS OF GATEWAY BANCORP, INC.1/
3.3 ARTICLES OF CORRECTION OF GATEWAY BANCORP, INC.
DATED APRIL 11, 1995 2/
3.4 ARTICLES OF AMENDMENT OF GATEWAY BANCORP, INC.
DATED JUNE 18, 1996 2/
27 FINANCIAL DATA SCHEDULE E-1
- ------------------------
(1) / Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 33-84784) filed by the Registrant with the Securities and
Exchange Commission ("Commission") on October 4, 1994, as amended.
(2) / Incorporated by reference from the Form 10-QSB for the quarterly period
ended June 30, 1996 filed by the Registrant with the Commission on August
13, 1996.
(b) No Form 8-K reports were filed during the quarter.
17
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GATEWAY BANCORP, INC.
Date: November 7, 1997 By: /S/ Rebecca R. Jackson
-----------------------------------------------
Rebecca R. Jackson, President and
Chief Executive Officer
Date: November 7, 1997 By: /S/ Pamela Howard
-----------------------------------------------
Pamela Howared, Assistant Secretary/
Treasurer (Chief Accounting Officer)
18