10QSB 1 doc1.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2003 [ ] Transition report under Section 13 or 15(d) of the Exchange Act for the transition period from _____ to _____ Commission file number: 000-24137 GATEWAY BANCSHARES, INC. (Exact name of small business issuer as specified in its charter) Georgia 58-2202210 (State of Incorporation) (I.R.S. Employer Identification No.) 5102 Alabama Highway Ringgold, Georgia 30736 (Address of principal executive offices) (706) 965-5500 (Issuer's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Class ----- Common Stock, $5.00 par value 657,638 as of August 8, 2003 Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
GATEWAY BANCSHARES, INC. June 30, 2003 Form 10-QSB TABLE OF CONTENTS Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Income . . . . . . . . . . . . . . . . 4 Consolidated Statement of Changes in Stockholders' Equity . . . . 5 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . 6 Notes to Consolidated Financial Statements . . . . . . . . . . . 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 9 Item 3. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 16 Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . 16 Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 16 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 16 Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . 16 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 17 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Certifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
* * * * * - 2 - PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
GATEWAY BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS June 30, 2003 December 31, (unaudited) 2002 --------------- -------------- ASSETS Cash and due from banks $ 6,161,479 $ 7,049,445 Federal funds sold 800,000 7,450,000 Securities available-for-sale 32,223,514 29,374,441 Federal Home Loan Bank stock, at cost 298,200 260,000 Loans 101,303,057 93,897,207 Allowance for loan losses (1,524,240) (1,291,097) --------------- -------------- Net loans 99,778,817 92,606,110 Premises and equipment, net 2,933,003 2,930,060 Accrued interest 729,751 723,943 Other assets 1,135,821 1,077,919 --------------- -------------- Total assets $ 144,060,585 $ 141,471,918 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing $ 11,731,136 $ 7,816,038 Interest-bearing 114,723,277 114,174,960 --------------- -------------- Total deposits 126,454,413 121,990,998 Long-term borrowings: Federal Home Loan Bank advances 3,000,000 4,000,000 Notes payable 1,100,000 800,000 Securities sold under agreements to repurchase 2,315,971 3,202,343 Accrued interest 271,383 288,629 Other liabilities 391,598 793,648 --------------- -------------- Total liabilities 133,533,365 131,075,618 --------------- -------------- STOCKHOLDERS' EQUITY Common stock ($5 par value: 10,000,000 shares authorized, shares issued and outstanding of 657,638 at June 30, 2003 and 681,758 at December 31, 2002) 3,288,190 3,408,790 Additional paid-in capital 3,305,748 3,610,206 Retained earnings 3,803,128 3,067,123 Accumulated other comprehensive income: Unrealized gains (losses) on investment securities available-for-sale, net of tax 130,154 310,181 --------------- -------------- Total stockholders' equity 10,527,220 10,396,300 --------------- -------------- Total liabilities and stockholders' equity $ 144,060,585 $ 141,471,918 =============== ============== The Notes to Consolidated Financial Statements are an integral part of these statements.
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GATEWAY BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (unaudited) Three Months Ended Six Months Ended ---------------------- ---------------------- June 30, June 30, June 30, June 30, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- INTEREST INCOME Loans $1,827,774 $1,573,775 $3,536,114 $3,167,043 Interest on securities: Taxable interest 182,094 271,467 382,066 529,980 Nontaxable interest 33,580 22,075 62,939 39,905 Interest on federal funds sold 16,028 17,399 31,286 30,138 ---------- ---------- ---------- ---------- Total interest income 2,059,476 1,884,716 4,012,405 3,767,066 ---------- ---------- ---------- ---------- INTEREST EXPENSE Interest on deposits 681,862 680,226 1,366,564 1,408,266 Interest on notes payable 694 12,195 9,194 24,390 Interest on Federal Home Loan Bank advances 30,316 29,622 60,300 58,742 Interest on federal funds purchased and securities sold under agreement to repurchase 3,422 - 8,245 3,015 ---------- ---------- ---------- ---------- Total interest expense 716,294 722,043 1,444,303 1,494,413 ---------- ---------- ---------- ---------- NET INTEREST INCOME 1,343,182 1,162,673 2,568,102 2,272,653 Provision for loan losses 150,000 75,000 260,000 155,000 ---------- ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,193,182 1,087,673 2,308,102 2,117,653 ---------- ---------- ---------- ---------- NONINTEREST INCOME Service charges on deposits 233,839 156,269 458,319 266,494 Mortgage loan fees 153,596 82,962 279,174 176,181 Insurance commissions 2,866 2,860 7,537 7,585 Gains on sale of securities - 5,788 183,804 8,613 Other income 33,689 30,594 63,454 53,031 ---------- ---------- ---------- ---------- Total noninterest income 423,990 278,473 992,288 511,904 ---------- ---------- ---------- ---------- NONINTEREST EXPENSE Salaries and employee benefits 640,898 541,015 1,275,089 1,040,711 Occupancy expense 47,343 43,512 96,859 90,358 Furniture and equipment expense 47,881 45,782 91,928 100,254 Other operating expenses 332,129 278,476 690,253 519,278 ---------- ---------- ---------- ---------- Total noninterest expense 1,068,251 908,785 2,154,129 1,750,601 ---------- ---------- ---------- ---------- Income before income taxes 548,921 457,361 1,146,261 878,956 Income taxes 204,097 156,240 410,256 292,086 ---------- ---------- ---------- ---------- Net income $ 344,824 $ 301,121 $ 736,005 $ 586,870 ========== ========== ========== ========== EARNINGS PER COMMON SHARE, PRIMARY AND FULLY DILUTED Net income per common share $ 0.51 $ 0.44 $ 1.08 $ 0.86 Basic weighted average shares outstanding 681,461 681,758 681,608 681,668 Diluted earnings per common share $ 0.49 $ 0.44 $ 1.02 $ 0.85 Diluted weighted average shares outstanding 707,258 689,660 720,789 689,886 The Notes to Consolidated Financial Statements are an integral part of these statements.
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GATEWAY BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited) Accumulated Total Additional Other Comprehensive Stockholders' Common Paid-in Retained Comprehensive Income Equity Stock Capital Earnings Income --------------- ------------ ----------- ----------- ----------- -------------- BALANCE, December 31, 2002 $10,396,300 $3,408,790 $3,610,206 $ 3,067,123 $ 310,181 Stock options compensation 59,792 - 59,792 - - Exercise of stock options 122,060 50,650 71,410 - - Repurchases of common stock, at cost (606,910) (171,250) (435,660) - - Comprehensive income: Net income $ 736,005 736,005 - - 736,005 - Other comprehensive income, net of tax: Unrealized holding gains (losses) on securities available for sale, net of reclassification adjustment (180,027) (180,027) - - - (180,027) --------------- ------------ ----------- ----------- ----------- -------------- Total comprehensive income $ 555,978 =============== BALANCE, June 30, 2003 $10,527,220 $3,288,190 $3,305,748 $ 3,803,128 $ 130,154 ============ =========== =========== =========== ============== The Notes to Consolidated Financial Statements are an integral part of these statements.
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GATEWAY BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Six Months Ended --------------------------- June 30, June 30, 2003 2002 ------------- ------------ CASH FLOW FROM OPERATING ACTIVITIES Net income $ 736,005 $ 586,870 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan losses 260,000 155,000 Depreciation and amortization 81,601 98,040 Stock options compensation 59,792 74,704 Net amortization on securities 235,036 99,054 Gain on sale of securities (183,804) (8,613) Deferred income taxes (79,716) (24,615) Changes in other operating assets and liabilities: Accrued interest receivable (5,808) 96,727 Accrued interest payable (17,246) (69,336) Other assets and liabilities (269,896) (600,640) ------------- ------------ Net cash provided by operating activities 815,964 407,191 ------------- ------------ CASH FLOW FROM INVESTING ACTIVITIES Net (increase) decrease in loans (7,432,707) 1,079,576 Proceeds from maturities, calls, and principal pay-downs of securities 11,265,729 2,761,365 Proceeds from sales of available-for-sale securities 7,595,101 5,006,000 Purchase of available-for-sale securities (22,051,502) (8,078,510) Purchase of Federal Home Loan Bank stock (38,200) - Purchase of premises and equipment (84,544) (32,859) ------------- ------------ Net cash provided by (used in) investing activities (10,746,123) 735,572 ------------- ------------ CASH FLOW FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 4,463,415 (7,194,063) Net decrease in securities sold under agreements to repurchase (886,372) - Proceeds from notes payable 300,000 - Payments on Federal Home Loan Bank advances (1,000,000) - Repurchases of common stock (606,910) - Exercise of stock options 122,060 32,520 ------------- ------------ Net cash provided by (used in) financing activities 2,392,193 (7,161,543) ------------- ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS (7,537,966) (6,018,780) CASH AND CASH EQUIVALENTS, beginning of period 14,499,445 14,963,268 ------------- ------------ CASH AND CASH EQUIVALENTS, end of period $ 6,961,479 $ 8,944,488 ============= ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 1,461,549 $ 1,563,749 Income taxes 538,232 274,740 ============= ============ The Notes to Consolidated Financial Statements are an integral part of these statements.
- 6 - GATEWAY BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) June 30, 2003 NOTE 1 - BASIS OF PRESENTATION ------------------------------ The consolidated financial statements include the accounts of Gateway Bancshares, Inc., and its wholly-owned subsidiary, Gateway Bank & Trust. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In management's opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report filed under cover of Form 10-KSB for the year ended December 31, 2002. NOTE 2 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ----------------------------------------------------------------------------- Organization ------------ Gateway Bancshares, Inc. (the Company) is a one-bank holding company which engages in providing a full range of banking services through its subsidiary bank, Gateway Bank & Trust (the Bank), in Ringgold, Georgia. The Bank received preliminary charter approval in 1995. In April 1997 the Bank was granted a charter by the Georgia Department of Banking and Finance and began full operations. Further discussion of the Company's financial condition and results of operations is included in the Company's consolidated financial statements presented in the Company's annual report on Form 10-KSB for the year ended December 31, 2002. Net Income Per Common Share ------------------------------- Net income per common share is based on the weighted-average number of shares outstanding for the periods presented. NOTE 3 - INVESTMENT SECURITIES ---------------------------------- The Company has applied the accounting and reporting requirements of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115). This pronouncement requires that all investments in debt securities be classified as either held-to-maturity securities, which are reported at amortized cost; trading securities, which are reported at fair value, with unrealized gains and losses included in earnings; or available-for-sale securities, which are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity (net of deferred taxes). At June 30, 2003, the Company had net unrealized gains of $209,925 on available-for-sale securities. As a result, the increase in stockholders' equity, net of deferred taxes, was $130,154. There were no trading securities at June 30, 2003. The net decrease in stockholders' equity as a - 7 - result of the SFAS No. 115 adjustment from December 31, 2002, to June 30, 2003, was $180,027. NOTE 4 - BORROWED FUNDS --------------------------- In September 2000, the Bank obtained a $1 million loan from the Federal Home Loan Bank. The note requires quarterly interest payments at an interest rate of 6.09 percent, and matures on September 15, 2010. This note is subject to an early conversion option effective September 15, 2003, which allows the Federal Home Loan Bank to covert this note into a floating rate advance tied to the LIBOR rate. The note is secured by a blanket lien on single-family first mortgage loans. In August 2002, the Bank obtained four additional advances of $500,000 each from the Federal Home Loan Bank. These notes require monthly interest payments at rates of 2.24 percent, 2.73 percent, 3.33 percent, and 3.84 percent. These notes have staggered maturities of August 27, 2003, August 27, 2004, August 29, 2005, and August 28, 2006, respectively. All advances are secured by securities held by the Federal Home Loan Bank. In September 2002, the Company refinanced $800,000 of a $1,000,000 loan from Gilmer County Bank. The proceeds of the original note were used to inject additional capital in the Bank. This note requires quarterly interest payments at the prime interest rate less one-half percent. Principal is due in full on September 20, 2004. The note is secured by 600,000 shares of Gateway Bank & Trust common stock. In June 2003, the Company obtained a $300,000 loan from Gilmer County Bank to fund the repurchase of Company stock. The note requires quarterly interest payments at the prime interest rate with the rate not being less than 4.25%. Principal is due in full on June 16, 2004. The note is secured by 600,000 shares of Gateway Bank & Trust common stock. NOTE 5 - STOCK OPTION PLAN ------------------------------- The Company has a stock option plan that provides for both incentive stock options and nonqualified stock options. The maximum number of shares that can be issued or optioned under the plan is 200,000 shares. In the case of incentive stock options, the exercise price shall not be less than 100 percent (110 percent for persons owning more than 10 percent of the Company's outstanding common stock) of the fair market value of the common stock on the date of grant. In the case of nonqualified stock options, the purchase price may be equal to, less than, or more than the fair market value of the common stock on the date of grant. All options have been granted at the fair market value of the shares at the date of grant. If not exercised, the options will expire from 2009 to 2011. Prior to 2002, the Company accounted for its stock option plan under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation was reflected in previously issued results, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. During the fourth quarter of 2002, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123) for stock-based employee compensation. All prior periods presented have been restated to reflect the compensation cost that would have been recognized had the recognition provisions of SFAS No. 123 been applied to all awards granted to employees after January 1, 1995. - 8 - A summary of activity in the Company's stock option plan for the period ended June 30, 2003, is as follows:
Weighted Average Number Exercise of Shares Price ----------- --------- Unexercised options outstanding, December 31, 2002 166,300 $ 12.08 Stock options exercised (10,130) 12.05 Stock options forfeited ( 5,420) 12.00 ----------- --------- Unexercised options outstanding, June 30, 2003 $ 150,750 12.09 =========== =========
Each of the outstanding options to purchase common shares vest beginning one year from the grant date on an equal incremental basis over a period of five years. At June 30, 2003, the number of options exercisable is 115,400. The range of exercise prices and weighted-average remaining contractual life of outstanding options under the stock option plan were $12.00 to $13.00 and 5.93 years, respectively. Under SFAS No. 123, the fair value of stock options at the date of grant is charged to compensation costs over the vesting period. Compensation costs recognized in the accompanying statements of income for the six-month periods ended June 30, 2003 and 2002, were $59,792 and $74,704, respectively. NOTE 6 - RECENTLY ISSUED ACCOUNTING STANDARDS --------------------------------------------------- In December of 2002, the Financial Accounting Standards Board issued Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS 148). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has voluntarily elected to change to the fair value method. The accompanying consolidated financial statements include stock option expense, and the required disclosures are provided. PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion is intended to assist in an understanding of the Company's financial condition and results of operations. This analysis should be read in conjunction with the financial statements and related notes appearing in Item 1 of the June 30, 2003, Form 10-QSB and Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in the Company's Form 10-KSB for the year ended December 31, 2002. FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the "Act"). In addition, certain statements in - 9 - future filings by the Company with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of the Company may contain forward-looking statements within the meaning of the Act. Examples of forward-looking statements include but are not limited to: (1) projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure and other financial items; (2) statements of plans and objectives of the Company or its management or Board of Directors, including those relating to products or services; (3) statements of future economic performance and (4) statements of assumptions underlying such statements. Words such as "believes," "anticipates," "expects," "intends," "targeted," and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from those in the forward-looking statements. Facts that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: (1) the strength of the U.S. economy in general and the strength of the local economies in which operations are conducted; (2) the effects of and changes in trade monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; (3) inflation, interest rate, market and monetary fluctuations; (4) the timely development of and acceptance of new products and services and perceived overall value of these products and services by users; (5) changes in consumer spending, borrowing, and saving habits; (6) technological changes; (7) consumer spending, borrowing and saving habits; (8) acquisitions; (9) the ability to increase market share and control expenses; (10) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiary must comply; (11) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board; (12) changes in the Company's organization, compensation, and benefit plans; (13) the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; and (14) the success of the Company at managing the risks involved in the foregoing. Such forward-looking statements speak only as of the date on which the statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made to reflect the occurrence of unanticipated events. CRITICAL ACCOUNTING POLICIES Management has determined that the accounting for the allowance for loan and lease losses is a critical accounting policy with respect to the determination of financial condition and reporting of results of operations. Management determines the required allowances by classifying loans according to credit quality and collateral security and applying historical loss percentages to each category. Additionally, as necessary, management determines specific allowances related to impaired loans based on the present value of expected future cash flows discounted at the loan's effective interest rate, or the fair value of the collateral if the loan is collateral dependent. A key component in the accounting policy is management's ability to timely identify changes in credit quality, which may impact the Company's financial results. - 10 - Management recognizes that in making loans, credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a secured loan, the quality of the security for the loan. Management's policy is to maintain an appropriate allowance for estimated loan and lease losses on the portfolio as a whole. The allowances are based on estimates of the historical loan loss experience, evaluation of economic conditions and regular periodic reviews of the Bank's loan portfolio by both internal personnel and a third party review firm. The Bank's loan portfolio consists mostly of commercial and real estate loans to companies in various industries, whose financial performance may be impacted differently by the local, regional or national economies and stage of the economic cycle. Management believes that the effects of any reasonably likely changes in the economy would be limited somewhat due to the diversification of the loan portfolio and the Bank's normal collateral requirements for such loans. While management uses available information to recognize losses on loans and leases, future adjustments in the allowance may be necessary based on changes in economic conditions, which could have a significant detrimental impact to the Company's financial condition and results of operation. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loans and lease losses. Such agencies may require the Company to recognize additions to the allowance for loan and lease losses based on their judgment about information available to them at the time of their examination. EARNINGS SUMMARY The Company's net income for the six months ended June 30, 2003 and 2002 was $736,005 and $586,780, respectively. The increase in net income resulted primarily from net loan growth and from an increased net interest margin. RESULTS OF OPERATIONS INTEREST INCOME Interest income on loans and securities is the principal source of the Company's earnings stream. Fluctuations in interest rates as well as volume and mix changes in earning assets materially affect interest income. Interest income was $4,012,405 and $3,767,066 for the six months ended June 30, 2003 and 2002, respectively. The increase in interest income is a result of overall loan growth during the past year. INTEREST EXPENSE Interest expense on deposits and other borrowings for the six months ended June 30, 2003 and 2002 was $1,444,303 and $1,494,413, respectively. The decrease in interest expense is a result of a continued decline in interest rates during the past year. The Bank had successfully lowered all deposit rates during the past year without sacrificing growth in deposits. PROVISION FOR LOAN LOSSES The provision for loan losses represents the charge against current earnings necessary to maintain the allowance for loan losses at a level which management considers adequate to provide for probable losses in the loan portfolio. This level is determined based upon management's assessment of current economic conditions, the composition of the loan portfolio and the levels of nonaccruing and past due loans. The provision for loan losses was $260,000 for the six - 11 - months ended June 30, 2003. The allowance for loan losses as a percent of outstanding loans was 1.50 percent at June 30, 2003, and 1.37 percent at December 31, 2002. NONINTEREST INCOME Noninterest income for the six months ended June 30, 2003 and 2002 was $992,288 and $511,904, respectively. Noninterest income consisted primarily of service charges on customer deposits ($458,319 for the first six months of 2003 and $266,494 for the same period in 2002), mortgage loan fees ($279,174 for the first six months of 2003 and $176,181 for the same period in 2002), gains on sales of securities ($183,804 for the first six months of 2003 and $8,613 for the same period in 2002), ATM and credit card fees, and rental of safe deposit boxes. The increase resulted from significantly greater gains on sales of securities and an increase in the Bank's fee structure. NONINTEREST EXPENSE Noninterest expense totaled $2,154,129 and $1,750,601 for the six months ended June 30, 2003 and 2002, respectively. The increase reflects the hiring of additional staff and the increase in other salary and benefit expenses. Other operating expenses consist primarily of data processing, advertising, professional fees, printing and postage and other miscellaneous expenses. INCOME TAXES Income taxes of $410,256 and $292,086 have been provided for the six months ended June 30, 2003 and 2002, respectively. The increase is a direct result of an increase in taxable income in 2003 as compared to 2002. FINANCIAL CONDITION EARNING ASSETS The Company's earning assets include loans, securities and federal funds sold. The mix of earning assets reflects management's attempt to maximize interest income while maintaining acceptable levels of risk. SECURITIES AND FEDERAL FUNDS SOLD The composition of the Company's securities portfolio reflects the Company's investment strategy of maximizing portfolio yields subject to risk and liquidity considerations. The primary objectives of the Company's investment strategy are to maintain an appropriate level of liquidity and provide a tool to assist in controlling the Company's interest rate position while at the same time producing adequate levels of interest income. For securities classified as available-for-sale, management intends to hold such securities for the foreseeable future except to fund increases in loan demand. Management of the maturity of the portfolio is necessary to provide liquidity and to control interest rate risk. Securities and federal funds sold decreased $3,800,927 or 10.3 percent from December 31, 2002, to June 30, 2003. The securities portfolio may be adjusted to make various term investments, to provide a source of liquidity and to serve as collateral to secure certain government deposits. Securities at June 30, 2003 and December 31, 2002 were $32,223,514 and $29,374,441, respectively, reflecting an increase of $2,849,073. Federal funds sold decreased from $7,450,000 - 12 - at December 31, 2002, to $800,000 at June 30, 2003. This decline is related to the increase in loans during the same period. LOANS Loans represent the single largest category of the Company's earning assets at June 30, 2003. At June 30, 2003, the Company had outstanding loans amounting to $99,778,817 net of its allowance for loan losses, or 69.3 percent of total assets, compared to net loans of $92,606,110, or 65.5 percent of total assets at December 31, 2002. The Company will continue to search for loan opportunities in its market area while assuming acceptable levels of risk. ASSET QUALITY Asset quality is measured by three key ratios: (1) the ratio of loan loss allowance to total nonperforming assets (defined as nonaccrual loans, loans past due 90 days or greater, restructured loans, nonaccruing securities, and other real estate), (2) nonperforming assets to total assets, and (3) nonperforming assets to total loans. At June 30, 2003, the Company had nonperforming assets of $249,822, which was 16.4 percent of the loan loss allowance of $1,524,240. Nonperforming assets were .25 percent of all loans and .17 percent of total assets. At December 31, 2002, the Company had nonperforming assets of $508,000, which was 39.3 percent of the loan loss allowance of $1,291,097. Nonperforming assets at December 31, 2002 were .55 percent of all loans and .36 percent of total assets. NONEARNING ASSETS Nonearning assets include premises and equipment of $2,933,003 at June 30, 2003, an increase of $2,943 from December 31, 2002. The increase results primarily from the additions of new fixed assets outpacing the depreciation of $81,601. The Bank leases the site for its main office at the rate of $2,089 per month. The lease term is for a maximum of fifty years, including extensions after the initial twenty-year period, and subject to certain conditions after the initial forty-year period. Accrued interest receivable was $729,751 at June 30, 2003, a decrease of $5,808 from December 31, 2002. The decrease is due to slightly lower overall interest rates on earning assets during 2003. Other assets consist primarily of prepaid expenses, deferred income taxes, and other real estate. Deferred income taxes consists primarily of tax benefits related to timing differences in the tax and financial reporting treatment of the allowance of loan losses, as well as other factors. DEPOSITS At June 30, 2003, the Company had outstanding deposits of $126,454,413 compared to $121,990,998 at December 31, 2002. Deposits are the Company's primary source of funds to support its earning assets. Noninterest-bearing deposits increased from $7,816,038 at December 31, 2002, to $11,731,136 at June 30, 2003. Time deposits of $100,000 or more decreased by $2,649,343. - 13 - OTHER LIABILITIES Other liabilities consist primarily of accrued interest payable and accounts payable. Accrued interest payable decreased $17,246 from December 31, 2002, to June 30, 2003. The decrease is due to slightly lower interest rates in 2003 and lower balances in interest-bearing deposits. STOCKHOLDERS' EQUITY Stockholders' equity increased $130,920 from December 31, 2002, to June 30, 2003, due in part to net income of $736,005 for the six months ended June 30, 2003. The equity adjustment for unrealized gains on securities available-for-sale decreased $180,027 during the six months ended June 30, 2003. This decrease is mostly due to the recognized earnings of $183,804 on the sale of securities during the same period. On April 30, 2003, the Company initiated a tender offer to repurchase up to 110,000 shares of its outstanding common stock, par value $5.00, at a price of $17.72 per share. The tender offer expired on May 30, 2003. A total of 34,250 shares of the Company's Common Stock were repurchased at a total cost of $606,910. RELATED PARTY TRANSACTIONS In the normal course of business, the Bank makes loans to directors, executive officers and principal shareholders on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers. Loans to directors, executive officers, and principal shareholders totaled $1,672,000 at June 30, 2003. OFF-BALANCE SHEET ARRANGEMENTS The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include standby letters of credit and various commitments to extend credit. At June 30, 2003, commitments under standby letters of credit and undisbursed loan commitments aggregated $20,472,000. The Bank's credit exposure for these financial instruments is represented by their contractual amounts. The Bank does not anticipate any material losses as a result of the commitments under standby letters of credit and undisbursed loan commitments. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY MANAGEMENT Liquidity is defined as the ability of a company to convert assets into cash or cash equivalents without significant loss. Liquidity management involves maintaining the Bank's ability to meet the day-to-day cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Without proper liquidity management, the Bank would not be able to perform the primary function of a financial intermediary and therefore would not be able to meet the production and growth needs of the communities it serves. The primary function of asset and liability management is not only to assure adequate liquidity in order for the Bank to meet the needs of its customer base, but also to maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities so that the Bank can - 14 - also meet the investment requirements of its stockholders. Daily monitoring of the sources and uses of funds is necessary to maintain an acceptable cash position that meets both requirements. In the banking environment, both assets and liabilities are considered sources of liquidity funding and both are, therefore, monitored on a daily basis. The asset portion of the balance sheet provides liquidity primarily through loan principal repayments or sales of securities. Outstanding loans that mature in one year or less totaled approximately $52.5 million at June 30, 2003. Securities maturing in one year or less totaled approximately $2.0 million. The liability portion of the balance sheet provides liquidity through various customers' interest-bearing and noninterest-bearing deposit accounts. At June 30, 2003, funds were also available through the purchase of federal funds from correspondent commercial banks. Purchases can be made from available lines of up to an aggregate of approximately $8.0 million. At June 30, 2003, no federal funds had been purchased. Liquidity management involves the daily monitoring of the sources and uses of funds to maintain an acceptable cash position. CAPITAL RESOURCES A strong capital position is vital to the profitability of the Company because it promotes depositor and investor confidence and provides a solid foundation for future growth of the organization. The Company has provided for its capital requirements with proceeds from its initial stock offering in 1996 and through the retention of earnings. FEDERAL HOME LOAN BANK ADVANCES In an effort to maintain and improve the liquidity position of the Bank, management approved the Bank's membership with the Federal Home Loan Bank of Atlanta (FHLB). As a member of the FHLB, the Bank improved its ability to manage liquidity and reduce interest rate risk by having a funding source to match longer term loans. The terms of the Bank's loans from the FHLB are summarized in Note 4 to the Consolidated Financial Statements appearing in this report. REGULATORY CAPITAL REQUIREMENTS Regulatory capital guidelines administered by the federal banking agencies take into consideration risk factors associated with various categories of assets, both on and off the balance sheet. Under the guidelines, the Bank's capital strength is measured in two tiers which are used in conjunction with risk-adjusted assets to determine the risk-based capital ratios. Tier I capital, which consists of common equity less unrealized gains on available-for-sale securities, amounted to $11.34 million at June 30, 2003. Tier II capital components include supplemental capital components such as qualifying allowance for loan losses and qualifying subordinated debt. Tier I capital plus the Tier II capital components is referred to as total risk-based capital and was $12.7 million at June 30, 2003. The percentage ratios as calculated under FDIC guidelines were 10.32 percent and 11.57 percent for Tier I and total risk-based capital, respectively, to risk-weighted assets at June 30, 2003. Both levels exceeded the minimum ratios of 4 percent and 8 percent, respectively. Management has reviewed and will continue to monitor asset mix, product pricing, and the loan loss allowance, which are the areas it believes are most affected by these requirements. - 15 - ITEM 3. CONTROLS AND PROCEDURES At June 30, 2003, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective at timely alerting them to material information relating to the Company (including its consolidated subsidiary) that is required to be included in the Company's periodic filings with the Securities and Exchange Commission. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to June 30, 2003, and there have been no significant deficiencies or material weaknesses requiring corrective action. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS Neither the Company nor the Bank is a party to any pending legal proceedings which management believes would have a material adverse effect upon the operations or financial condition of the Bank. ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS - NONE ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - NONE ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 17, 2003, the Company held its annual meeting of shareholders at which the following director nominees were elected to a one-year term by the votes indicated:
Directors Votes For Votes Withheld --------- --------- -------------- Jack J. Babb 491,854 - 250 - William H. H. Clark 491,854 - 250 - Jeanette W. Dupree 491,854 - 250 - James Arthell Gray, Sr. 491,854 - 250 - Harle B. Green 491,854 - 250 - Danny Ray Jackson 491,854 - 250 - Ernest Kresch 491,354 - 750 - Robert G. Peck 491,854 - 250 -
ITEM 5 - OTHER INFORMATION Stockholder proposals submitted for consideration at the next annual meeting of stockholders must be received by the Company no later than December 1, 2003, to be included in the 2004 proxy materials. A stockholder must notify the Company before February 1, 2004, of a proposal for the 2004 annual meeting which the stockholder intends to present other than by inclusion in the Company's proxy material. If the - 16 - Company does not receive such notice prior to February 1, 2004, proxies solicited by the management of the Company will confer discretionary authority upon the management of the Company to vote upon any such matter. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit Number Description of Exhibit -------------- ---------------------- 11 Computation of Net Income Per Share 31 Certifications Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended June 30, 2003. - 17 - SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GATEWAY BANCSHARES, INC. /s/ Robert G. Peck August 8, 2003 ------------------- --------------- Robert G. Peck, Date President and CEO (Principal Executive Officer) /s/ Harle B. Green August 8, 2003 ---------------------- ---------------- Harle B. Green, Date Chairman and Chief Financial Officer (Principal Financial Officer) - 18 -